Paramount added record new subscribers to its streaming biz in Q4. But behind the scenes, finances were bleak.
Paramount’s net operating income plummeted by 93% YOY to $182 million, down from $2.6 billion in Q4 2021.
The broadcaster expects peak operating losses in 2023, pointing to the faltering economy (like just about everyone else). “But we see a light at the end of the tunnel,” CEO Bob Bakish said on the company’s earnings call on Thursday. “These losses are short term in nature.”
To turn things around, Paramount is introducing new streaming bundles and price hikes – in addition to hoping the ad market returns to normal.
“We expect to see market recovery in the back half of this year,” said CFO Naveen Chopra, who also spoke on Thursday’s earnings call. Until then, Paramount’s streaming distribution strategy will help turn the corner toward profitability and positive free cash flow, he added.
Direct to costs
For now, at least subscriber growth is ticking in the right direction. Paramount+ gained 9.9 million new subscribers for the quarter, bringing total direct-to-consumer (DTC) accounts up to 77 million.
But the DTC business will continue losing profits, in part because of “soft demand” from advertisers, Chopra said. Paramount reported a 5% decline in international ad revenue for the quarter and a 2% decline within the US market.
To make up for losses, Paramount is restructuring its streaming offerings to increase average revenue per user (ARPU).
Most significantly, Paramount is folding its Showtime network into the ad-free Paramount+ tier later this year to consolidate tech and operating expenses. The ad-free Paramount+ tier and the linear network will both be rebranded to “Paramount+ with Showtime.”
The broadcaster doesn’t expect the cannibalization to eat away at its overall DTC growth. Ad-free Paramount+ subscribers have a higher ARPU and lower churn compared with Showtime viewers, Chopra said.
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Combining two different libraries of entertainment content will also justify price increases, Chopra added.
Once the new bundle launches, Paramount+ with Showtime will increase to $11.99 per month (up from $9.99) while the ad-free version will be $5.99 per month (up from $4.99) and will not include Showtime.
Paramount will also combine Paramount+ and Pluto TV into a “fully integrated advertising product,” Chopra said. This means Paramount will no longer break out revenue attributed to Pluto TV in its quarterly updates for shareholders.
At the same time, Paramount is leaning more heavily into media partnerships to continue building scale by attracting new subscribers. Most recently, Paramount announced a streaming integration for Paramount+ with Delta Air Lines and expects the additional exposure on Delta flights to draw in more paid sign-ups this year.
Cutting corners
Speaking of cost-cutting, Paramount also plans to spend less on content this year.
“By far, our biggest lever to manage [content] spending is to focus on franchises,” Bakish said.
Compared with originals, fan-base-fueled franchises have higher levels of brand affinity that spell higher subscriber growth at lower customer acquisition costs for Paramount, he said.
The “overwhelming majority” of Showtime engagement comes from network franchises, Chopra said, so combining that IP with on-demand titles on Paramount+ should build a stronger selling point for future subscribers.
Expanded opportunities paired with improvements in the ad market should also put Paramount at an “inflection point” to return the company to “significant earnings growth and positive free cash flow come 2024,” Chopra said.
Investors aren’t too impressed, though. Paramount’s stock price dipped 7% once trading hours opened on Thursday.
