The media and entertainment industry prides itself on its mastery of classical storytelling’s three acts: the setup, the conflict and the resolution.

It’s safe to declare the first act of the streaming video wars over. Barring a surprise late entrant, every major media and technology company that wants to be in the streaming game has planted a flag. Disney+, Apple TV+, Paramount+, Peacock and other new streaming services are spreading around the globe.

“Act one was the land grab phase,” said Chris Marangi, a media investor and portfolio manager at Gamco Investors. “Now we’re in the middle act.”

Last month, the central conflict of the streaming wars came into focus. The industry was thrust into turmoil after Netflix disclosed its first quarterly drop in subscribers in more than a decade and warned subscriber losses would continue in the near term.

That news set off worries about streaming’s future and cast doubt on whether the growing number of platforms could become profitable. At stake are the valuations of the world’s largest media and entertainment companies — Disney, Comcast, Netflix and Warner Bros. Discovery — and the tens of billions of dollars being spent each year on new original streaming content.

As recently as October, Netflix, whose hit series “Stranger Things” returned Friday, had a market capitalization more than $300 billion, topping Disney’s at $290 billion. But its shares are down over 67% from the start of the year, slashing the company’s worth to around $86 billion. 

Legacy media companies that followed Netflix’s lead and pivoted to streaming video have suffered, too.

Disney shares are among the worst performing stocks on the Dow Jones industrials this year, down about 30%. That’s even though series such as “The Book of Boba Fett” and “Moon Knight” helped Disney+ add 20 million subscribers in the past two quarters. The highly anticipated “Obi-Wan Kenobi” premiered on Friday.

Warner Bros. Discovery’s HBO and HBO Max services also added 12.8 million subscribers over the past year, bringing total subscribers to 76.8 million globally. But shares are down more than 20% since the company’s stock began trading in April following the merger of WarnerMedia and Discovery.

Nobody knows whether streaming’s final act will reveal a path to profitability or which players might emerge dominant. Not that long ago, the formula for streaming success seemed straightforward: Add subscribers, see stock prices climb. But Netflix’s shocking freefall has forced executives to rethink their next moves. 

“The pandemic created a boom, with all these new subscribers efficiently stuck at home, and now a bust,” said Michael Nathanson, a MoffettNathanson media analyst. “Now all these companies need to make a decision. Do you keep chasing Netflix around the globe, or do you stop the fight?”

The simplest path for companies could be to wait and see whether their big money bets on exclusive streaming content will pay off with renewed investor enthusiasm.

Disney said late last year it would spend $33 billion on content in 2022, while Comcast CEO Brian Roberts pledged $3 billion for NBCUniversal’s Peacock this year and $5 billion for the streaming service in 2023.

The efforts aren’t profitable yet, and losses are piling up. Disney reported an operating loss of $887 million related to its streaming services this past quarter — widening on a loss of $290 million a year ago. Comcast has estimated Peacock would lose $2.5 billion this year, after losing $1.7 billion in 2021.

Media executives knew it would take time for streaming to start making money. Disney estimated Disney+, its signature streaming service, will become profitable in 2024. Warner Bros. Discovery’s HBO Max, Paramount Global’s Paramount+ and Comcast’s Peacock forecast the same profitability timeline.

What’s changed is chasing Netflix no longer appears like a winning strategy because investors have soured on the idea. While Netflix said last quarter that growth will accelerate again in the second half of the year, the precipitous fall in its shares suggests investors no longer view the total addressable market of streaming subscribers as 700 million to 1 billion homes, as CFO Spencer Neumann has said, but rather a number far closer to Netflix’s total global tally of 222 million.

That sets up a major question for legacy media chief executives: Does it make sense to keep throwing money at streaming, or is it smarter to hold back to cut costs?

“We’re going to spend more on content — but you’re not going to see us come in and go, ‘All right, we’re going to spend $5 billion more,'” said Warner Bros. Discovery CEO David Zaslav during an investor call in February, after Netflix had begun its slide but before it nose-dived. “We’re going to be measured, we’re going to be smart and we’re going to be careful.”

Ironically, Zaslav’s philosophy may echo that of former HBO chief Richard Plepler, whose streaming strategy was rejected by former WarnerMedia CEO John Stankey. Plepler generally argued “more is not better, better is better,” choosing to focus on prestige rather than volume.

While Zaslav has preliminarily outlined a streaming strategy of putting HBO Max together with Discovery+, and then potentially adding CNN news and Turner sports on top of that, he’s now faced with a market that doesn’t appear to support streaming growth at all costs. That may or may not slow down his efforts to push all of his best content into his new flagship streaming product.

That has long been Disney’s choice of approach; it has purposefully held ESPN’s live sports outside of streaming to support the viability of the traditional pay TV bundle — a proven moneymaker for Disney.

Holding back content from streaming services could have downsides. Simply slowing down the inevitable deterioration of cable TV probably isn’t an achievement many shareholders would celebrate. Investors typically flock to growth, not less rapid decline.

Traditional TV also lacks the flexibility of streaming, which many viewers have come to prefer. Digital viewing allows for mobile watching on multiple devices at any time. A la carte pricing gives consumers more choices, compared with having to spend nearly $100 a month on a bundle of cable networks, most of which they don’t watch.

Consolidation is another prospect, given the growing number of players vying for viewers. As it stands, Amazon Prime Video, Apple TV+, Disney+, HBO Max/Discovery+, Netflix, Paramount+ and Peacock all have global ambitions as profitable streaming services.

Media executives largely agree that some of those services will need to combine, quibbling only about how many will survive.

One major acquisition could alter how investors view the industry’s potential, said Gamco’s Marangi. “Hopefully the final act is growth again,” he said. “The reason to stay invested is you don’t know when act three will begin.”

