The global economy has stepped back from the verge of collapse, but many economists believe that consumer spending habits have been permanently reset — at lower levels.
For decades, the media and entertainment industry has heard critics predict its demise. The industry is struggling to cope with the digital evolution amid an economic downturn.
In the 1950s, experts were sure that television would kill radio. In the 1970s, cable TV was going to spell the end of free-to-air television. In the 1980s, video was going to shutter movie theaters.
More recently, YouTube has been seen as dooming professional content. And piracy — already having cut a swath through music — is causing alarmists to fear that it may destroy the entire industry.
But, to paraphrase Mark Twain, reports of its death are greatly exaggerated. The media and entertainment industry, each and every time, has not only survived but thrived. It has remained resilient when compared to the broader economy even during the worst economic crisis since the Great Depression.
Despite the critics’ shouts, many industry players are quietly expressing more optimism about their prospects than other industries and feel better prepared to take advantage of opportunities when the economy rebounds.
Figure 1
Using Standard and Poor’s S&P Global 1200 index as a measure, during the 20-month period ended 31 August 2009, the media and entertainment index outperformed the broader cross-industry index by 4.2% — with staggering volatility. Some media and entertainment companies’ share prices showed a decline of up to 91%, while others grew as much as 7%.1(See Figure 1.)
The perfect storm
The industry is facing a perfect storm of events:
- First, there’s the digital evolution, which is transforming the way consumers get information and entertainment, and the way advertisers reach their customers.
- Second, there’s the plummet in advertising and the severe decline in consumer discretionary spending.
- The third event involves the gravitational pull of online content on consumers, and the fact that they want it for free.
For companies that once thought they could pursue digital initiatives at their own pace, the perfect storm is forcing them to accelerate as their core businesses come under assault.
Yet despite the lashing winds of change, most media and entertainment companies are weathering the storm. While earnings are down in many media and entertainment subsectors, many companies have retained strong cash or working capital positions.
Most continue to be conservative with their cash management. Others are actively seeking strategic investment opportunities at bargain-basement prices. Those with less favorable liquidity positions are actively searching for ways to access capital or cut costs even further.
A new model for the new economy
As consumer behaviors and technology continue to change, companies need to rethink their business models. Content owners, for example, need to chart a new course for exploiting their content assets through distribution channels that were unheard of just a short time ago.
Finding the right balance will mean not only protecting profits from traditional distribution, but also establishing a profitable future.
Media and entertainment companies are also affected by vanishing consumer credit availability and job worries that together have resulted in a drop in discretionary spending — for example, in DVD sales and specialty-channel subscriptions (e.g., HBO, Showtime).
Companies have to rethink the timing of relaunching or repricing services or products. The global economy has stepped back from the verge of collapse, but many economists believe that consumer spending habits have been permanently reset — at lower levels.
Optimizing capital availability and maintaining financial flexibility have been priority considerations for media and entertainment companies during the economic downturn. But not necessarily at the expense of long-term planning.
True, there has been some short-term pain as companies secure their present, but those that reshape their businesses to compete in the digital age have the potential to position themselves for a strong and sustainable future.
1. Factset 2007.5B – Company Explorer 2.0 – Prices – Price Chart, accessed 2 September 2009.
