Wall Street Punishes U.S. Media as Cord Cutting Accelerates

The Biggest Studios and their Bosses

One person’s crisis may be another’s opportunity. As the board rooms and C-suites of US media conglomerates convulse to the rhythms of finger pointing and job preservation, publicly-listed media companies haemorrhage cash from self-inflicted wounds. 

Stock market investors in the largest US media companies are feeling the pressure while private equity investors embrace a growing Media & Entertainment industry ripe for continued disruption. 

Private Equity fund managers broke records in 2021 with US$733 billion in new capital raised, the largest full-year tally on record. According to an article in Private Equity International, a PE industry trade journal, Private Equity fund managers are targeting US$930 billion for 2022. 

Read the full article here.

Private Equity has funded a staggering 42% of M&A deals in the Media & Entertainment industry over the past 12 months, up from 24% in 2018. Announced deal value totalled a record US$469 billion. According to PWC’s Media and telecommunications midyear outlook, deal momentum continued into the second half of 2022 at a vigorous pace.

PWC reports that, “intellectual property […] continues to drive the investment thesis for players in the media space”. 

Read the full outlook here.

While Private Equity drives capital into the content production and content management end of the Media & Entertainment industry, the publicly-traded US media giants have focused on seeking or maintaining control over distribution and delivery as the Streaming Wars wage on.

This may explain why Wall Street is punishing US Media in the worst year for the sector’s publicly-listed stocks in thirty years. In an article published on November 10, 2022, Bloomberg data shows that share prices for some of the largest US media companies have retreated far more than the broad S&P 500 index.   

Image credit: Bloomberg. Source: Bloomberg data.

In an expansive expose, Bloomberg journalist Lucas Shaw has sought to explain the painful lessons of Media Majors relying on legacy business models that may no longer reflect commercial reality. As Media & Entertainment continues to grow beyond US$2.5 trillion in annual revenue driven by increased digital consumption of entertainment content, the largest media conglomerates have begun to feel constraints imposed by over-reliance on yesterday’s business models. 

“While Netflix’ subscriber loss earlier this year precipitated the initial concerns, the real reason is this:” Shaw reports. “The Pay-TV business is in free fall”. 

Read the full Bloomberg article here.  

Broadcast television’s evolution into cable and satellite delivery between the 1950s and the 1990s, and the windfall revenues that era enjoyed, are responsible for industry consolidation and vertical integration that created some of the largest media companies today. The heritage of linear television has contributed greatly to US popular culture, for better or for worse and the old guard within the largest media companies are loath to move on. The inheritance of those legacy assets and business models have proven to be an anchor to large, publicly-listed conglomerates with institutional difficulty in adapting to the dramatic change in economic climate over the past decade. 

The institutions built by previous generations may not always be purpose-built for the environment of the next generation. Large, vertically integrated media conglomerates demonstrate this lesson as they cling to the legacy of fading business models and a sea-change in demographics. What may have been a strong advantage in the early days of the Streaming Wars is proving to be an Achilles heal.  The Streaming Wars continue to accelerate what may prove a crippling reliance on Pay TV revenues by the largest US media conglomerates.

The dramatic transformation of the Media & Entertainment industry from analogue to digital, necessitated by Netflix and Amazon’s paradigm shifting embrace of SVOD, has been expensive. For over a decade, the US media conglomerates have relied on the once core business of Pay TV through cable and satellite subscription services to cover their costs of the Streaming Wars. 

Affiliate fees are what cable and satellite channels pay to distribute a studio’s content. Those cable and satellite channels then rake in revenues for delivering advertisers to subscribing audiences. For media companies with both content production and distribution, revenues are generated from affiliate fees, Pay TV subscribers and advertisers alike. Vertically integrated media conglomerates simply pay for content produced by one side of their corporate structure with subscriber and affiliate fees generated by the other side. Those media companies without the cable and satellite distribution assets become increasingly dependent on those with them. 

But in an age of wireless broadband internet, cord cutting has taken a toll. Content consumption over broadband internet has persuaded many households to cut the cost of cable and satellite subscriptions by “cutting the cord”. As cord cutting accelerates, cable and satellite networks are squeezed between fewer and fewer subscribers and advertisers, who now have digital options, pushing down hard on what they are willing to pay.

Image credit: Bloomberg. Source: MoffetNathanson, Quarterly data.

Hollywood, and the heritage of story-telling, has propelled the Media & Entertainment industry into one of the most lucrative economic sectors on the planet. Most of the Media Majors have spent billions transforming themselves from analogue Pay TV behemoths into digital Netflix-killers while relying on Pay TV to subsidise their war chests. 

While the production of entertainment content is booming in an effort to keep up with global audiences that now consume content over broadband internet, the number of US subscribers to cable and satellite services is in steep decline. With most of the media conglomerates being vertically integrated between legacy distribution channels, particularly cable and satellite, and studio entertainment production, the failure of one side of that equation now threatens the success of the other.

The days of Pay TV seem to be over and Wall Street is punishing those who failed to distinguish legacy from heritage. 

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