U.S. regulators may make any deal among the largest streamers difficult. Amazon bought MGM, the studio behind the James Bond franchise, for $8.5 billion, but it’s unclear whether it would want to buy anything much larger.

Government restrictions around broadcast station ownership would almost certainly doom a deal that put, say, NBC and CBS together. That likely eliminates a straight merger between parent companies NBCUniversal and Paramount Global without divesting one of the two broadcast networks, and its owned affiliates, in a separate, messier transaction.

But if streaming continues to take over as the dominant form of viewership, it’s possible regulators will eventually soften to the idea that broadcast network ownership is anachronistic. New presidential administrations may be open to deals current regulators may try to deny.

Warren Buffett’s Berkshire Hathaway said this month it bought 69 million shares of Paramount Global — a sign Buffett and his colleagues either believe the company’s business prospects will improve or the company will get acquired with an M&A premium to boost shares.

Some bullish investors hope new ad-supported streaming subscriptions that cost less will help find new customers. Disney is planning to launch a new ad-laden Disney+ late this year. Netflix also shocked the media world by announcing it plans to launch an advertising-supported service after years of refusing to consider commercials.

While a cheaper Netflix may lead to some of its existing customers paying less, an advertising-supported service could actually help with profitability. Comcast’s Roberts said earlier this year that the blended average revenue per user at Peacock, which already offers cheaper subscriptions with ads, is about $10 per month. That illustrates the value of advertising, given the vast majority of Peacock subscribers either pay nothing or $4.99 per month.

A Netflix with ads may also help restart subscriber growth. U.S. and Canadian customers pay an average of nearly $15 per month for Netflix. That compares to Disney’s average of just $6. Netflix could expand its appeal by offering an option to pay $9.99 (or less) per month — a price level HBO executives believed was essential to generate significant numbers of new customers for customers used to paying $15 per month. HBO Max announced its $9.99 per month ad-supported service last year. Netflix hasn’t announced a price yet for its ad-supported product.

Still, Disney and Netflix plan to unveil the options as the prospect of a recession looms over the global economy. That could dampen hopes for ad revenue if corporations tighten marketing budgets.

“The macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month,” wrote Snap CEO Evan Spiegel in a note to employees this week. Snap makes most of its money from advertising. Shares dropped 43% the next day.

“Advertising is an inherently volatile business,” said Patrick Steel, former CEO of Politico, the political digital media company. “The slowdown which started in the fall has accelerated in the last few months. We are now in a down cycle.”

Offering cheaper, ad-supported subscription won’t matter unless Netflix and Disney give consumers a reason to sign up with consistently good shows, said Bill Smead, chief investment officer at Smead Capital Management, whose funds own shares of Warner Bros. Discovery.

The shift in the second act of the streaming wars could see investors rewarding the best content rather than the most powerful model of distribution. Netflix co-founder and co-CEO Reed Hastings told the New York Times his company “is continuing to have some of the most popular shows in America and around the world.” But it remains to be seen if Netflix can compete with legacy media’s established content engines and intellectual property when the market isn’t rewarding ever-ballooning budgets.

“Netflix broke the moat of traditional pay TV, which was a very good, profitable business, and investors followed,” said Smead. “But Netflix may have underestimated how hard it is to consistently come up with great content, especially when capital markets stop supporting you and the Fed stops giving away free money.”

The major problem with staying the course is it’s not an exciting new opportunity for investors who have soured on the streaming wars.

“The days of getting a tech multiple on these companies are probably over,” said Andrew Walker, a portfolio manager at Rangeley Capital, whose fund also owns Warner Bros. Discovery. “But maybe you don’t need a tech multiple to do well at these prices? That’s what we’re all trying to figure out right now.”

Offering a new storyline is one way to change the stale investment narrative. Media analyst Rich Greenfield advocates Disney acquire Roblox, a gaming company based on digital multiplayer interactive worlds, to show investors it’s leaning into creating experiential entertainment.

“I just keep thinking about Bob Iger,” Greenfield said of the former Disney CEO, who departed the company in December. “When he came in, he made his mark by buying Pixar. That transformative transaction was doing something big and bold early on.”

Given the extreme pullback on Roblox shares, Greenfield noted Disney CEO Bob Chapek has an opportunity to make a transformative deal that could alter the way investors view his company. Roblox’s enterprise value is about $18 billion, down from about $60 billion at the start of the year.

But media companies have historically shied away from gaming and other out-of-the-box acquisitions. Under Iger, Disney shut down its game development division in 2016. Acquisitions can help companies diversify and help them plant a flag in another industry, but they can also lead to mismanagement, culture clash, and poor decision making (see: AOL-Time Warner, AT&T-DirecTV, AT&T-Time Warner). Comcast recently rejected a deal to merge NBCUniversal with video game company EA, according to a person familiar with the matter. Puck was first to report the discussions.

Yet big media companies are no longer compelling products on their own, said Eric Jackson, founder and president of EMJ Capital, who focuses on media and technology investing.

Apple and Amazon have developed streaming services to bolster their services offerings around their primary businesses. Apple TV+ is compelling as an added reason for consumers to buy Apple phones and tablets, Jackson said, but it’s not special as an individual stand-alone service. Amazon Prime Video amounts to a benefit making a Prime subscription more compelling, though the primary reason to subscribe to Prime continues to be free shipping for Amazon’s enormous e-commerce business.

There’s no obvious reason the business will suddenly be valued differently, Jackson said. The era of the stand-alone pure-play media company may be over, he said.

“Media/streaming is now the parsley on the meal — not the meal,” he said.

Disclosure: CNBC is part of NBCUniversal, which is owned by Comcast.

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