#The Strike’s Side Effect: A Cash Hoard for Studios

The ongoing actors and writers strikes are creating a paradox for major studios and streamers, one that will become more apparent over the coming months, when each company reports quarterly earnings. As the impasse wreaks havoc on the entertainment economy, the companies that SAG-AFTRA and the Writers Guild of America are striking against will see their cash flows rise and their profit margins (or losses) improve.

It makes sense, after all: With the vast majority of film and TV sets shut down, the companies are keeping cash in their treasuries that normally would be funding those productions. And with Wall Street analyst firm MoffettNathanson estimating that total media industry content spend in 2022 was nearly $135 billion, there’s going to be a lot of cash sitting idle.

“In the short term, every media company will benefit from preserving cash and right-sizing talent deals,” MoffettNathanson’s Luke Landis wrote in a May 3 report. “Longer term the strike could cement the pendulum swing away from Peak TV to its antithesis: An age defined by a dearth of English-language-scripted content rather than a glut.”

In fact, the impact of the strikes on corporate balance sheets already was visible when Netflix reported its quarterly earnings July 19. The company had previously told investors that it expected 2023 free cash flow to be about $3.5 billion. Thanks in part to the strikes, it raised that figure to more than $5 billion.

“If the strikes are extended, there is likely further upside in ’23 FCF,” Morgan Stanley analyst Ben Swinburne wrote July 19. “This is not necessarily good news, as Netflix is in the business of producing TV shows and films. If the strike lasts for an extended period of time, 2024’s slate will be impacted even if it is relatively better off versus the competition.”

For other companies, like Disney, Warner Bros. Discovery, Paramount and NBCUniversal — which have spent billions in pursuit of streaming hits but so far have come up short — near-term cash boosts could nudge them closer to profitability, even if that quarterly improvement is just a mirage, with the long-term impact of the strikes on the content pipeline not to be felt until next year.

And to be clear: the strikes, if they continue on much longer, will be very bad for the entertainment giants. “The consequences of a very long strike could prove bothersome and even dire, under certain circumstances, for the many media companies along the food chain that rely on the entertainment content studios produce and that have minimal diversity, minimal sports rights and news programming, or lack adequate replacement content and financial flexibility,” Moody’s senior vp Neil Begley wrote in a July 17 report.

Take Netflix’s latest earnings report, in which the guidance on free cash flow was accompanied by co-CEO Ted Sarandos telling analysts about growing up in a union household and his desire to cut a fair deal with the guilds. Netflix’s focus is on “creating a steady drumbeat of must-watch shows and movies” for its users. If that drumbeat slows, or stops altogether, there will be consequences for Netflix and any other company that relies on a steady stream of content for growth.

And for the owners of broadcast and some cable networks, the economic pain will be felt sooner, as fall schedules get impacted by a lack of scripted programming. That in turn will cause more pain in an already strained advertising market. 

NBCU, for example, says that it closed its upfront deals the week of July 17 with cash commitments “in line with last year,” driven largely by sports and tentpole events. But if its entire schedule is impacted (or even its planned 50th-anniversary celebration for Saturday Night Live, which NBCU says more than 30 advertisers have already inquired about), the strikes’ pain will far outstrip the gains. “With actors and writers both striking for the first time since 1960 and an approaching broadcast season, we believe profitability could be impaired in 2H23 due to lower advertising,” JPMorgan’s Phil Cusick wrote in a July 18 note.

In other words, for companies that own broadcast networks, those short-term gains may be very short term indeed.

As was the case during the COVID-19 shutdowns in 2020, many of these companies will find themselves with extra cash, raising the question: What do they do with it? The simplest answer would actually be a repeat of the 2020 shutdowns: Hoard it.

In the early weeks of the pandemic, companies desperately sought to shore up their cash reserves, unsure of how their businesses would be impacted. The concern isn’t the same in 2023, but there is one key similarity: Once the strikes are over, the productions will resume, and fast.

While companies may look to exit some projects or deals in search of long-term cash savings, they also will be going from a dead stop to a sprint when it comes to restarting films and series halted by the strikes.

“In Q3 and then further in Q4, we hope to start ticking up our cash spend on content again and doing it in a healthy way,” Netflix CFO Spencer Neumann told analysts on the company’s earnings call, adding that the disruptions will create “some lumpiness” in the company’s content spend. “So we think we’ve got a lot more we can spend into a big opportunity, but we want to do it responsibly.”

If the picketing drags on, companies may look to put their cash to use in other types of content, perhaps reality or unscripted shows or international productions not impacted by the strikes.

But there are other options. A big one is returning cash to shareholders via dividends or stock buybacks. Disney already has said that it hopes to bring back its dividend by the end of 2023 after eliminating it during the pandemic, and Netflix recently told shareholders that it expects “to increase our stock repurchase activity in the second half of 2023,” citing its excess cash.

Of course, there’s also the M&A question. While high interest rates and an aggressive FTC and Department of Justice could pose issues for megadeals, there is still an appetite for dealmaking. Just look at the feverish speculation over selling off Disney’s linear TV businesses, including ABC, following Bob  Iger’s declaration that they “may not be core” to the company. Or Lionsgate, which is splitting its studio business and Starz business later this year, potentially making each ripe for acquisition.

And with its cash hoard only growing, and a relative dearth of legacy IP to build off of, Netflix is frequently cited as a possible buyer of assets. “Some of those assets are stressed for a reason,” Sarandos said when asked if any troubled entertainment companies could be an acquisition target for Netflix. “But if there are opportunities that give us access to pools of IP that we could develop into and against that could be super interesting.”

The future may include lower overall spending on content as the irrational exuberance of content spend in search of a profitable streaming business.

For the major Hollywood players, the need to balance that uncertainty with what is likely to be some extra cash is a difficult equation to solve. Every entity except the already consistently profitable Netflix wants to make gains, but it needs to be sustainable: Short-term profit in favor of long-term pain won’t cut it. The actors and writers will make up a piece of that puzzle and likely will get more than they had previously, though if content spending falls overall, the strikes may very well be the death knell of peak content.

A version of this story first appeared in the July 26 issue of The Hollywood Reporter magazine. Click here to subscribe.