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Rapid Changes, Rapid Upheaval
The Media & Entertainment (M&E) industry is undergoing
rapid changes in many different dimensions which are impacting all
aspects of the video ecosystem, upending business models and
affecting consumer consumption and technology delivery models.
From an economic perspective, the “free money era” is
over. Lower interest rates helped to fuel Cable TV expansion with
continued MVPD carriage fee increases, escalating sports rights
fees, expanded film slates and funded the build-out of streaming
platforms. Today, however, all of those drivers that fueled M&E
growth are challenged. MVPD carriage fees for linear TV are in
decline. The lucrative business of home video, comprised of rentals
and purchases which subsidized the film industry, continues to
dwindle. Higher interest rates challenge M&E firms in servicing
the existing debt on their balance sheets and impact the ability to
support growth driven by debt-fueled M&A. Macro-economic issues
such as inflation and higher interest rates along with labor
strikes, cord-cutting and intense competition among streaming video
providers have resulted in significant structural changes to the
entire M&E ecosystem.
The industry economics are eroding, consumers are changing their
behavior and technology is advancing at a pace at which the
industry has never experienced. In view of all of these factors,
mergers and acquisitions to drive industry consolidation through
cost optimization, the adoption of new target operating models and
the execution of carve outs to divest non-core assets will define
the M&E business operating agenda for the next 12-24
months.
What Corporation Transformation Initiatives Are Impacting the
M&E Industry?
Almost every week, there are significant developments in the
M&E industry involving corporate transformation. Large
technology companies are purchasing broadcast rights to sporting
events that heretofore were only available on major broadcast
networks or Pay-TV channels. Streaming service providers are
removing programming for lower performing shows and sophisticated
algorithms are being used to provide information about how program
budgets are sized, authorized and executed across the global
marketplace.
Relative to what they were five years ago, many balance sheets
are now significantly more burdened. Acquiring long-term content
rights, increasing original scripted production and a blank-check
mentality for building out global streaming platforms appeared to
be a logical strategy to drive growth. But viewers shifted, Pay-TV
subscriptions decreased and viewers went shopping for selective
streaming subscriptions. However, consumer churn rates on streaming
services are significantly higher than historical MVPD churn rates,
thus making commitments to long-term sports rights and increased
original programing investments challenging to sustain.
The Macro Time Horizons in M&E
Ask anyone who has had a senior level position across any
M&E segment—film, television, music, etc.—what the
pace of change was over the course of 50 years (1960 to 2010) and
the response would probably be the notion that while there were
very significant changes during that period, they were also gradual
and accretive. Today’s changes are anything but that.
- In television, three broadcast channels per market grew to
hundreds via Pay-TV services. Network television was joined by
cable networks and the expansion of channels via the cable bundle,
home video (VHS/DVD), electronic sell through (EST) and video on
demand (VOD) all added new content windowing to drive incremental
revenue. - In Film, the box office expanded as theaters evolved into
multiplexes which led to the globalization of content with new
markets and territories as well as creating additional windows for
monetization such as Pay-TV, home video, VOD, EST and Premium VOD
for same day and date releases. - Streaming platforms were assumed to be a further extension of
monetizing the video ecosystem on a global basis, through
direct-to-consumer, subscription and ad-supported services.
However, the technology and the business models supporting
streaming have proven to be more transitory than accretive.
Streaming shifts audiences from traditional “cash cow”
businesses such as linear television but it is a lower margin,
higher churn and highly competitive offering. Streaming does not
currently provide the accretive revenue and margin pathways that
prior evolutions in the video ecosystem provided.
The evolution of those accretive windows and technologies for
incremental distribution played out over decades. But change is
accelerating and M&E is now competing with hyperscaler
technology platforms, their significant balance sheets and cash
reserves, as well as traditional M&E competitors.
It took Netflix 10 years to reach 100 million subscribers. It
took Disney+ 16 months to reach 100 million subscribers. After
decades of growth, cable service providers will continue to
experience losses in Pay-TV subscribers. According to audience
measurement firm Nielsen, U.S. TV-viewing time as of November 2023
was led by Streaming at 36.1 percent followed by Cable at 28.3
percent and Broadcast at 24.9 percent.
Driven by Wall Street’s mandate to measure media success via
digital platforms and a growth at all cost mentality, there has
been an incessant march to create streaming video services and to
establish direct-to-consumer relationships. Consumers struggle with
having to subscribe to multiple streaming services to watch desired
content. The challenge of content discovery is considerable. The
onus is now on the consumer to find content as opposed to the
traditional television viewing experience where content is
programmed and delivered for a passive viewing experience. Over
time, recommendation algorithms driven by artificial intelligence
(AI) and machine learning (ML) will assist in solving some of these
problems. Content providers at first enjoyed the revenue gained by
licensing content to streaming providers but then decided to
discontinue those licensing deals as they sought to keep their
content exclusively on their own streaming platforms to drive
subscriber growth. Original content creation and acquisition
budgets measured in the billions of dollars, increasing in double
digit percentages Year-over-Year (YoY).
The objective was clear: Gain as many subscribers as fast as
possible. The result? Hundreds of millions of subscribers
worldwide. But the “grow subscribers at any cost”
approach resulted in billions of dollars spent on creating original
content and building streaming platforms to support global
direct-to-consumer services at scale. The lost revenue from no
longer licensing their content to third parties has also
contributed to billions of dollars of losses in operating these
streaming services. The strategy for content exclusivity on owned
and operated streaming platforms eroded a proven and necessary
content monetization window.
Content Spend Forecast: Linear TV vs. Streaming
And then, a sensibility switch was turned on by Wall Street and
suddenly the new dictum is now profitability over subscriber
growth. The industry has come almost full circle in that it:
- Initially licensed content to streaming services to drive
incremental distribution revenue. - Recognized that content shouldn’t be on a competing service
to assist in driving a competitor’s growth and should be used
to drive subscriber growth on their owned and operated streaming
service platform. - Re-established third party licensing and the associated revenue
as they are important aspects of content monetization and
profitability. - Evolved their content windowing strategy to address when
content should be made available on their own streaming services as
well as licensed to other platforms to maximize distribution
revenue and audience reach.
According to The Hollywood Reporter, original content spend by
streaming providers grew 45% from 2021-2022 but only grew by 14% in
2023 as a result of the renewed focus on the profitability of
streaming services.
To be sure, there are companies in the M&E industry that
have healthy balance sheets and robust cash flow. There are also
numerous companies that are severely leveraged and have flat or
decreasing revenue along with high fixed overhead costs. This
creates significant challenges to generate free cash flow (FCF) to
service the debt, especially in relation to increased interest
rates. And, in many cases, EBITDA of these organizations is still
predominantly driven by their linear networks’ businesses. They
may have technical operations that may be better suited for a cloud
or streaming provider and are facing challenges from a crop of
competitors leveraging the newest technologies and scale to
reinvent current operations at far more advantageous operational
run rates.
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