You most likely know Paramount Global (PARA +0.00%) best for its movie studio -- which is a good one. It's the name behind the Star Trek, Top Gun, and Indiana Jones franchises, just to name a few.
Films aren't its only business though. In fact, the film studio is its smallest profit center. Traditional linear television is its biggest -- by a country mile. Not only does Paramount own the CBS network, but also a raft of cable channels, including popular ones such as Nickelodeon, CMT, and Comedy Central.
And yes, that's a problem for shareholders.
Where Paramount Global makes its money
In addition to movies and television, Paramount also operates a couple of important streaming platforms. Paramount+ is its premium service, and boasts 67.5 million paying subscribers, while PlutoTV is a free-to-watch, ad-supported service.
But where do each of these businesses stand in relation to one another? The answer may surprise you. The cable and network television unit accounts for about 67% of Paramount's top line. Streaming now makes up roughly 24% of its business. Movies are only about 8.5% of Paramount's sales.
Data source: Paramount Global. Chart by author. Figures are in millions.
This mix is problematic.
See, the company's film arm isn't always profitable, and even when it is, it's not a huge moneymaker. The last highly profitable quarter Paramount's film studios reported was the second quarter of 2022, thanks to smash hit Top Gun: Maverick. Not even last year's latest installments to the Transformers, Mission: Impossible, and Indiana Jones series meaningfully moved the needle. And streaming? Although it's a much more consistent -- and consistently growing -- business, it's still bleeding money. Indeed, Paramount's direct-to-consumer arm doesn't even appear to be making any real progress on the profitability front. The only unit that can be counted on for profits is the TV media arm.
Data source: Paramount Global. Chart by author. Figures in millions. OIBDA = operating income before depreciation and amortization.
That's concerning for exactly the reason you probably would expect -- the cable television business continues to shrink. Paramount's shrinking TV profits underscore this reality.
There's no real relief in sight, either.
The cable television business is shrinking
Admittedly, cable television is going to be around in one form or another for the foreseeable future.
It's most definitely on the defensive, however.
For perspective, at its peak in 2013, the U.S. cable television industry was serving a little over 100 million households, according to data from Insider Intelligence. Now that number is somewhere in the neighborhood of 60 million and falling. This decline largely explains Paramount's deteriorating cable TV revenue and operating income. Moreover, industry research outfit Digital TV Research predicts cable's penetration rate will fall below 50% of U.S. households this year.
It's no secret where these cord-cutters are going. They're bundling their own combinations of streaming services that effectively replace cable television. Ampere Analysis even believes domestic streaming revenue will (for the first time ever) eclipse the country's cable television revenue later this year. Paramount+ is one of these streaming choices. PlutoTV is as well.
NASDAQ: PARA
Key Data Points
Even these alternatives, however, are starting to bump into more serious headwinds. Data from streaming research company Antenna indicates that the growth rate in the total number of streaming subscriptions was halved to only 10.1% last year. Perhaps worse, 2023's subscription churn rate of 5.5% was nearly three times greater than 2019's number. Consumers are becoming less and less loyal to any particular streaming service.
So how might a streaming service re-inspire loyalty? Providing more and better content would be a good start. More and better content, though, costs more money. Remember, Paramount's streaming business is already consistently losing money. Even if it grows its revenue, if it spends more on production to do that, the business could remain in the red. This dynamic will keep pressure on the company's one and only reliable profit center -- a profit center that's already weakening.
No visible path to balance or growth
Never say never. Paramount could eventually figure out an optimal mix of business that's not only profitable on all three fronts, but capable of growing.
That possibility isn't anywhere in sight, however.
And it's not just the market saying so (though it is, as reflected in the stock's steady decline since early 2021). Potential suitors aren't seeing enough to like either. Although several companies are reportedly interested in acquiring at least a controlling stake in the media giant, after several months of deal rumors, only Byron Allen's Allen Media Group has made an offer -- which, as of the latest look, Paramount hasn't taken. Indeed, reports surfaced just this week that Warner Bros. Discovery is walking away from merger discussions with Paramount, despite the fact that both companies need a distribution partner they can leverage to help them better compete with the likes of Netflix and Walt Disney.
In sum, there are no great arguments for buying this stock. That's particularly true when there are so many other, better picks an investor could step into right now.
