If the last few years have taught us anything, it has to be that expectations can always be confounded, and that what happened last month is no guide to what will happen next.
In these febrile times the media industry faces a wide range of challenges, and nowhere is this more visible than the streaming market, where content spend, market share and global expansion have been the driving forces for several years.
The financial bear awakes
One of the biggest financial stories of the last six months has been rising inflation across much of the globe, leading to many dire financial predictions. This general trend has resulted most recently in a ‘bear market’ hitting so-called risk based investments, dropping share prices on most major global indexes.
The chances of the bear market having an impact on content creation revenues into the next few years seem high, especially given the backdrop of other economic challenges, including the Ukraine war and supply chain disruption. This comes at an unfortunate moment from a content industry perspective, with 2022 slated as a bumper year even as recently as Dec 2021. Indeed, an Ampere report from just six months ago predicted that the double digit growth in content spend in 2021 was set to be considerably exceeded in 2022.
Hannah Walsh, Research Manager at Ampere Analysis siad: “In 2022, we expect content investment to exceed $230 billion, primarily driven by subscription streaming services, as the battle in the original content arena intensifies – both in the US, but also in the global markets which are increasingly key for growth.”
Global ad spend still rising
A report from WPP’s media buying unit GroupM recently predicted continued growth in global advertising spend in spite of the general economic outlook. The company’s global mid-year forecast predicts an 8.4% growth in global ad spend this year, just below its December estimate which put growth at 9.7%, and the US alone at 9.3% - a sharp contrast to China, which has been revised to 3.3%.
Television advertising is forecast to grow 4% globally in 2022, while the continued rise of the streaming industry is expected to push spend on connected TV up 24% year-on-year, to account for 12% of global TV spend.
WPP said that sources of growth in 2022 include increasing numbers of new small businesses, which are likely to advertise at higher levels than the business they are replacing; venture-funded “new economy” advertisers seeking growth; and Chinese-based marketers advertising abroad. Low unemployment levels and high household savings are another bright spot. However, interest rate hikes will be a drag on growth.
Netflix - the canary in the coalmine?
Of course, good news for advertisers is not necessarily good news across the board, as Netflix demonstrated back in April 2020, seeing a sharp stock market response to the latest subscriber figures from the streaming giant. Indeed, the first official drop in Netflix subscribers (200k) in a decade triggered a 35% drop in stock value, which may (or may not) also be pricing in a predicted 2 million subscriber drop in the second quarter of 2022.
While Netflix might have lost a touch of lustre, the wider over the top (OTT) streaming market continues to look healthy. A report from ReAnIn assessed the market to be worth USD 120.6 billion in the year 2021 and is projected to reach USD 261.8 billion by the year 2028, registering a CAGR of 11.9% during the forecast period. The report puts this down to increasing device penetration, continued popularity of home-streaming vs movie theatres post-pandemic, and expansion of streaming services in emerging economies.
Interestingly, the report also said that Advertising-supported Video on Demand (AVOD) accounted for the highest market share (about 40%) in 2021, while Subscription Video on Demand (SVOD) is expected to witness the highest CAGR during the forecast period. Many analysts have pointed to the expansion in AVOD platforms and standalone channels (such as Paramount’s Pluto TV) as being a direct contributor to slowing subscriber traction overall.
The bear and the Mouse
Of course, not all SVOD players are experiencing the growing pains of Netflix quite so directly, with Disney in a bullish mood, in spite of rising content costs. In Q1 2022, Disney saw higher content costs contribute to a tripled quarterly operating loss to $900 million, but on the flipside a 33% year-on-year subscriptions growth on Disney+. The company projects that Disney+ will reach 230 million-260 million subscribers in fiscal year 2024, but also noted that not all channels are equal.
“Direct-to-Consumer revenues for the quarter increased 23% to $4.9 billion and operating loss increased $0.6 billion to $0.9 billion. The increase in operating loss was due to higher losses at Disney+ and ESPN+ and lower operating income at Hulu”, noted the media giant.
Whether times are tough or booming, mergers and acquisitions remain a central strategic play, most recently and significantly in the case of the WarnerMedia & Discovery merger to become Warner Bros. Discovery, which completed back in early April 2022. Already the new entity has pledged to save $3 billion in ‘synergies’, which are likely to include cutting costs in many areas, such as ad sales.
Cowen analyst Doug Creutz noted just weeks ago that: “We fully expect the company to achieve its cost synergy targets; the main question is whether it can do so without causing too much disruption to the Warner culture or the content pipeline.”
In summary, it seems likely that the global squeeze on liquidity and pressures on the cost of living will have an impact on entertainment content too. However, it will probably manifest as a more targeted, precise approach to content production, rather than the open tap that was apparent in the early days of SVOD, when market share was the prime motivator.
The fact is that content spend has still increased overall - Disney may have cut $1 billion from the 2022 budget, but the simple fact remains that it will still spend $7 billion more than a year ago. The bear might bite, but the content industry will continue to thrive.
For more information about how the content industry is approaching the challenges of producing content, watch: Content supply chain innovation with Verizon’s Josh Arensberg.