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The media and entertainment industry is becoming more uncertain than ever as the business of content creation, distribution, advertising and broader monetization is changing rapidly in the streaming age, accounting and consulting firm EY argues in its annual trends report. No wonder then that companies are in a race to continue adapting, says John Harrison, Americas media & entertainment leader at EY.
Streamers and movie theaters recalibrating to address their challenges are among the trends his team foresees. For example, EY expects streamers will “bundle up to brave the elements,” the firm says. “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.”
In the meantime, box office remains below pre-COVID pandemic levels. Plus, the broader media and entertainment sector is also facing such challenges as high inflation and economic worries hitting consumers and the advertising market.
The Hollywood Reporter spoke with Harrison about streaming and box office trends, economic worries and how companies are reacting to the various challenges.
Streaming subscriber growth seems to have lost some steam this year, and economic clouds, such as high inflation, may only make consumers more cautious about their spending decisions, including on entertainment. How do you see the state of streaming in that context?
What drives streaming churn is that people come on and off services as they consume the content they want and then move away until the next season comes on. Inflation adds to that challenge. Consumers are just getting smarter overall. And everything is more expensive now. That theme is playing out in households around the U.S. and around the world. If there is real pressure at the household level, I think the risk of subscription churn becomes greater. I think the streaming providers are certainly aware of that. That is one of our themes for 2023, the whole concept that bundling is going to become a much greater focus for these companies.
How could such bundles look?
The hard bundles where companies today have distinct streaming services, they are going to wrap those into a single app at a lower price point, so it’s more affordable to customers. It’s also going to produce a much more favorable customer experience, because you’ll have more content in one place to access on a single app, so you don’t have to swap in and out, which has proven to be a frustration.
Are there any other bundling opportunities for Hollywood giants’ streaming services?
Similar to what we have seen with the large digital natives, the media companies are going to look to add in non-video services into that bundle. So it could be e-commerce, it could be music, it could be fitness programming, merchandise or tickets to live events or experiences or theme parks. Basically, media companies are looking at their portfolio of businesses and saying ‘how can we wrap this into our streaming bundle to make it that much more attractive to consumers and enhance the perceived value that consumers see from signing up for that streaming service’? And we think that is going to be a huge focus in ’23.
What about bundling opportunities for companies that are mostly focused on TV and film content?
I think for companies that don’t necessarily have that broad portfolio of other assets, there will be an exploration outside of their business to other partners that may be looking to add an element of entertainment content to whatever their existing business is.
Do you expect much change to Hollywood conglomerates’ focus on producing content for their own streaming and other media platforms? Warner Bros. Discovery management, for example, has said that it will also continue to license programming where that makes financial and strategic sense. Will other biggies change course to such a content “arms dealer” approach?
The licensing revenue that media companies historically generated by selling programming to the sort of native streamers was a great financial business, because that revenue came with an extremely high margin. When the media companies launched their own streaming services, it made less strategic sense to offload their best programming, because it makes their own service less compelling. In 2023, I don’t expect a return to licensing the programming to third parties, at least by the larger media companies, because that really does serve to devalue the content available on their own platform. That would be a departure from that all-in commitment to streaming.
What’s your take on the state of the movie business? The box office has recovered from the COVID pandemic, but not as quickly as some had predicted, while studios are also bringing some films to their streaming platforms more quickly these days. What does this mean for exhibitors and studios? The new EY report says theater owners will need to recalibrate their business and financial models to account for less film product flowing through their multiplexes…
There were definitely some positive signs in 2022, with the biggest one being the success of Top Gun: Maverick, which really pulled out an enormous audience to theaters across generations and demographics. And I think that’s the flashpoint where everyone says, ‘Hey, listen, there is a path forward for the first-run theatrical window’. But the stats say that the box office is still down around 30 percent when you compare it to 2019.
