Digital Media & Entertainment: Investments, M&A Industry Overview

Digital distribution platforms are increasing overall demand for content but also threatening networks and cable and satellite operators due to potential for substitution. Television companies that haven’t been making a shift to more digital have faced greater challenges and continued to lose subscribers in traditional large-bundle pay-tv over the past year. Media companies within broadcast networks, major sports programming (NFL, NBA etc.), and original content are better positioned for success in the future. Also, companies like Sky will continue to offer its build your own packages because the one size fits all strategy doesn’t work anymore.

Mobile will account for about 70% of all digital media consumption and about 50% of the estimated $220 billion global digital ad spending in 2018. Mobile platforms are continuing to grow as smartphone penetration grows to the projected third of the global population in 2019 (Industry Top Trends 2018).

In-house production

Networks are increasingly focusing on in-house production due to growing profitability of the international markets as well as the opportunity to provide content to new distribution platforms. One example of massive in-house content investments comes from Netflix who spent $4.9B in 2016, $6B in 2017, and it is expected to spend even more in 2018. Even though compelling content is becoming significantly important it is the flexibility of demand for content that consumers are after. This means that third party distributors of content like Netflix, Hulu are creating more in-house content. Disney has proposed its own OTT streaming service, which will cause other media companies to follow suit as there will be even more pressure on the traditional video bundle.

Growth in International demand

Increasing share of US film and TV content revenues coming from international markets, which is expected to continue throughout 2018. China and Latin America seem to offer the greatest potential for international market growth for SVOD but companies like Netflix must start to create content that correlates to the consumer’s needs of those countries, which will have big upfront costs.

Advertising

Advertising revenues are macro-driven and cyclical but subscription and transmission fees are becoming increasingly large contributors instead of advertising, which is migrating to social media (Industry Top Trends 2018).

Programmatic advertising and digital marketing is becoming more significant as advertisers’ are able to narrow in on certain audiences with personalized messages. Programmatic advertising enables advertisers to buy digital ad space automatically and better target their audience using data from consumers’ Internet consumption habits, giving them behavioral insights on existing and potential consumers. Depending on the brand ad agencies will need to offer more personalized advertising packages to advertisers as well as complementary targeted and mass-market ad campaigns.

Another theme that will emerge is the spending on digital transformation, and the digital advertising technology and marketing technology. This will help organizations to centralize customer management and real-time analytics as they become more client-focused (Industry Top Trends 2018).

Radio Broadcast

There is an expectation that the share of audience attention and advertising dollars is going to continue to decline at a slow rate because of the continued loss of market share to digital media. This should cause radio to have a slow loss of top-line growth as audiences consume more digital radio and other media alternatives (Industry Top Trends 2018).

Transactions

There has been several transactions in 2017 but the U.S. television industry saw four significant media and entertainment M&A transactions that have been proposed and could change the industry: AT&T’s proposed acquisition of Time Warner Inc. for $85B, Twenty-First Century Fox’s proposed acquisition of Sky for $15B, Discovery’s proposed acquisition of Scripps for $12B, and lastly Disney’s proposed acquisition of Twenty-First Century Fox fro $52B. Throughout 2018 there should be more vertical and horizontal transactions like these four as more media companies try to become more relevant within the television ecosystem (Industry Top Trends 2018).

Overseas in China saw the Hong Kong-listed Tencent acquire a controlling stake in Finnish mobile game developer Supercell from owner SoftBank Group Corp for $8.6bn (M&A in the media sector).

Radio Broadcast M&A of CBS Radio Inc. and Entercom Communications Corp (Industry Top Trends 2018).

Eventbrite acquires Ticketfly from Pandora for $200M(Press Release).

