Moody’s Predicts Three-Month Writers Strike, Affecting Industry Credit

Bond-rating agency Moody’s Investors Services predicted in a new report that the just-called Hollywood strike by 11,000 members of the Writers Guild of America could last three months or more, hurting the credit of “weakly positioned” media companies.

Talks broke down Monday evening, hours before the most recent contract was to expire, sending writers to picket lines the rest of the week, and bringing to a halt many operations across Hollywood studios and streaming companies.

Moody’s report, titled “Studios say “cut” to writers union as they face mounting linear revenue loss, costly streaming shift,” frames the strike within a bigger set of economic tides buffeting Hollywood media companies, which are making a difficult transition to streaming from high-margin but fading legacy broadcast and cable TV.

Writers are striking over intractable issues that largely boil down to compensation and residuals, but also include wanting tight controls on studio use of artificial-intelligence tools to replace screenwriters.

The WGA is particularly concerned about many issues first pioneered by streaming services, which have changed Hollywood practices in areas such as syndication, international rights, residuals payouts, shorter seasons, and smaller “writers rooms.” The union is also pushing for more transparency on streaming viewership and related data.

A long strike could impact the already struggling movie theater business, where some major exhibitor chains went bankrupt during the pandemic lockdown. The industry has only slowly and partly recovered, with U.S. ticket sales still lagging far behind pre-pandemic levels.

Also at risk are “diversified media companies transitioning to streaming.” The report suggests that the most highly leveraged or weakly positioned companies can ill afford higher costs as they struggle to break even on their streaming expenditures by as soon as next year.

Warner Bros. Discovery, for instance, still has roughly $45 billion in net debt even after massive layoffs, cancellations of programs, mothballing of other projects, a renewed focus on third-party content licensing, and other maneuvers.

By contrast, the report suggests that the least vulnerable operators are “global streaming platforms that are well positioned financially, and major studios and broadcasters with deeper and more globally diverse production and libraries, that are well-diversified beyond TV and film and have relatively strong balance sheets.”

Netflix
NFLX
, practically alone amid the major streaming services, claimed more than $3 billion in free cash flow last year, while competitors collectively said they had lost roughly $10 billion on their streaming operations. Netflix also 40 production centers around the planet, many of which are not covered by Hollywood union contracts.

A very long strike would have tremendous follow-on impacts on “smaller production companies, broadcast networks, television broadcast station owners, movie theater owners and possibly Subscription-Video-on-Demand and Advertising-Video-on-Demand streamers,” the report said.

Regardless of length, a new agreement, whenever it comes, will likely both significantly increase costs and be “credit negative” for studios still trying to adjust to a new media business climate, the report said.

“This is because the dispute comes when these companies are under pressure to mitigate the secular decline in linear outlets, and show they can operate streaming platforms at a profit,” the report said. “We estimate an improved three-year contract for writers will ultimately cost media companies for which we have credit ratings $250 million to $350 million per year.”

Any big pay hikes and concessions by the studios would also be reflected in upcoming negotiations with other major Hollywood unions, including the actors of SAG-AFTRA and the Directors Guild of America, both of whose contracts also expire in the next few weeks.

Many in Hollywood are expecting a lengthy writers strike. Accordingly, the Moody’s report suggested the stoppage might last even longer than the 100-day strike in 2007-2008 that cost the Los Angeles area hundreds of millions of dollars in economic losses. That strike also reshaped the television industry, fostering an explosion of cheap, non-union reality programming and a partial turn away from the premium scripted programming created by WGA members.

A long strike would most hurt companies with weaker balance sheets, though the company said “the bulk of the effect” on credit ratings would likely be temporary, and depends on the impact of delays in film and TV production.

The report suggested one sliver of hope: a much shorter strike than three months would likely have a “nominal effect” on the industry.

“We do not expect (a shorter strike) to seriously hurt revenue and cash flow, particularly for large, diversified investment-grade companies,” Moody’s said. “Strikes that are longer typically result in short-term softness tied to the lack of new content when pipelines are exhausted, pushing out releases of theatrical films and scripted TV series, despite the industry evolution over the last decade.”