A big driver of that is that the number of films coming into the theaters is smaller. There are just fewer films released. And part of that is related to studios and their corporate parents really focusing on maximizing that direct-to-consumer agenda and making sure that content is available on streaming. But there is a focus on what genres work best in which distribution window. So I think the studios have come to the conclusion after some tough decisions that for big blockbuster films the theatrical release window has a real advantage and sets value for that blockbuster through all the subsequent windows, including, most importantly, the streaming platform. So for the biggest movies, the theatrical release is going to remain important.
This year saw some periods without big releases in cinemas. What are the lessons from that experience?
I was surprised at how slow the release calendar was in the second half of this year, certainly from the end of the summer (until recently). For 2023, especially as more film content moves its way into the release schedule, studios and theaters are going to have to work on a collaborative basis to really balance objectives. Not every single movie can get released in the May-through-August summer window or in the Thanksgiving-to-Christmas window, there is going to have to be some collaboration to achieve a balance throughout the calendar year, because the theater owners really depend on that for their operations and so that their financial condition can remain stable. As I look ahead to ’23, it is about understanding the cooperation that will need to take place on managing that release calendar so the whole first-run ecosystem remains in balance.
So is there a path for the box office to return to where it was pre-COVID?
I think it will be very difficult to get fully back to pre-COVID levels, because I think the industry is fundamentally different today than it was three years ago. And I think studios will continue producing genre-based films and mid-budget films. But the decision to put those into theaters is much more difficult when the primary corporate priority is thriving streaming growth. For smaller films, the right home very well could be a streaming release. So I think that the theater business is going to be more reliant on fewer but larger films going forward, which probably results in a smaller overall box office compared to where we were pre-COVID. But it is still a very viable business and an important part of the entertainment value chain.
How do mergers and acquisitions fit into the current industry picture? The new EY report argues media and entertainment sector deals will “still a big piece of the puzzle.” It notes that “the intensifying pressure from investors to achieve direct-to-consumer (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.” But with many industry stocks under pressure, aren’t deals likely to be put on the backburner?
We absolutely believe consolidation will continue. I think the timing of that consolidation is less clear with stock prices at multi-year lows and some players still working very hard to integrate and achieve the full benefits of prior deals, but the rationale is intact. And the streaming marketplace right now is fragmented and complicated. It’s complicated for the industry participants, and it’s certainly complicated for consumers. And so the industrial logic of simplifying the marketplace is just very strong. Financially, the consolidation of companies creates cost savings, and those cost savings are going to be essential to fund investment and to boost profits. And then just the overall industry landscape needs to get further rationalized because right now, it’s driven by a handful of global heavyweights. And for smaller players that really remain reliant on declining linear operations, M&A is the way to realize their strategic end game, and they fundamentally need to join up with partners to make the industry operate more profitably over the long term.
Talk about the metaverse seems to have been less in focus for media and entertainment executives as of late, but will remain “on the long-range radar,” your new EY report argues. Where does Hollywood stand on this topic and is it still viewed as a key future opportunity?
The excitement certainly cooled in the second half of 2022. But that was really the onset of what others are calling the crypto winter, but really the meltdown or the bear market of cryptocurrency. The metaverse and crypto aren’t the same thing, but they are closely tied. And then there is also pressure on some of the large technology companies that are really leading the way in the metaverse and investing heavily, and they are facing pressure from their own investors around the pace of investment and the magnitude of investment and the timing for a payoff on that investment. So I think the net result was a cooling of the early enthusiasm around the metaverse.
But metaverse ambitions will not disappear completely?
Media companies are absolutely aware that entertainment and access to content and the nature of the internet itself will evolve. And they are preparing for that next age of interactivity. By preparing I mean that there have dedicated teams doing strategic planning, executing on consumer research, developing new technologies, framing out potential business plans. The underlying goal of all this is really to maintain optionality for how the metaverse evolves over the next two, five, 10 years. And the investment companies are making is modest over the near term, but it is not immaterial. There is a concerted effort across the industry to make sure that companies are staying proactive and engaged in this opportunity, so they are well-positioned when it takes a more structured form.
Interview shortened and edited for clarity.
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