1. Streamers bundle up to brave the elements
If we’ve learned anything in the past few years, it’s that long-term success in streaming requires establishing a durable subscriber relationship. Building on the long and successful legacy of the cable TV model, nearly all media companies that are active in the direct-to-consumer (DTC) arena today are now aiming to offer consumers a bundled offering of streaming content and other services.
Along with boosting sign-ups and reducing churn — thereby increasing subscriber lifetime value — bundles allow media companies to improve efficiency in marketing spend and technology investment. Consumers benefit by paying a lower all-in price compared to à la carte buying while also gaining access to a broader array of content in a single offering. Shrinking the aggregate number of subscriptions that consumers must manage is another plus.
Initially, streamers offered “soft” bundles, with separate DTC services packaged together for a favorable monthly rate. Going forward, media companies will fully integrate distinct streaming services into one application, creating a true “hard” bundle of content. Consumers will have the ability to toggle seamlessly within the app for content that was previously delivered through separate platforms and interfaces. By offering a greater selection of content on a common platform, and at an attractive relative price, DTC providers will have fertile ground to keep consumers engaged on, and subscribed to, their app.
To further strengthen the DTC customer relationship and raise switching costs, media companies are looking to attach other services to their streaming bundles, replicating the success that some of the large, digital-native platforms have had linking the video subscription to e-commerce, music, fitness, and other lifestyle offerings. Media leaders will also seek to leverage their portfolios of assets, or those of partners, to encourage lasting streaming relationships.
Streaming companies that lack content scale today and choose not to engage in a bundling strategy risk being marginalized in a market where the consumer holds the power to cancel at any time and is being trained by the industry to seek out a good deal. Owners of stand-alone DTC services will need to double down on their niche offering and core customer base to remain relevant.
2. Media deals are still a big piece of the puzzle
The intensifying pressure from investors to achieve DTC profitability will be a catalyst for further consolidation activity, especially for the group of relatively smaller players that rely on cash flows generated by fading linear assets. Strategic combinations will simplify the streaming marketplace for consumers, generate cost savings that can be utilized to fund investment in better content, marketing and technology, and rationalize an industry landscape that is driven by global heavyweights today.
Predicting when mergers and acquisitions will happen is very difficult, of course, even when the strategic rationale for action is clear. Forces influencing the timing of media deals are varied. Some players are still integrating prior acquisitions and are busy working to realize synergies that will improve future financial positioning. Others are highly focused on clearing tax and regulatory hurdles that will allow for efficient transactions and a more certain path to closing. Conditions in the capital markets and the broader economy are also major factors in any deal — and current visibility is low in both areas.
Regardless of the specific timing and list of criteria for dealmaking, media leaders have a proven track record of executing creative transactions to achieve their ambitions. In the year ahead, asset sales and spin-merge transactions may be more likely than whole-company deals. Reshaping the industry for the DTC era will require fitting the media puzzle pieces together in a manner that creates the greatest strategic value and competitive advantage while simultaneously threading the needle through potentially challenging deal structuring considerations.
If outright M&A is not possible for some media players, the imperative for consolidation is powerful enough that they will look to other options. Partnerships and joint ventures with industry peers can serve to accelerate market entry, share investment and deliver synergy benefits. While often more complicated than executing a straightforward acquisition or a sale, strategic commercial deals and partnerships are alternatives that many players in the industry will explore.
3. Regional sports media is changing the channel
Regional sports network (RSN) revenues are facing significant pressure as subscriber counts decline due to consumer cord-cutting and loss of carriage from pay TV operators, who are choosing to drop the networks rather than pass along pricey affiliate fees to customers. The combination of lower revenues with a high fixed-cost expense base (i.e., rights payments to teams) is driving a structural decline in cash flow and existential questions about the viability of the RSN business model.
Professional sports teams and leagues are looking ahead to the expiration of existing RSN rights deals. They have concerns about the durability of a critical source of team income, given the financial stress in the RSN landscape. This dynamic is a major focus for baseball, basketball and hockey teams that rely heavily on RSNs to support fan engagement throughout lengthy regular-season schedules.
To address the potential for disruption, teams and leagues are studying — and in some cases, executing on — transactions to purchase RSNs and position the business for transition to DTC streaming. Acquiring an RSN would vertically integrate content (game broadcasts and shoulder programming) with distribution and allow teams or leagues more robust connectivity with their customers. RSN ownership would also enable creative bundling opportunities. Offerings could include discounted game tickets and concessions, exclusive fan experiences, team-branded merchandise, NFTs, and tie-ins with sports betting — all geared to motivate fans to sign up for the DTC service. Advertising and sponsorship revenues are additional sources of revenue.
However, acquiring an RSN and making the pivot to streaming comes with considerable risk. DTC pricing must be high enough to offset current payments for rights fees while also being affordable enough for subscribers to discourage churn in the team’s off-season or during periods of poor team performance. This may require multiple pro teams participating in a streaming venture together to facilitate a year-round programming schedule.
4. Movie theaters look for more action
Despite the tangible momentum gained for the big blockbusters at theaters this year, studios and exhibitors are working through a recalibration of the movie business. Box office revenue is over 30% below annual totals in pre-pandemic years, according to BoxOfficeMojo.com. The total number of films released in 2022 is tracking well below the 10-year average leading up to 2020, leaving consumers with fewer options when they are considering a trip to the theater and driving down admissions industry-wide.
Studios are reviewing which genres “work” economically for theatrical releases versus a straight-to-streaming approach. Action, superhero, horror, family-friendly, rom-com and so on all bring different budgets, marketing plans, potential audience breadth and, ultimately, monetization opportunities for studios. Studios are basing release plans on a corporate agenda that is now centered on maximizing DTC — ultimately determining that some films are best suited for a streaming release.
In response, theater owners will need to recalibrate their business and financial models to account for less film product flowing through their multiplexes while staying nimble enough to capture the returns from the mega blockbusters. Theater owners are taking tactical action around loyalty programs and other steps to stay engaged with consumers. Strategically, some exhibitors are restructuring their balance sheets and shrinking theater portfolios to align with current market realities. Studios can assist too, by managing release calendars to ensure that a steady supply of films hit theaters in a cadence that includes traditional busy periods like the summer season while also load-balancing the schedule throughout the year. This will help support the operations of exhibitors and enable them to deliver a positive customer experience to moviegoers.
5. Metaverse is on the long-range radar
While the excitement around NFTs and visions of a metaverse-driven future may have cooled in late 2022 as macroeconomic factors took center stage, media companies continue to prepare for the next age of interactivity. Investment areas include strategic planning, research and development, consumer research and technology, with a goal of maintaining optionality as the metaverse comes into view.
Media leaders are studying how consumers will access content, engage with advertising, transact and socialize within an immersive internet experience. Blockchain-based digital assets, including NFTs, are expected to be a key element of the media value chain in the metaverse, enabling digital identity, asset ownership, royalty tracking and payments, and providing offline linkages to “IRL” experiences.
Today’s experimentation will become the business plan of tomorrow and the revenue generation beyond. To execute, media companies will stay on the path of taking purposeful steps, appointing dedicated metaverse champions and supporting them with technology, finance, legal, and creative talent to frame out scenarios and drive innovation. Capital allocation to metaverse-related initiatives will remain modest over the near term, but not minimal — there is commitment across the industry to stay proactive and engaged with this emerging opportunity.
For 2023, all signs point to another year of excitement and change for the M&E industry. These five trends — and many others influencing the industry — will require leaders to make bold moves to survive and thrive during this era of great disruption.