7 minute read 12 May 2022
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The CEO Imperative: M&E industry investments are center stage as uncertainty builds

By John Harrison

EY Americas Media & Entertainment Leader

Transformative leader with a passion for media and entertainment. Identifying the opportunities afforded by convergence and disruption. Executing strategies to succeed in a fast moving market.

7 minute read 12 May 2022

As M&E CEOs digest last year’s M&As, they are looking inward, harvesting capital from legacy businesses to pursue high-growth opportunities.

  • Historic government stimulus and a rapid economic recovery have spurred organic and inorganic growth, as seen in media and entertainment industry performance.
  • However, geopolitical tensions have forced media and entertainment (M&E) CEOs to reconsider cross-border activity and reconfigure supply chains.
  • Focused on the future, M&E CEOs are investing in digital transformation and existing businesses to accelerate organic growth, while watching macro indicators.

Although every company in every sector has felt the impact of the COVID-19 pandemic, the media and entertainment (M&E) industry overall fared better than most (albeit with significant variability across subsectors). Leading M&E CEOs are reframing their investment strategies for growth in a changed world. They’re benefiting from an extended economic recovery and embracing the shifts initiated or accelerated by the pandemic.

M&A remains a tool for reshaping portfolios, but using mergers and acquisitions is only one of many media and entertainment industry trends that CEOs are using. M&E executives are also looking inward to optimize investments and position their companies for the future.

In this edition of the CEO Imperative Series, which provides critical answers and actions to help CEOs reframe the future of their organizations, we explore how media and entertainment M&E CEOs are responding to the pandemic and the recovery, and offer recommended actions to help them fuel market-leading growth in the year ahead.

Historic government stimulus to address the pandemic supported markets and emboldened M&E industry investment 

According to the EY 2022 CEO Outlook Survey of more than 2,000 CEOs, including 90 M&E CEOs, the vast majority (86%) of M&E companies have been impacted by the pandemic. And while one in five (21%) M&E CEOs say that their industry has been fundamentally reshaped for the worse due to consumers radically — and permanently — changing behaviors, the impact of the pandemic also accelerated performance in subsectors that were already benefiting from disruption. Streaming and video games, for example, experienced significant growth throughout 2020 and much of 2021. Operationally, M&E CEOs ramped up digital transformation initiatives to improve efficiency, lower expenses and power through the effects of the pandemic.

Yet, despite the turmoil the pandemic wrought, aggressive government financial support of the economy underpinned a boom in capital markets, creating a powerful catalyst for M&A and organic investment across the M&E industry. Over the last two years, there have been blockbuster mergers; growth-driven, bolt-on acquisitions; and an unprecedented proliferation of special purpose acquisition companies (SPACs).

M&E companies have also made heavy investments in content and new service launches. Further, for media subsectors that have felt the impact of the pandemic more acutely, there has been ample capital to help bridge reopening and survival. Movie theatres, for example, were able to endure the near total shutdown of the box office for over a year by deftly accessing financing.

As 2022 began, the strategic backdrop remained vibrant. However, with military conflict erupting in Eastern Europe and inflation rates climbing fast, headwinds are beginning to blow, ratcheting up uncertainty for CEOs and leadership teams.

Geopolitical tensions force M&E CEOs to adjust strategic investments

As per the media and entertainment industry trends identified in the CEO survey, 41% of M&E industry respondents said geopolitical tensions are forcing them to shift portfolio investments. It’s important to note that this survey was conducted between November and December 2021, prior to the war in Ukraine. Since 24 February 2022, there has been a corresponding sharp rise in macro uncertainty and market volatility.

Of the 41% altering their investment plans, 56% have stopped or delayed a planned cross-border investment. International expansion is a core element of the growth thesis for many major media companies. For example, streaming is a global market. The lack of clarity on market conditions and stability is a challenge for M&E CEOs, at least in the short term, as they make investment decisions. M&E CEOs must balance the international growth market opportunity with the associated business and capital risk.

