Finding value in the next evolution of media and entertainment

Media and entertainment (M&E) companies are used to drama — they make their living from it — but the pace and scale of disruption in 2023 had M&E executives reflecting on how best to navigate the next evolution of their industry.

Higher interest rates and rising economic uncertainty put a question mark on the outlook for consumer spending. Recent strikes by Hollywood writers and actors halted film and TV production for months, delaying the release of fresh content and denting future studio profitability. The storyline for the linear television business remains grim while the advertising sector churns through a period of volatility. Meanwhile, the streaming model still is not profitable for most M&E companies.

In October 2023, Ernst & Young LLP (EY US) surveyed 150 US M&E board members, C-suite executives and their direct reports to gather insights into the current state of the industry and identify trends for the future.

Our findings suggest that M&E companies are zeroing in on optimizing content and media business portfolios and harnessing artificial intelligence (AI) and generative AI (GenAI) to help rekindle their growth ambitions and create sustained resiliency. They are also taking a serious look at how to future-proof profitability by continuing to consolidate, create new partnerships and streamline operations to permanently reduce expenses.

According to more than two-thirds (68%) of M&E executives we surveyed, the most important part of an optimal media business portfolio today is advertising sales, followed by streaming platforms (51%), and broadcast and cable networks (41%) — and this is expected to remain the case in three years. Advertising’s high ranking is testament to the fact that, despite its cyclicality and the pressing need for M&E companies to generate alternative new revenue streams, it will continue to play a vital role in driving operational and financial success.

The traditional linear broadcast and cable network business remains under considerable strain. 91% of M&E execs say linear video will keep declining yet will remain a key part of an optimal media business mix for the foreseeable future. More than half (52%) of survey participants say that the decline in this segment will continue at a rate consistent with current trends, while 39% expect the decline to accelerate. One-third (33%) of survey respondents attribute the preference for tailored services over the traditional pay TV bundle as the primary driver for cord cutting by consumers. An equal percentage (33%) indicate that with less discretionary spending at their disposal, consumers are taking action to reduce expenses.

Yet any suggestion of linear TV’s imminent demise would be premature. Our study finds that M&E executives overwhelmingly say that the broadcast and cable network segment should remain a part of an optimal media business mix. Respondents rank linear video, including TV stations and cable networks, in the top four of all businesses to include in a media portfolio — both today and in three years’ time.

Despite fading popularity with consumers, linear video, supported by the favorable economic structure of the pay TV bundle, still generates solid profits and cash flow, far higher than what streaming offers today with its subscriber churn and heavy investment in content, technology and marketing.

To address persistent losses in streaming, M&E executives are moving ahead decisively with the rollout of hybrid models, pushing subscribers toward ad-supported direct-to-consumer (DTC) offerings that re-create the dual revenue streams of linear, while offering lower monthly prices — a critical factor in an à la carte media world where the consumer remains firmly in control.

More than nine out of 10 respondents (93%) say that consumers appreciate the increased choice DTC services offer, while 85% believe that consumers value the ability to more effectively manage their media and entertainment budget.

At the same time, leaders think the industry must address consumer pain points to improve the day-to-day streaming experience. More than two-thirds (68%) say consumers want to access content through a single platform; 59% note that DTC users would prefer an uncomplicated process to change channels, much the way they can when they watch linear TV. The belief that consumers prefer an aggregated viewing experience is shared by executives across all M&E sectors.

The idea that a single platform improves the viewing experience is not new. For decades, the multichannel video programming distributor (MVPD) bundle served consumers — and the industry — very well. Consumers benefited from having simple access to news, sports and a wide variety of entertainment video programming. With few alternative options for consumers, the video production and distribution players also profited handsomely.

The advent of streaming gave consumers an unprecedented level of choice of — and control over their viewing experience and budgets. M&E companies responded by emulating their tech counterparts, spending billions to amass the content rights necessary to build their own streaming platforms. However, streaming adoption has badly frayed the traditional MVPD bundle. The results are clear, with the number of traditional MVPD subscribers falling rapidly in recent years. There is no sign of this trend slowing.

In the meantime, the streaming landscape has evolved into a patchwork of competing services, price points and content offerings — a situation similar to the “walled garden” environment of the early internet. Consumers must sign up for multiple streaming subscriptions to get the content they want, which is neither economically sustainable nor what consumers want.

