The State of the Media Sector Midway Through 2021

Navine Sarma, Senior director of SMP Global Ratings. He first came on Strictly Business in early where he demonstrated a keen eye for understanding the industry from his vantage point as a credit analyst, and now he's back to offer an updated perspective. It's all coming up today on this episode of Strictly Business. Welcome back to Strictly Business is where my guest is an E. Vins Arma, Senior director

of SMP Global Ratings. I wanted to start with sort of the broadest possible context in terms of taking a look at where the global economy is in the emergence from the pandemic and then sort of put that within uh, put the media business within that context because obviously one impacts the other, sure absolutely, so it's A. It's an interesting time right now because you know, we've certainly had UM, you know, a lot of growth this year, a lot

of expectations. We expect in the US that GDP will grow more than than six clearly off of a base last year, but still that's really strong growth. But you're starting to see signs of pressure on potential growth that could lead to you know, slow different growth, and those are primarily things around inflation. We've seen inflation step up in the United States, and that's really from a couple of reasons. Right you have the stimulus money that the

government has UM. The US government has it into UM, you know, to to UH to the population. A lot of that money is sitting in bank accounts and is not being spent, and that's driving at prices. And the other thing is you're having pressure from supply chains, which is something that we're spending a lot of time looking at as well, not just within media but across all of our corporate ratings. UM is supply chains are under pressure,

and you're seeing pricing go up because of that. And then the second thing is the pressure UM the potential pressure from interest rates going up. And you know, we've heard some some statements out of the FED over the

last couple of weeks. And then the case that maybe an interest rates could go up sooner rather than what people expected, which is twenty two maybe twenty three, And and what that means from a media standpoint, and really from a corporate standpoint, that you had a lot of companies make it through the crisis by issuing a lot of debt to sharp liquidity, um, you know, could cash on their balance to try to you know, to survive

the pandemic. They've survived the pandemic, but they have balance sheets that are are over levered, and so you know, the last they want to see is inflation and you know kick in and also interest rates go up. And so that's a that's something that we're spending a lot of time thinking about because we have a lot of companies like that, and I'm sure we'll touch on some

of them. Sure. I'm also curious to hear your perspective of what this sort of global economy means with regard to advertising, because I would imagine, I mean, we're seeing the data come in both on the TV side and the tech side. It just seems like marketers are chopping at the bit to get at consumers again. Yeah, yeah, absolutely right. What's interesting. I mean we thought advertising would

be you know, weaker last year, it wasn't. Um and and we can talk about you know what this year, which is you're getting you know, a bifurcation some sectors that are recovering faster than others. But let's just start off by saying, you know, digital advertising was down maybe negative for one month last year, April, and then it came roaring back. And so you know that the shifts in spending to digital really helped overall advertising recover much faster.

And if you look at more traditional advertising, whether it's UM, you know it's on television or radio or outdoor television, especially national television hung on really really well. Advertisers seemed to back off a bit, but then realize that the recovery was coming, and so they wanted to be in front of consumers, you know, pitching their brands, and so they didn't pull backs as quickly or as as thoroughly

as we thought they were going to. And then you know, you had you had political advertising which really helped local and really helped support local television UM and then you know you kind of spring to this year. You have outdoor coming back really strong. You have local when some of these sectors are talking about already being in twenty levels, which is far faster than we thought. Um, you know National is trailing a bit, but you know a bit

of that as a secular trends as well. But I think overall, when you look at advertising, it's a it's a lot better shape then we thought it was going to be at this point. But Navine, it seems a little nutty to me the TV side, because what we have seen clearly even before the pandemic, accelerated by the pandemic, is linear television is I don't I don't know what metaphor do we use, falling off a cliff, clearly declining precipitously. So why are they getting more money for less viewers?