Opportunities

Many of the newer market entrants in television appear comfortable with sacrificing short term profitability to acquire compelling content that they believe will help drive long-term subscriber growth. However, this strategy will likely pressure established media companies’ operating margins, requiring them to show considerable discipline in their programming budgets to avoid margin degradation. We also believe that while most media companies will continue to invest in their own content production, those with weaker balance sheets will need other means such as co-production partnerships and joint ventures to gain access to either intellectual property or financing to produce the content. Also, since most of the companies like Netflix and Hulu are continuing to get bigger and produce in-house content it is forcing major media companies like Lionsgate and Paramount to create better in-house content and compete in the streaming business. These major companies will be looking to gain an upside this year on their competition. Look for acquisitions and joint ventures from all companies looking to gain any sort of edge of the market share in the USA and internationally.

There has also been a growth in IT and consulting companies merging such as Publicis Group partnering with Capgemini on a contract with McDonalds and Accenture acquiring Australian creative agency The Monkeys. This trend should continue and shows the importance of ad agencies to businesses marketing strategies throughout the world. Look for further acquisitions of consulting companies and ad agencies looking to gain an edge on their competition (Industry Top Trends 2018).

Risks

Key risks in the media and entertainment industry include any global economic uncertainty or shocks hurting consumer confidence and ad spending, increased entertainment options leading to accelerated television audience fragmentation, and continued shift in ad spending to digital media from traditional media. As the USA market share becomes harder to get for companies they will have to start looking in international markets for growth, which is never a guarantee that companies will succeed and it could have huge upfront costs putting companies in strenuous situations (Industry Top Trends 2018).

Television

Most of traditional TV has higher pricing than those of SVOD and pay-TV bundles, which will cause even more viewership to decline. Even phone companies like AT&T are offering free subscription to HBO for free, which will continue to gear audiences to SVOD. Most media companies should take one of three paths: partnering with platforms that already have DTC operational capabilities, such as customer case and billing; investing in building their own platforms; or acquiring key technology, such as Disney did with its recently announced acquisition of a controlling stake in Major League Baseball’s leading BAM Tech platform (Industry Top Trends 2018).

In-house content

The in-house content that is going to be continued to be delivered to consumers can be seen as overwhelming and might cause a decline in subscribers. If companies wish to expand into international markets they must appeal to the consumers if they want to be successful, which will have huge upfront costs to create this type of content.

Radio Broadcast

There has been few M&A deals other than the CBS Radio one mentioned above and there shouldn’t be many over the next year. Since the 2008-2009 recession the radio industry seems still have yet to recover.

Ad Fraud and Fake News

The expectation is that ad fraud should continue in 2018 because there is little punishment still for this. Types of ad fraud are nonhuman traffic, ads that have no chance of being seen, and ads that intentionally misrepresent. Ad fraud has an overall potential to weaken and damage media companies and brands. Also, compliance and security costs will increase in 2018 as companies invest in people and technology to strengthen systems and prevent abuse.

Regulations

Companies like Apple, Amazon, Google, and Facebook face many regulations globally that vary depending on the country and how much they wish to encourage growth or competition. The uncertainty of how these companies are being regulated also affect how media, tech, and telecom businesses will be regulated as a whole (Industry Top Trends 2018).

Sources

Industry Top Trends 2018, INDUSTRY TOP TRENDS 2018: MEDIA AND ENTERTAINMENT – SPRATINGS(2017), https://www.spratings.com/documents/20184/1481001/ITT_MediaEntertainment_2018.pdf/ca0bf634-ee52-459d-a906-8c6a3c82b7f0.

M&A in the media sector, FINANCIER WORLDWIDE, https://www.financierworldwide.com/ma-in-the-media-sector/#.WlhCwpM-eb8 (last visited Jan 14, 2018).

Press Release: Eventbrite to Acquire Ticketfly, Eventbrite US Blog(2017), https://www.eventbrite.com/blog/eventbrite-and-ticketfly-ds00/ (last visited Jan 14, 2018).

Samimain, 4 TRENDS IN TV AND DIGITAL MEDIA THAT WILL SHAKE UP THE INDUSTRY IN 2018– ADWEEK(2017), https://www.adweek.com/tv-video/4-trends-tv-and-digital-media-that-will-shake-up-the-industry-in-2018/ (last visited Jan 14, 2018).