Geopolitical tensions also have M&E CEOs rethinking their supply chains, with 60% saying they have adjusted or are planning to adjust their global operations or supply chains. Of those making changes, one-third (33%) are adjusting because of geopolitical risks. We expect this percentage would be much higher if the survey were conducted today, in another example of accelerating media and entertainment industry trends and intensifying headwinds.

Another top risk to future M&E growth strategy is the acceleration of climate change impacts and increasing pressure to embed sustainability into product and service innovation and delivery. Media and entertainment industry trends show that financial disclosure requirements for environmental, social and governance (ESG) are set to significantly expand, too. In response, M&E leadership teams are making great strides in building out robust ESG policies and action plans. 

Capital and growth strategy focuses on digital transformation in the media and entertainment industry, to accelerate organic growth

M&E CEOs need to invest to secure future opportunities. For nearly half (49%), investments in digital transformation and existing businesses to accelerate organic growth and value creation are critical to their plans. 

M&E companies need to improve customer-facing technologies and experiences to drive engagement and respond to shifting consumer preferences. This industry trend holds true in all media subsectors, including entertainment, advertising, cable, publishing, sports and live events, and information services. Specific focuses are on data and analytics capabilities to enhance decision-making and employee technology enablers, such as collaboration tools to support emerging hybrid working frameworks.

There has been a slight shift in the CEO capital allocation approach to longer-term investments in new growth options that may become important in the future if they succeed. Examples include experimentation with non-fungible tokens (NFTs), augmented and virtual reality (AR and VR), as well as metaverse concepts. The advertising subsector is also piloting innovations that include new measurement methodologies and technologies.

There’s a strong belief by 60% of M&E CEOs that investors are extremely supportive of well-articulated investments. CEOs are placing increasing emphasis on delivering a roadmap for returns on major investments, most notably in streaming.

To protect and improve profit margins, 30% of M&E CEOs surveyed say they plan to leverage digital platforms to increase customer interactions, building on a long trend of infusing technology deep into the customer experience. Already, the media and entertainment industry trend is about direct-to-consumer transition to provide media companies with new pathways to increase and monetize engagement. More than a quarter (27%) indicate they will use technology and automation to replace higher-cost labor roles and improve scalability. For these M&E CEOs, their underlying motivation is to reduce expenses and unlock capital to redeploy into growth initiatives.

As M&E CEOs look ahead to growth expectations over the next five years, 27% expect their strongest source of growth to be using data effectively to develop new products and services; 26% say it will come from developing innovative delivery systems and channels for interacting with customers. 

M&E CEOs take a step back to digest last year’s M&A and look inward for organic growth

M&A was the accelerant of choice for M&E CEOs to advance their strategic ambitions in 2021. This ambitious M&A activity has lowered expectations in 2022 as CEOs reflect on last year’s activity. 

Forty-four percent of M&E CEOs plan to actively pursue M&A in the next 12 months. Of these, 40% say they will concentrate on bolt-on acquisitions to increase market share and build-out capabilities, including technology and talent. 

Based on responses to the EY 2022 CEO Survey, no M&E CEOs who participated expect to undertake a transformative deal this year. Despite this low result, M&E is an industry that has been shaped and reshaped many times through large-scale M&A, especially over the last five years. Transformative deals are hard to predict yet are a standard feature of the M&E strategic playbook. 

In addition to taking time to digest recent acquisitions, the media and entertainment industry trends point to the fact that 40% of M&E CEOs surveyed say they are planning to reshape their portfolios through organic investment. They are harvesting cash flow from profitable but declining legacy businesses and aggressively putting it to use in higher-growth areas, positioning the enterprise for the future. 

Summary

For M&E industry CEOs, the pandemic accelerated trends that had been building for years. Riding a tailwind of a stimulus-fueled economy, CEOs have been actively reconfiguring their companies, using both organic and inorganic investments to accelerate growth.  Now, CEOs may need to prepare for headwinds that seem to be blowing more forcefully than anyone could have expected at the start of 2022.

About this article

By John Harrison

EY Americas Media & Entertainment Leader

Transformative leader with a passion for media and entertainment. Identifying the opportunities afforded by convergence and disruption. Executing strategies to succeed in a fast moving market.