Bundles appear to remain popular, but the question becomes who will provide them? Traditional MVPDs? Networks? Streamers? E-commerce providers? Others? Two industry heavyweights suggested the answer with their carriage agreement in September 2023. Ending a standoff, the deal enabled the cable giant’s subscribers to receive ad-supported DTC services in a bundle with certain linear TV packages. The media company retained linear distribution at attractive rates, which protected a crucial source of cash flow generation. We expect to see more of these types of deals as media companies try to preserve as much of their legacy business as possible while they transition to streaming.

To maximize the value they can deliver to consumers, M&E companies are investing in four key areas:

1. 75% are prioritizing advanced advertising technology to drive marketing relevance.
2. 67% are investing in platform design to enhance the user interface and overall experience.
3. 51% are spending on cross-platform service bundles (e.g., e-commerce, wireless) to boost the overall offering for consumers, with the potential to reduce churn.
4. 44% are creating an industry solution for streaming service aggregation to revive the easy-to-use pay TV experience of having all content in one place, an integrated program guide for programming discovery, and the ability to change channels with a single click of the remote.

To drive customer centricity, more than half (53%) of M&E executives view the top priority to be enhancing sales capabilities by leveraging data analytics and AI to better understand consumer behaviors, thereby improving ad effectiveness and relevance. This is a particularly high priority for advertising and marketing services companies (63%), reflecting their efforts to serve marketers that increasingly favor performance-based advertising platforms. Slightly less than half of all respondents (47%) see creating omnichannel experiences as a top priority, though that figure rises to 70% among broadcast, cable and streaming networks.

Content spend on streaming will continue, despite profitability issues

Consumer enthusiasm for streaming will keep the spend flowing for content, even though streamers have yet to make the kind of stable profits linear TV has produced for decades.

Until recently, streaming executives justified the spend, saying it was necessary to offer a deep well of content to attract and retain subscribers.

Throughout 2023, industry analysts highlighted the initiatives underway at the major M&E companies to rein in content expense to accelerate the path to profitability in streaming. Yet, despite the efforts to restrain spending, 77% of M&E executives say they expect content outlays to increase over the next three years. This rises to 90% among broadcast TV, cable and streaming networks, and film, TV and video game production. The competitive content race remains vigorous. Companies continually add programming to feed their streaming services to lure in new subscribers and keep existing users, fearing that a reduction in investment will lead to a loss of market share to their peers.

So, what is the most desirable content? More than three-quarters (77%) of M&E executives cite sports as the most important content to a media company’s success, followed by user-generated or shortform content (56%), video games (55%) and unscripted (news, reality) (41%). The perceived high value of sports content is a view that is both shared across M&E sectors today and expected to remain so in three years. Sports remains one of the few types of content that can still aggregate large live audiences. This, in turn, reinforces that sports rights will continue to be highly sought-after, driving further price inflation and intense competition between M&E operators and the digital-native behemoths.

These align broadly (though not entirely) to the types of content respondents see as most valued by consumers.

Interestingly, only 18% of respondents cite library content as being of value to customers. This seems contrary to many conglomerates’ stated rationale for recent acquisitions, in which they highlighted the benefit of adding a large roster of “old favorites” to their streaming programming lineups. It’s also at odds with consumer viewing habits. Older sitcoms, for instance, are some of the more popular shows on streaming services.

As heavy investments in content for streaming services raise capital intensity in the industry, measuring ROI is vital. Yet it’s an area where M&E executives say they struggle. Previous EY surveys, spanning several years, have shown ROI measurement to be a persistent problem. This year’s survey is no different. More than half (54%) of M&E executives say that their inability to measure ROI is an extremely significant business challenge, up from 51% in 2022’s survey.

In a time when M&E companies spend tens of billions of dollars annually on programming, developing effective processes and analytics to assess and evaluate results is essential for making informed decisions. With profitability in the spotlight and balance sheets under pressure, investors and other stakeholders are pressuring M&E leaders to demonstrate the returns on the capital allocated to content investment.