You and I talked about this recently. It's crazy because you know, you think that, you know, given those dynamics, you'd start to see a weakening and CPMs, but it just isn't happening. And I think primarily it's because television is really the best way and at the moment, the only way to reach the broadest audiences. So if you're advertising you know, to to generate transactional revenue, you're gonna go digital. But if you're looking to build brands, you

still have to go to television. And so you know, at the moment, advertisers still want television, and I think you're going to see that start to weaken eventually. And I think I think the other thing that's complicating it is linear television is being combined and sold with UM with with you know, with digital television, you know, the streaming services, and so you're getting, you know, sales across both platforms. If you were to break one and the other,

you'd see dynamics that are different. But if you combine the two, um, the digital side is definitely supporting the linear television side. Well, let's talk a bit more about streaming,

because advertising obviously isn't just the entire picture there. It's the subscription dollar infusion that is been so interesting to watch all these media companies chasing Netflix right now, and you know, the pandemic again seem to have an impact there, although very positive one, much more consumption than ever, all these streaming service coming into the market at that time. Where does that set us up in terms of the

next leg of the race for these streaming services. Sure, it's it's interesting because you had a pull forward of a lot of subscribers over the over the last year. And so I mean Netflix is a perfect example call of all of a sudden, all these new subscribers came in. And I think just seeing part of that um manifest and may call it, you know, slightly weaker subscriber growth this year, but you know, comparing the last year is

is a bit unfair. UM. But I think what we've what we've got now is we have a number of companies that have decided that they want to be global and and go after you know, in kind of the Netflix model. But what you need for that is you need too things. When you need um, scale of content and scale of distribution, you need to be in a lot of countries. Um. And if you look at all the players, they're all have different they're all in different stages of that kind of competition and that kind of

goose characteristics. If that's what they want to do. Um. You know, clearly Disney has both the scale of content as well as the geographic scale. They benefited from the you know, the twenty one century Fox acquisition and so they're pretty far along in terms of UM if you want to call it, you know, compaion against a Netflix. But if you look at UM some of the other players,

you know, they're either lacking scale yelled geographically. And I would point to like you know, Concast, NBC and and Time Warner, which we'll talk about our Warner brothers, which we'll talk about. I'm sure UM, but they all are. And then you have other companies that are lacking in in content and I think Discovery is a good example of that. They're certainly one of the um one of the most diverse geographically media companies in the world, but

they don't have the same kind of content scale. And so I think what you're seeing is a lot of companies have decided we're going to go down that path, or those companies have decided they're going to go down that path looking at the assets that they have and making decisions on do they have the right set of assets and do they want to keep playing this game? And you know, and I think Fox or I think

Discovery and Warner are clearly in that boat. Well, to me, this is the biggest question mark looming over this space because as you're describing it. There are these companies that are trying to play by the Netflix playbook, spending what I could would assume seem to be putting them well in front of their skis as they cannibalized their core business. So, you know, is the market taking it on faith that the Netflix playbook can still be played years after Netflix

has already played it. It's a good question. Um. I mean, initially, if you looked at some of the run ups and let's let's you know, I mean, what happened to Discovery and Viacom was a bit of you know, an anomaly this year, but you did see her run up in the like the Disney Stock where you know, investors looked at this and gave them credit for two hundred and

fifty million subscribers. And then as we kind of got into the first court and the name just came maybe a little weaker than people expected, they pulled back a little. And so I think you're going to have over the next year, um, a separation um in in in the market's eyes about who are the winners and who are

the losers? But you know what were we spent a lot of time to getting asked this question and a lot of times, and we're spending a lot of times deflecting it at the moment because I think it's too early to pick winners and losers. But I also think it's a bit unfair to look at everybody and paint them in the same brush and say everyone needs to be like Netflix. We talked to Comcast about their you know,

about what they want out at NBC. It's different than what Disney wants to achieve, and so I think you have to look at it within the context of their strategies and so and what they're trying to achieve. Well, when you look at this, as you put it, this separation that is happening in the streaming land, deals like Warner Media and Discovery makes sense. Deals like Amazon and MGM makes sense. They're trying to get into that top tier. Uh, what do you think of Warner Discovery. Let's let's let's

