The pandemic was a golden time for streaming media as people sought out home entertainment instead of live events and going to theaters. Today, with many consumers ready to venture beyond the couch, which media and entertainment sectors will benefit from this change?
“About 70% of companies in this industry are expected to experience revenue growth of 10% or more in 2022,” said Ben Swinburne, head of Morgan Stanley’s U.S. media research group. “But while this demand strength is largely in place across the 25 companies in our coverage group, the ability to translate this strength into higher earnings varies widely.”
Which players in the entertainment economy will benefit from the current environment? Here’s what investors need to know.
The transition from legacy media distribution to Internet-based media distribution has drastically reduced the fortunes of movie theaters and TV broadcasters, but investors are still skeptical of the streaming video model.
On the one hand, approximately one billion households will switch to Internet distribution or have already done so; this will result in strong revenue growth for streaming platforms. On the other hand, many of these platforms are part of traditional entertainment companies, so this growth comes at the expense of their other offerings, such as pay TV or home video.
Streaming has also become increasingly capital-intensive, with spending expected to increase by more than 12%, compounded annually, between 2022 and 2025 due to an insatiable need for new content. So while continued subscriber growth means improved streaming revenue, rising content creation costs mean investors can keep their thumbs close to the pause button.
Overall, says Swinburne, “Having seen outsized benefits in 2020 and surpassing them in 2021, video streaming faces a bit of a slump in 2022.”
With economies emerging from the pandemic, consumer spending will likely increase. So will advertising, as companies strive to get their name out there to eager buyers. “In October, we nearly doubled our expectations for US ad growth in 21 and exceeded expectations by 22% to 14%, above consensus,” Swinburne says. His team predicts that the fastest growth will come from emerging areas such as connected TV/streaming video and digital audio/podcasting.
A resumption of advertising growth in the United States also bodes well for outdoor advertising (OOH). Digital billboards in small to medium markets are cost effective to build and revenues are growing faster than rental expenses. As a result, OOH companies are well positioned to generate higher-than-expected margins.
As for the agencies that create these ads, a tight job market means bigger paychecks for writers, designers and account staff, which could mean a cap on margins. That said, investors should keep an eye on emerging categories, such as mobile ad networks.
The biggest caveat? Inflation. Morgan Stanley economists believe inflation will peak soon, but if prices continue to rise, consumer spending, and therefore advertising spending, could slow.
Advertising in the United States as a percentage of GDP peaked in 2000, bottomed out in 2015, and has continued to rise.
Among live events, sports is expected to generate compound annual growth of 6% between 2022 and 2030, as providers fill seats and buckets with popcorn to meet growing consumer demand. Already, the five largest US venues expect an average of around 20% more events in the first quarter of 2022 compared to the same period in 2019.
For the big screen, highly anticipated superhero sequels should bring people back to the movies. That said, pandemic-related production shutdowns have delayed other landmark films. As a result, total attendance at national movie theaters could reach just 80% of pre-pandemic levels in the coming year.
At best, therefore, the media and entertainment sector can offer a cautionary tale. With the growth of streaming, advertising and live entertainment driving strong revenue growth in 2022, investors need to watch closely if they hope to avoid a box office miss.
For more Search Morgan Stanley about the coming year for media and entertainment in North America, ask your Morgan Stanley representative or Financial Advisor for the full report, “Media & Entertainment—Here We Are Now, Entertain Us” (December 15, 2021). Have more Ideas opinion leaders from Morgan Stanley.