So why is Warren Buffett’s Berkshire Hathaway still sitting on a $US1.5 billion paper loss on a 15% stake in Paramount Global, the former Viacom and CBS groups (and owner of the Ten Network in Australia) controlled by Shari Redstone, especially when Paramount+, the company’s cash eating streaming video business is something Buffett clearly doesn’t like?
For the moment it seems he sitting pat but If Buffett was to tire of the loss and sell the 15% of Paramount Global, that would be very likely to trigger another huge fall in its share price and raise questions about its long-term viability and that of assets like the underperforming Ten Network here.
Even though Berkshire is carrying the loss, Buffett is not averse to getting rids of failures – he bailed out of holdings in four big US airlines several years ago after running up losses, but the original investment remains odd.
Judging by remarks he and his Vice -chair, Charlie Munger have made recently about the media and streaming video, Paramount would be a company Buffett would have normally avoided.
Buffett reckons that streaming is not a viable business model in its current state (Netflix’s success belies that view; see below) – a point he re-emphasised at the Berkshire AGM and Munger recalled that he had always stayed away from an entertainment industry where profits go to celebrities rather than to shareholders.
And so it’s little wonder Buffett sounded a little jaundiced about Paramount after its shares dropped 28% the day before the Berkshire meeting following a terrible March quarter report that included a large loss and an 80% slash to the company’s dividend.
“It’s not good news when any company cuts its dividend dramatically,” Buffett told the meeting. He noted that the streaming business remains challenging with numerous competitors keeping prices low. It’s easy to cancel a streaming subscription and hop to a competing service.
“The streaming business is extremely interesting to watch, because people love to use their eyeballs being entertained on a screen in front of them or a phone, whatever it may be, but there is a lot of companies doing it, and you need fewer companies or you need higher prices, or it doesn’t work,” Buffett said.
“There are a bunch of companies who don’t want to quit,” Buffett said. “Who knows what will happen with pricing.”
Berkshire became the largest holder of Paramount stock last year, with a stake of around 15%.
Paramount shares are down by about half since Berkshire began buying in the first quarter of 2022.
It’s not that Buffett is a media neophyte – for more than 15 years he held investments in the Buffalo News, the Washington Post and a string of regional newspapers as well as Capital Cities/ABC network which was formed in 1985 with Berkshire’s backing. Thomas Murphy, the veteran chair and CEO of Capital Cities/ABC was a long-time director of Berkshire.
Buffet knows media intimately enough to question the viability of streaming video which is looking more and more like a costly attempt by a strong of companies to keep up with Netflix (a first mover).
And there is a further question – in the three months to March Berkshire sold out of holdings in US BanCorp and Bank of New York Melon because he was worried about banks (but bought into the credit card group, Capital). So why didn’t Buffett and his managers also close out the huge loss making 15% stake in Paramount Global and take part of the loss as a write down and tax break?
Perhaps it was not sold because Paramount’s problems were not huge in the March quarter – it’s only since Paramount’s rotten quarterly report in early May and the shock decision to slash dividend, that the shares have fallen out of bed. The shares fell 28% on the day that was announced.
At the May 5 briefing, Paramount executives affirmed the worst of that storm may be over, with both Bakish and Paramount Chief Financial Officer Naveen Chopra saying the media company’s financial investment in Paramount+ and related services will peak this year. The company looks to be profitable in 2024.
Berkshire paid an average price of $US30.60 and has built the stake to just under 94 million shares. At $US15.57 this week, the shares are less than $US1 above the low of $US14.92 reached on May 12.
Paramount cut its quarterly payouts to 5 US cents, or 20 cents a year to save around half a billion dollars, it’s again putting book publisher Simon & Schuster back on the sale block after a previous deal fell apart last year for competition reasons. Staff have and are being sacked, studios and other facilities closed, programs ended and films chopped.
On a more positive note, the company said its Paramount+ streaming service added 4.1 million subscribers, above the 3.1 million forecast. This brings the number of subscribers to the service to a total of 60 million, 36 million less than Warner/Discovery and far, far behind Netflix’s 232 million subscribers and Disney’s 162 million subscribers.
Paramount is also facing pressures on its film, free to air and cable TV businesses such as the CBS network and a fleet of stations across, the US, MTV, Showtime, Comedy Central, Nickelodeon, Paramount, Miramax, BET and Channel 5 in the UK and Channel 10 Network in Australia. There are streaming services in the US in addition to Paramount+, Viacom, and a whole lot more.
But a Berkshire sell-off would send the shares tumbling and raise a lot of questions about the future of these media assets and that could trigger problems here in the struggling Australian media sector, especially free to air TV which is ailing.
On the other hand there is Netflix, which six months after the landmark debut of its ad-supported subscription tier, says it now has 5 million monthly active users (MAU) globally who are paying each month to view its stream.
Although the MAU number is a fraction (2.1%) of Netflix’s global base of 232.5 million subscribers, the company said the number of paying customers on the $US6.99 a-month ad plan has more than doubled since early this year.
The news saw the shares leap more than 9% on Thursday, leaving the shares up nearly 26% year to date.
That was after Co-CEO Greg Peters told an advertising presentation on Wednesday (called an Upfront) that more than a quarter of new subscribers “now choose the ads plan in countries where it’s available.”
At launch, it was in 12 countries: Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, the UK and the U.S. “Seventy percent of our ad-supported members are between the ages of 18 and 49 and the median age of ad-supported subscribers is 34.”
“The signals are promising: engagement on our ads plan is similar to our comparable non-ads plans,” Peters said. “That’s critical because it all starts and ends with consumers.” He added that there is “plenty of runway ahead of us,” citing the stat that Netflix accounts for 10% of overall TV usage even in its most-penetrated territories.
Co-CEO Ted Sarandos told the same presentation that Netflix’s scale makes the ad effort viable. “Our shows and movies are generating audiences that are generating global audiences that are many times bigger than our closest competitors’,” he said.
Sarandos also offered context for the company’s longstanding resistance to allowing ads. “For years, we were trying to keep our business as simple as possible, so that we could grow as fast as possible,” he said. “But we have actually realised that we left a big segment off the table.”
Annualised that’s more than $US400 million in extra revenue to go with the expected $US34 billion in total revenues this year ($US32 billion in 2022).
The two executives talked about ways of maintaining the life of the ad on the stream by including them in the content in varying ways. These could include holding the same ads on a server to be inserted at each download, or holding new ads to be inserted randomly, like the free You Tube service now does.
Netflix however faces the big test from now on with the start of its long-planned crackdown on password sharing in the US and other countries by the end of the second quarter on June 30.
Netflix’s 5 million figure easily tops ad supported streams from rivals like Disney+, HBO Max and Netflix, Peacock, Hulu, Sling, Pluto TV, Tubi (which is owned by Fox Corp). Some of these are free ad-supported streams – such as Tubi, Sling and Pluto.