start with that. That combination. Well, I think one of the things, and I keep reminding investors of this point, which is, prior to a t T buying, Warner Warner was arguably the best media company in the world. And this is before Disney merged with with we kind of forget that right, because it got buried within any team take. And so now you stand back and you look at Warner, and what's interesting from the transaction I think was more a function of both companies looking at what they had

and realizing they needed to do something. A T. T looked at Warner and looked at frantically all of its other businesses and says, you know, we have a limited amount of capital. It's a T T. But it's a limited amount of capital. What do we have to spend

it on? And it was Spectrum and it's five G. And so the Warner's side of the business wasn't going to be able to get the kind of investments aid programming, but also an expansion overseas because they don't really have that big a footprint overseas compared to some of their peers. And so they realized A T. T. Realized they just couldn't make the investments to make Warner a truly global

streaming service. And then you turn it around and you look at Discovery, Discoveries and two odd markets, and so they've got the um the global footprint. But I think what they've discovered is that launching what the content they have is a bit of a challenge. It's a good content, it's niche content, and so if you're trying to get the two hundred or three hundred David zaslofs at formimillion, but if you're trying to get to it, you know,

hundreds of millions of subscribers. I don't think the Discovery content on its own as it can do that, and you need to have kind of you know, the the the Warner Brothers, big movies and you know, you know, big brands, and so the combination of the two I think is a reflection of the limitations that both companies have.

And so that made a lot of sense. Yeah, And it also creates another big question for this space, which is you look at what's gone on now and if you're Viacom, CBS, if you're NBC Universal, must you make similar moves in the M and A arena in order to be able to compete at the highest levels to be among the top tier streaming services. Do you do? You do you see much activity coming on in this as a result of the Warner Discovery deal. I don't know. Oh,

I don't think so. And I say that because I think there's been a lot of I would say there's been probably a lot more internal discussions within both companies and so what there, what their goals are, And I think you have to look at them separately. I think if you look at Comcast, it's a cable company. I think, you know, I think Brian realizes that that NBC is called limited scale, you know, compared to the other companies,

and and that's fine for him. If all of these, all of these, if all off all he is thinking, get that one out, is that NBC is there to support the cable business and the Sky business in Europe. And if that's all it is, it's plenty. It's plenty large enough in terms of the amount of content it has and the and the content that it produces, not just as library but also um, you know, it's it's production out of this film studio. To be able to

support that business. Vicom is a separate question because they don't have, you know that those kinds of businesses to lean on um and so if they really want to be like you know, Disney, they've got more scale and it kind of what's interesting is the guidance that they gave so far for their global subscribers was the top seventy five million. You know, maybe that's just something about their intentions overseas, or you know, it's a question that

they have to answer. I don't know if Emine necessarily solved that problem, but maybe they need to scale back on their you know, on their expectations overseas. We need to take a quick break, but we'll be back with more from Navene Sarma. And we're back with Navin Sarma, Senior director of SMP Lottal Ratings. I also mentioned a very different deal Amazon MGM. Different in the sense that it brings together entertainment and big tech in a way we haven't really seen before, but also I think is

similarly motivated in terms of the Warner Discovery deal. This is about competing in the streaming race. It's not scaling up for the global push, but it is scaling up the sort of the content arsenal. Anything I do, I do, I agree with you. For the longest time, I was a bit skeptical about whether or not either Apple or or Amazon would really want to get into into the entertainment business. To the media business, it's expensive, it's full of I mean, you know, it's a difficult industry to

try to break into. You see other companies try to get into media and realize it's it's got a bunch of characteristic to make it very difficult for you to get in and be successful, especially if you're not a media company getting into there. Um So what Amazon is doing is interesting because they've always kind of dabbled on the side of the studio. They hired people, they want content.

