|
Thanks for reading The Briefing, our nightly column where we break down the day’s news. If you like what you see, I encourage you to subscribe to our reporting here. Greetings! Television advertising is becoming a one-trick pony—it’s all about sports. Check out Walt Disney Co.’s March-quarter results, released Wednesday. Ad revenue from its sports TV and streaming businesses rose 22%, due to staggering growth at ESPN’s U.S. business. “Live sports, as you know, is doing extremely well,” said Chief Financial Officer Hugh Johnston. In contrast, advertising on its entertainment outlets fell 9.8%, as a falloff in Disney’s old-fashioned TV networks outweighed ad growth on its Hulu and Disney TV+ streaming services. This shift is part of a bigger trend: My colleague Sahil Patel wrote last Friday that marketers are expected to cut their ad spending on entertainment and news programming by as much as 10% in the coming year, whereas sports programming is expected to be fine. That trend is good news for Disney, which arguably has more live sports than any other entertainment company, as well as other sports-heavy outlets like Amazon Prime Video and Comcast’s Peacock service. In the very long term, though, the shift is a bit of a threat to Netflix, which has little in the way of sports—or, for that matter, of advertising revenue. For sure, no one is going to worry about that now. Netflix’s operating profits in the first quarter were about 10 times the profits Disney generated from Disney TV+ and Hulu in the same period. Netflix’s market capitalization of around $492 billion is more than the combined market cap of all other entertainment companies—Disney, Comcast, Warner Bros. Discovery, Paramount Global and Lionsgate. But investors are now paying a huge premium for Netflix shares—the stock price translates to 11 times next year’s estimated revenue for Netflix compared to the equivalent multiple of 2.4 times for Disney, according to Koyfin. For that reason alone, it’s worth considering why the shift to sports ads—which is a huge change from the days when advertising underwrote all kinds of television—threatens Netflix’s hegemony. Netflix executives have said repeatedly they hope advertising becomes a growth driver in the years to come. They have good reason to say that. As Netflix taps out the market of possible subscribers, its growth will depend increasingly on price increases (which can’t continue indefinitely without driving away some subscribers) and advertising. But as TV and streaming advertising becomes more about sports, Netflix will have to go much deeper into that category if it wants to build a meaningful ad business. This is not a problem it can solve overnight. There aren’t a lot of sports rights available right now—most are locked up for years to come. But in 2029, the NFL can break its existing decadelong TV deals and sign new ones, which it might do if it thinks it could make more money by signing with some newer outlets. (See Sahil’s recent deep dive into Netflix’s NFL relationship.) The big question is whether Netflix would have to spend so much to get the sports programming that its bottom line would be worse off. Netflix could steer clear of that outcome and yet still end up as one of those no-growth but hugely profitable companies many investors avoid. Shares of Google tumbled 7% on Wednesday after Apple executive Eddy Cue told a Washington courtroom that search volume on Apple’s Safari browser, which uses Google as the default search engine, had fallen for the first time last month, according to Bloomberg’s account of his testimony. This shouldn’t have come as that much of a surprise. A Google executive testified a couple of weeks ago, at the same court hearing, that Google had seen some erosion of search queries due to ChatGPT. The executive, Sissie Hsiao, said at the time they were primarily “homework and math” queries that typically didn’t generate much in ad revenue. Up to that point, Google hadn’t seen cannibalization of queries that could produce ads, she said, though she added that Google’s ad chief Vidhya Srinivasan believed that trend was inevitable. But it’s not just Google that artificial intelligence threatens. Cue also told the courtroom, according to the Bloomberg report, that technology changes could mean “you may not need an iPhone 10 years from now, as crazy as it sounds.” • Uber reported 14% higher revenue of $11.5 billion in the first quarter and higher operating income of $1.2 billion. • AppLovin, which has become an important player in the mobile app ad market, reported 40% higher revenue for the first quarter, while net income more than doubled to $576 million. More here. • OpenAI said Wednesday it is planning to build data centers for artificial intelligence in countries other than the U.S. through its Stargate joint venture with SoftBank, which aims to develop $500 billion worth of facilities over the next four years. Start your day with Applied AI, the newsletter from The Information that uncovers how leading businesses are leveraging AI to automate tasks across the board. Subscribe now for free to get it delivered straight to your inbox twice a week. | 
