Media and entertainment (M&E) companies must develop effective differentiation strategies while balancing growth and profit ambitions in an increasingly challenging market.
A thematic shift is underway in the media and entertainment industry as companies adjust away from an aggressive investment and expansion mindset, most notably in streaming media, and refocus on a more disciplined growth agenda. Intensifying competitive pressures, an uncertain economic outlook and evolving consumer behaviors are all serving as catalysts for M&E change.
External forces: Macro weakness impacting consumer spend and advertising
EY economists expect the US economy to enter a recession in 2023, impacting consumer spend as discretionary income shrinks. As the pullback materializes, M&E offerings — many of which are considered expendable by consumers during tough times — face headwinds. Cord cutting continues to accelerate as households move to lower-cost or free streaming alternatives. Advertising revenues are under stress as marketers reduce their spend in response to the softer outlook. Even streaming growth slowed in recent quarters. Savvy — or cost-conscious — subscribers have learned to churn on and off platforms, taking advantage of the flexibility promoted by direct-to-consumer (DTC) players to manage the monthly outlay for entertainment content.
Industry forces: As legacy M&E models fade, will new-generation businesses produce profitable growth?
The secular decline of the linear content delivery model — the industry’s cash flow engine — is beginning to strain the financial results of the major media companies. At the same time, the industry has moved with urgency, spending tens of billions of dollars annually to build and scale streaming services on a global basis. Following a burst of new service launches over the last five years, streaming revenues for the companies that publicly release financial information now total nearly $70 billion a year in the aggregate. The growth of streaming as an attractive substitute for pay TV has, in effect, accelerated the very cord-cutting that is pressuring the industry’s longtime reliable linear profit machine.
Until recently, the streaming formula was relatively straightforward: Launch the service, spend heavily on fresh content, draw in subscribers and watch the stock price soar. However, by early 2022, competition intensified and the market fragmented. Some streaming services reported subscriber losses, while others experienced sharp slowdowns in growth as markets appeared to plateau — especially the US.
Financially, while revenue growth was impressive during the DTC launch phase, profits were a somewhat distant vision for many industry leaders. Investors took notice of the cash burn triggered by the capital investment needed to build a scaled streaming service. They began to focus less on subscriber counts and more on the long-term prospects of the transformation underway in the industry and its impact on company valuations. A reset was in the making.
M&E companies need to chart a new way forward
The EY team recently partnered with global economic forecasting firm Oxford Economics to survey 150 M&E senior executives to understand the current industry imperative further and inform our outlook and perspectives for 2023. The participating companies ranged from $100 million disrupters to multibillion-dollar industry giants. By type, the survey included companies from nearly all industry subsectors. The research explored the opportunities and challenges M&E leaders face today and their priorities as they pivot from a growth-above-all mindset to an approach that balances growth with profitability and cash flow generation.
Overall, based on our EY industry experience and insights from our targeted executive survey, we believe that M&E companies should focus on the following four key themes:
- Reinvention is a never-ending process that requires both strategy and execution excellence.
- Customer centricity is the core organizing principle.
- Operations must be structured to support scale and profitability.
- For many players, portfolio optimization and industry consolidation will be essential to improve competitive positioning.