This just seems to be a bigger push. Having said that, it's I think there's their intention still is to try to sell you know, diapers and retail stuff, and so the content. How big they want to get in terms of their content base, Um, it will be interesting to stay.

They don't want to get too big, I think, but they also want to be able to offer enough content that people will stay on their websites and use that as a kind of a selling point to get people to sign up for Amazon Prime, especially in those markets where you know, either the shipping costs are higher or you can't do one or two day deliberate got it. I do wonder whether this will end up forcing the hand of Apple in terms of its investments in this space.

They kicked the tires at MGM at the very least, and there's other entities out there, like a lions Gate and a MC that could make sense if Apple wanted to make a similar move. Yeah, I a great. Great, We'll see. They haven't done anything. They let a lot of deals go. I mean, you know, they haven't completed any deals. So we'll have to see if if they're

really serious about being a serious media player. So we're talking about all these companies that are spending you know, tens of billions, well not everyone spending tens of billions, but single billions, tens of billions to be in the programming space. What does this mean in terms of the backlog of production that we've seen building up out of the pandemic. It's amazing, isn't it. Every time I pick up Variety or I get an email from Variety it's

another project that just got greenlit. You've gotta wonder how they're gonna space us all out and actually produce all this stuff. It's got to be years and years of backlog. Um they called the Golden Age of television. There's a

lot of content. There's just a lot of content, and you know, and and from our standpoint, it's putting stress on a lot of companies balance sheets because you know, the revenue is not going to come in for a while, especially streaming services as you grow that and so you're gonna see twenty three twenty four before any of these streaming services even chief break even status. And so that stresses the you know, the balance sheets of all these

companies and the cash flows of all these companies. Um. You know, from a rating standpoint, it's a concern. And and we've taken rating actions where we've downgraded some companies because of that, um you know, and eventually and the problem is, you know, if a company doesn't win and spends all that money and doesn't grow out of that, you know, then they're kind of locked in longer term with with credit measures that are just are weaker. That's

to me a big red flag. And yet I also wonder whether investors kind of as we saw with Disney at the end of will still say, wait, I see a big streaming service success story happening here hundreds of millions, So we'll just give them a pass and they'll just keep spending. I don't know, I think you're gonna get some that are going to get a pass and some companies that aren't gonna get a pass. Yeah, that's that's that's basically how this competition is going to play out.

UM also wanted to ask, you know, we're we're talking about streaming, but of course movie theaters remain a big part of the business. Movie theaters, of course, took a huge hit during the pandemic, and so I wanted to get your sense of how you saw the exhibition business as we return to normal. Yeah, it's a great question.

When we look at all of the sectors that we cover print TV, UM, the one that that has popped up on our raider screens and one as the one that we think is the most impacted and the one that's less most likely to be to change permanently because of the pandemic. Our movie theaters. Other ones we think we're gonna come back, whether it's theme parks or you know, um, you know, live events. But you know, for us, you had the rise of streaming, you've had the change of

the of of windowing. UM, people may be a bit not reluctant to go back to the theaters, but certainly less likely to because you're gonna have other options to

see the same piece of content. Um. Having said that, you know, we've always thought for years that there were just too many screens in the US, and UM and and I just I don't want to sound like, you know, we were hoping for this would happen, but we certainly thought that the pandemic would be an opportunity for for the the the industry to look at the number of screens and to reduce those numbers of screens. It doesn't

appear that that's going to happen. UM. I think we've seen a couple of comments by a couple of companies that Cinemark talked about this the last week or a couple of weeks ago, where they think, you know, maybe it's five or five percent of screens might shrink. That's probably not sufficient. But I think the ones who are going to benefit from that are the larger guys. The smaller guys, UM are the ones who are probably going

to consolidate or shrink. And we've seen some bankruptcies, but overall, I think the fund, the small business funding that came from the US government has supported a lot of these smaller studies, the smaller exhibitors, and so they've managed to survive their way through the pandemic. So you're saying a smaller footprint overall consolid bigger companies. Um, you're you're not saying, as as some seem to say lately that we're a Vergin extinction for theaters, like there's a place for them

