As the strikes in Hollywood rumble on, the shockwaves are being felt further and further down the production line. Two UK-listed companies are feeling the pain, alongside the legions of film professionals who rely on the industry for a living, who now fear productions won’t get started again this side of Christmas. 

Translation and localisation services business Zoo Digital (ZOO) has launched a round of layoffs despite expressing optimism about a resolution to the dispute between the studios and writers and actors, who argue they are not getting a fair share of streaming revenue under current residual payments agreement. “Although we think work will resume soon, these strikes could go on for months, which means we have had to make this difficult decision to protect cash flow,” Zoo Digital chief executive Dr Stuart Green told the Investors’ Chronicle.

The writers’ strike initially didn’t impact Zoo’s business because studios have a long pipeline of shows. However, once the actors joined the strike, the postproduction work – such as rerecording voices – stopped. 

Demand for Zoo’s translation and dubbing work has slowed dramatically in the first half of the year and it is not going to be able to catch up in the second half. FactSet analysts’ consensus is for Zoo’s revenue to drop 9 per cent and operating profit to sink 66 per cent this year. 

The strikes have also disrupted video hardware business Videndum (VID), which has delayed its results because “more time is required to finalise its half-year financial reporting”. Videndum supplies hardware, such as tripods and lighting, to production companies. Videndum said that financial performance has been impacted by macroeconomic headwinds and “compounded” by the strikes. Broker Shore Capital expects adjusted operating profit for the half year to be just £13mn, down from £30mn last year.

 

Strikes could drag on

So far, there has been little progress in the negotiations between the studios and the unions. This is because the studios are under pressure from investors to reach profitability and don’t want to lock themselves into costlier long-term deals with the unions. “All the big studios have taken a pause for breath and are conducting strategic reviews to work out how they can actually make money,” said Green. 

The difficulty for the writers is that they are asking for a share of streaming revenue just as demand for their services has slowed. In the first half of 2023, US TV script commissions dropped 31 per cent year on year, according to research firm Ampere Analysis. “There’s been a big reduction in the number of projects, and going forward I don’t think studios will take as many risks on expensive projects,” said Ampere analyst Fred Black. 

The Writers Guild of America also made this point earlier in the month. “We’re transitioning from a period of rapid investment and competition that brought about new and diverse content to a monopolistic model that will concentrate control over entertainment programming in the hands of just a few large and powerful corporations,” said the union’s research and public policy director, Laura Blum-Smith. “For writers, that means fewer buyers for their work, employers who exert more leverage in individual deal negotiations, and depressed pay and working conditions.”

In its recent earnings call, Disney (US:DIS) announced plans to further cut costs, as well as cracking down on password sharing, to try to reach profitability. When previously asked about the strike, chief executive Bob Iger said the writers’ demands “were just not realistic”, although he has struck a more conciliatory tone recently. 

Netflix (US:NFLX) is the only major streaming service with positive free cash flow. Last year, it made $1.6bn of free cash and FactSet analyst consensus expects it to rise to $5.2bn this year. The company admits that it is no longer in the growth phase, though. Chief financial officer Spencer Neumann said on the results call that Netflix “hopes to start ticking up our cash spend on content in a healthy way”, but only once revenue starts accelerating.  

 

Shift away from big spending

Dr Green believes the studios’ new frugality could benefit Zoo Digital in the long term. His argument is that studios will shift spending from costly projects to a greater number of smaller cheaper shows. Reality TV is the cheapest to make and will become relatively cheaper if the writers secure a significant pay rise.

Zoo gets paid a fixed rate regardless of the overall budget of the projects. So a higher volume of shows would increase its revenue, even if the studios are spending less overall. Green also “expects there to be a consolidation of suppliers”, which will benefit Zoo as an “end-to-end supplier”.

There is an argument that the recent share price weakness caused by the strikes provides a buying opportunity. Zoo and Videndum’s share prices are down 63 per cent and 52 per cent, respectively, this year. Shore Capital moved its Videndum rating from hold to buy as “it believes the end of the writers’ strikes could represent a catalyst for a re-rating”. The broker has heard that Labor Day (4 September) is an unofficial date by which the parties could seek a resolution. Around 20 per cent of Videndum’s revenue was impacted by the strikes.

However, even when the strikes end, it is unlikely that content spend will return to the levels seen during the race for streaming market share. At the time, Zoo Digital was growing exponentially. Its revenue more than doubled from $40mn in 2021 to $90mn in 2023 and correspondingly it was valued like a high-growth stock. Now, this gravy train has slowed, in the past year, its forward price/earnings ratio has fallen from over 30 times down to 17.

The ongoing strikes are a symptom of a wider problem the industry is facing. For years, cheap money paid the bills, which meant lots of demand for writers, localisation services and everything in between. Now, real profits need to be made, there has to be some concessions, and neither the writers, actors nor studios want to make them.