By Eric Becker and Ashley DeSimone, ICR Global Media, Sports & Entertainment Practice
There is no way to sugarcoat just how difficult a year 2022 was for stocks in the media and entertainment sector, with Fox Corporation (NASDAQ: FOX) the big “winner” with its stock falling only 15%. Many companies in the media space lost market value of 35-50%, with some facing even more precipitous declines.
With most media companies already under pressure due to the disruptive nature of the transition from traditional pay TV and theatrical movie releases to one dominated by lower margin streaming, previous market darling Netflix dramatically missed on both short-term and long-term revenues and growth prospects in April, and continues to be scrutinized for its advertising-model roll out, sending a shockwave through the category.
The total addressable market (TAM) size for streaming media is now believed to be far smaller than originally expected. After the Netflix miss, the TAM decline is only one indicator of the category’s new reality. Fundamental problems now exist that must be addressed by key players.
Media companies and their investors have poured billions of dollars into the promise of untapped growth prospects for streaming and unlimited thirst from consumers for new content. In 2022, these same companies had the fundamentals of their future business strategies called into question.
They were seeing the iceberg melting even more rapidly than expected in the entrenched ecosystem, which had been underwriting the very same future investments in growth. To compound the problems, the incremental new ice that has been built up from streaming subscriber and viewership gains for subscription video on demand (SVOD) and advertising video on demand (AVOD) have turned out to be far less valuable than the lost revenues from the traditional pay TV ice melt. And even more troubling, subscribers can now more readily come and go since streaming churn is becoming an entrenched component of new consumer behavior.
Layer in less discretionary consumer income due to inflation and a possible recession, a shift (perhaps short-term) from post-COVID consumers wanting to enjoy the experiential economy, competition from mega-cap high-tech players (Amazon and Apple just to name two), new challenges for ad-revenue driven business models and a proliferation of streaming alternatives now competing for subscribers and ad dollars, and you have an industry that is filled with competition and future uncertainty.
One safe haven has been sports content. However, the business of professional and collegiate sports has its own challenges. While the major professional and collegiate associations are weathering the disruption with new broadcast and cable deals secured, all is not well for the overall category.
The viability of many regional sports networks, led by Bally Sports, are in serious question, as DTC economics are not materializing and RSNs have been particularly damaged by the erosion of the traditional bundle. Some have speculated that bankruptcy for many regionals could be likely in the coming years. While some RSNs appear to be managing the challenges better (YES, NESN) than others, the demise – or severe blows – to RSN economics will have an impact idiosyncratic to the teams, the leagues, and the specific markets, though there is no indication as of now that professional sports team valuation growth will be impacted.
The path forward in 2023 is uncertain for the broader category. In Fall 2022, Comcast reported its worst ever pay TV losses and #2 cable provider, Spectrum, reported only mildly better results. Yet, despite all that’s mentioned above, it’s not all doom and gloom for media and entertainment.
There will be many winners in the broader business. Even slowing growth rates in new programming has still resulted in historically high levels of content creation. And entertainment has always been one of the most resilient of industries and consumer demand and consumption remains robust. The category has fallen out of favor in the past only to spring back again, akin to the phoenix rising from the ashes. M&A is a possibility for many small-medium sized players, though this has been speculated on for years, and it’s unclear who could emerge as buyers in this climate. Smaller entities joining forces for collaboration, partnerships, and outright business combinations also remains possible. Just this week we witnessed WWE announce that it is seeking strategic alternatives.
Broadband adoption is growing. While this could commoditize the high-margin economics of the business — particularly for smaller broader providers — making high-speed access in the U.S. ubiquitous and affordable is good for business. Particularly in smaller, underserved, and rural markets this is a tremendous longer-term net positive for the category, and the country as a whole.
Communications professionals in the media and entertainment category need to be cognizant of the severe overhang plaguing the category right now, understand that the downside risk of missing expectations and the reality that losing credibility with analysts and press has never been more acute. Smart professionals will understand the very challenging environment we are operating in right now and strike opportunistically as the category recovers and green shoots of growth start anew.
Competition and uncertainty create a terribly difficult environment and overhang in which to operate. However, the disruption offers opportunity for savvy media and entertainment communications professionals to navigate in, albeit with caution. Differentiation, innovation, potential M&A, etc., all offer PR green shoots for media companies and visionary executives as we prepare for the phoenix to rise once again.
Follow the entire ICR 2023 trends series on the ICR Insights blog.