going forward. There's no. Yeah, yeah, we don't think that that's gonna I mean every no, No, I won't happen that quickly. I think I think there's still in need. If you talk to all these studios, they still want

to put big blockbusters into the theaters. Um, you're you know, I think what you're seeing this year, Um you know with things like, um, what Disney is gonna do with Black Widow or what Warners has done with this entire slate is more a function of the pandemic and the uncertainty over are all the theater is going to be reopen? And even today I think we're like, and so Black Widow and F nine comes out this weekend, next weekend,

comes out really soon. Yeah, and so you know it's not gonna it'll do really well, but it's not going to be in every theater, and so you're not gonna get the kind of releases you got two years ago, and so I still think the studios are heading their bets this year. But I think going forward, you're going to see Disney Point, it's Marvel movies, and it's Star

Wars movies into the theaters. What you're gonna see is also a shrinking number of call it you know, um, you know, smaller releases, drama and clearly dramas and comedies have kind of already abandoned the theaters. But I think you're gonna see more and more of that going forward. Um, you know, will Netflix or Amazon step in and kind of, you know, fill those empty screens. I'd like the things,

So I don't think that's gonna happen. I think Netflix looks at the ex the theaters and says, you know, you can put a couple of movies in there, But at the end of the day, they're making movies for their their subscribers, and so putting it into the theaters doesn't benefit their subscribers or the subscriber totals. So I think there's less likely that happening. So it sounds like you're saying, you know, it's hard to have a monolithic

conversation here. Different kinds of movies are going to take on different kinds of distribution strategies. Uh, you know, the biggest and brightest blockbusters will go straight to theaters. I think where we're headed, though, is in a period of experimentation in the coming years for just about everything else, in terms of the amount of time they're in theaters, exclusively how much they'll be, if they'll be day and

date releases. I mean, do you think, as I do, that there's gonna be a lot of experimentation or will we move to a standard fairly quickly? I mean, you could argue the easiest, simplest thing is one forty five day window for everything, and there's something to be said for simplicity, and there is, there is. But um but I think you're right. I think it's going to be experimentation. Universal signing with seventeen days and so I think you're

gonna get a lot of that kind of experimentation going forward. Um. So yeah, I don't think I think they'll they'll all kind of congregate around forty five days and so instead of nine, you will be forty five. But I think

you're going to get, you know, decisions made. I don't know how close a release, it's gonna be made, but you know, the studio will look at the particular movie and say, you know, we're gonna put it on the streaming service and set and so I think you're going to get that kind of variability, which, um, I don't know how close to release we're going to see that,

but I think that's gonna be the case. And I think based off of my conversations with all of the studios and all the exhibitors, the contracts that they've signed so far, aren't you know, one size fits all other than what Warner did for the twenty one slate. Everything else is based off of a film by film basis for analysis. Got it? Well, we should also be careful to note here. You know, we're we're kind of talking pretty generally, but there's the US market and then there's

everything going on overseas. Um, do you see any fundamental differences between what goes out here in this country and everywhere else, especially in light of the pandemic is obviously impacting the globe in different ways. Yeah, it's an interesting question, and I think we as Americans tend to forget about

how diverse the world is. So, you know, talking about windowing into somebody in France is a totally different conversation because the French government basically becomes in and dictates what the windows are and so um, and so I think studios have to be well aware of of what each market um is like. And especially as we come out of the pandemic, right, not all of the theaters have

opened up around the world. And so you know, for our movie like Black Wad Up, you know, if you think it's going to do incredibly well in Europe, then you've got to be a bit careful how you release it because not all the European theaters are open. F nine made a lot of sense if you saw the release in China. China's theaters are all open. So um, I think you can't look at the US alone and and and draw conclusions off of what studios are going to do based off of the U S market, got it? Uh?

