Hollywood faces painful next episode

The sense of hope for the film and TV industries at the conclusion of Hollywood's six-month labor stoppage is crashing into the grim reality that the industry faces a brutal road ahead.

Why it matters: Hollywood's economic structure is being rewritten as studios make massive budget cuts to appease jittery investors.

By the numbers: Moody's Investors Service estimated the new guild contracts for Hollywood workers will cost studios between $450 million and $600 million per year.

What’s happening: Studios are cutting projects.

• The day after the strike ended, Warner Bros. Discovery shelved John Cena's "Coyote Vs. Acme" film, which completed filming last year.
• Most recently, on Wednesday, Netflix canceled five series including “Shadow and Bone” and “Glamorous.”

Yes, but: The cuts aren't new.

• Studios had cut back on production before the strikes. The first quarter of 2023 had 31 fewer active TV and film productions compared to the same 2022 timeframe, which translated to more than $1 billion less in spending, according to ProdPro, a production tracking service.
• During the strikes, series renewed for additional seasons — including Amazon's "A League of Their Own" and "The Peripheral" — were canceled because of the labor stoppage.

The big picture: The strikes gave studios cover to dramatically rein in spending that had ballooned over the past few years in an industry-wide effort to gain streaming subscribers.

• Conversations with multiple industry insiders in the days after the strike made it clear that most expect contraction throughout the next year.
• That means fewer TV series greenlighted, tighter budgets on TV and film productions; and a dramatic drop in eight and nine-figure production deals for creators.

Meanwhile, the scramble to restart production will lead to further production delays, which means that even more projects will get shelved as studios look for ways to save money.

Zoom in: Smaller independent production companies could bear the biggest brunt of the coming Hollywood contraction.

• Star-driven production entities like Reese Witherspoon's Hello Sunshine, LeBron James' SpringHill and Will Smith's Westbrook scored high valuations on minority investments and outright acquisitions.
• Some insiders expect these companies will struggle to justify those high valuations, which could force some to seek more capital or find an exit ramp.
• At the same time, one insider suggested there could be an opportunity for companies that can create content for less money.

What's next: Next year could see a renewed wave of consolidation as the streaming era spits out unworthy competitors to Netflix.

• Many media giants are racing to turn streaming profitable before the bottom completely falls out of their legacy businesses — which have been funding the streaming push.
• Sometime next year, Disney will finish off its buyout of Comcast's 33% stake in Hulu. Comcast CEO Brian Roberts' history suggests that lump of cash could make him a buyer.

The intrigue: Then there's Warner Bros. Discovery. A key stipulation of its 2022 deal with AT&T essentially prevented WBD from having any merger talks until April 2024.

• Once that expires, WBD could either be a buyer or find a big merger partner, such as Paramount or Comcast, the two companies most often cited in any WBD tie-up.
• David Zaslav, the CEO of Warner Bros. Discovery, said during WBD's earnings call this month that he's positioning the company to be a buyer: "We're de-levering at a time when our peers are levering up, at a time when our peers are unstable, and there is a lot of excess competitive — excess players in the market. ... We could be really opportunistic over the next 12 to 24 months."

The bottom line: The dual strikes by the writers and actors underscored the myriad of challenges Hollywood faces. Things will likely get worse before they get better.