It just I If you're at Disney and you're sitting there with a Disney plus and you've got the ability to make huge money with your best and brightest movies in theaters, how do you navigate that balance, which which Disney to some degree seems to be doing by not just throwing movies on Disney. Plus they do some of that as well, but they've got this window where they're spent, you know, consumers have to uh spend I think it's like thirty dollars to see a movie walls in theaters.

What do you think of that approach? I I'm guessing that Disney is probably the only one who can get away with something like that. Um, it's interesting, and you know, it isn't clear what kind of viewing they're getting from for those movies, you know, whether it was Milan or you know, any of the other ones that they're released that way. The only thing I can guess is because they're continuing to do that, they're they're getting you know,

they're seeing either interesting data or data that's positive. Um. And so my guest is Disney will be continuing to do that kind of But I guess I guess they'll experiment again. Right, some of those movies are going to go to thirty dollars, Some of those are gonna be day and date free, some of them. Every movie is gonna have a different story, got it. So, So bringing it back around to the broader view on these businesses, as we move into the second half of the year.

I mean, are you anticipating that we're going to see it? Seems right right now in terms of investors in the media sector, it's not quite what it was maybe at the end of twenty When I think about, you know, Disney or how Viacom and Discovery went for some nice rides earlier this year. How how do you see uh it playing out for these stocks in the second half

of the year. Sure, well, I'm thinking I'm a credit analyst, so I won't comment on but but I will say the conversations we've had have gone from let's talk about the pandemic and what the recovery looks like. Now we're talking about secular trans same exact conversations we were having with investors two years ago. What's a cutting a look like? You know, once the decline of television look like? And clearly you know what's streaming, and that's dominating every conversation

we're having. And the thing about cord cutting, we we you know, we were were missed not bringing it up because at the end of the day, it is the biggest revenue stream in the business. Uh, it's sir, I mean, if I if I'm the pandemic. Actually, I think it wasn't quite the killer that people thought it would be for cord cutting, which actually held up for a variety of reasons. But do you feel that once we come out of the pandemic more clearly that in this country

we're gonna see cord cutting re accelerate. It's a great question. And every year we published our forecast, and every year we're wrong. So I'm gonna say that I know I'm gonna be wrong. Which is we think so last year card cutting, you know, if you include them, both the virtual operators as well as the physical operators, cutting was summer on the order of about five UM. We think

it's going to accelerate a little to about six going forward. Um. And and and you know, and we've looked at a couple of years, and that's our forecast at least that's where we're modeling to and and said that we're probably gonna be wrong. Well, I mean it's just because to some degree defies belief. You've for years now and will be the biggest yet. You see how much is collecting on the streaming side in terms of what they could do to entice chord cutting. But at the end of

the day, isn't it really about sports? And that as long as linear TV keeps a stranglehold on the best rights, there's only so much we're going to see cord cutting happen. That's the theory. I agree with you, that's the theory. But then, you know, now the conversation becomes, you know, ESPN Plus, when does Disney decide ESPN Plus will now contain all of its kind because it's got it's gotten

streaming rights, you know, for every one of its sports. Um, you know what happens with Sinclair and the RST that the dd c rs n s that they're pinning on watching. I mean all of these things, you know, peck away, peck probably too smaller word. They chip away and they take out big chunks of of of the cable bundle.

At some point we're going to reach, you know, an inflection point where Disney is gonna say enough enough, you want ESPN you can get it by a streaming and then the model falls apart and there is that five years away? Is it ten years away? I don't know. That's the balancing acts. So any media companies are navigating right now, and it's gonna be interesting to continue to do that, um Levan, that's all the questions I have. Appreciating you taking the time out for a big picture discussion,

Appreciate your having me. Thank you very much. This has been another episode of Strictly Business. Tune in next week for another helping of scintillating conversation with media movers and shakers, and please make sure you subscribe to the podcast to hear future episodes. Also, leave a review in Apple Podcasts and let us know how we're doing.