Across the corporate landscape, among governments and in the minds of consumers, feelings are mixed about the exponential opportunities offered by and existential ethical risks posed by AI and GenAI. Yet the M&E executives we surveyed firmly believe that AI will be a net positive for the industry. Executives plan to harness the transformative power of AI, with many using it for both revenue generation and back-office efficiency.

More than four out of five executives surveyed (83%) say their companies have initiated AI projects or plan to within the next 12 months. More than two-thirds (69%) of all respondents expect that GenAI will accelerate the process of content creation, from research to ideation to scripting; this belief rises to 87% for film, TV and video game production executives, who no doubt recognize AI’s potential to augment human creativity.

Nearly two-thirds (65%) expect that GenAI will improve the customer experience through intelligently automated assistants, voice recognition and elevated customer query handling. More than half believe that GenAI will improve content quality (53%) and drive audience engagement at scale (51%).

With roughly half of respondents (49%) saying their companies have AI pilot projects underway, M&E companies are getting hands-on experience with the technology to test GenAI’s hyped benefits.

Interestingly, while M&E companies across subsectors are working to address the practical challenges that AI poses around quality control and the need to upskill talent, slightly more than a quarter (27%) are developing AI ethics and guidance policies. This presents a critical gap — and a significant risk — for M&E companies. These policies set the legal, moral and business parameters within which AI can operate.

Companies across subsectors have come together to expand their operations and drive scale, find synergies among disparate business units and position themselves for future opportunities. These large M&E conglomerates have set the pace for the industry, even as they compete with a juggernaut of digital-native giants for content rights, advertising share and consumer engagement.

Yet, as powerful as today’s top industry players appear, M&E executives believe that more deals are inevitable. More than two-thirds (68%) expect that only one of today’s M&E conglomerates will remain as a stand-alone company in three years’ time; the other 32% don’t expect any of them to remain independent. These sentiments foreshadow a final round of industry consolidation that will rationalize the media landscape for operators and consumers alike.

This suggests that M&E companies will continue to seek strategic opportunities, but they will do so within a more focused set of core businesses rather than pursue transformational deals that span M&E segments.

If M&E conglomerates pick up the pace of M&A, their dealmaking would follow a multiyear period of strategic activity that has reshaped the industry. According to our survey, 97% of M&E leaders say that mergers completed over the last five years have driven lasting benefits for the acquiring companies. Specifically:

• 83% say M&A activity has improved competitive positioning.
• 65% note that they’ve acquired more robust streaming capability.
• 53% indicate M&A has enhanced their content portfolio.
• 38% suggest that increased scale has helped their companies to realize cost savings and efficiencies.

Yet, the M&A agenda for the industry faces some key challenges. For one, 73% of M&E executives point to capital constraints, up significantly from 2022, when 53% of executives rated access to capital as the greatest challenge. Additionally, as companies consider bundling products and services through new M&A, executives cite the task of managing complex content rights as a hurdle. Almost 60% ranked this as a significant obstacle to further consolidation — second only to access to capital. Finally, a challenging M&A regulatory environment (cited by 43%) could also impact the pace and timing of the next round of deals.

M&E companies look inside for improved financial performance

As they consider their strategic options, M&E executives continue to look inward for opportunities to improve operating and financial performance. And they are signaling a willingness to make hard decisions to hit their targets.

They are taking steps to optimize working capital, target discretionary spend and reduce headcount. At the same time, they need to find ways beyond functional improvements to structurally boost cash flow generation, which means splitting their focus between day-to-day operations and broader strategic opportunities and threats.

Most respondents in our survey (93%) say they have simplified their business portfolios to focus resources on their core strategy, or plan to do so over the next 12 months. A similar number (89%) indicated they have already streamlined or will streamline operations and corporate functions to boost efficiency. This is comparable to 2022, when 82% of respondents said they were undertaking cost reduction efforts.

Conclusion

With continued disruption in the industry and massive shifts on the horizon, executives have an opportunity to seize the moment to strengthen their businesses by:

• Acknowledging and acting on consumer desire for choice, convenience, aggregation and value
• Harvesting cash flow from the old (linear) and taking decisive actions to improve profitability
• Investing in the new (streaming-led re-bundling/packaging, advanced data analytics)
• Embracing opportunities offered by GenAI in a responsible manner
• Positioning for the final round of industry consolidation

M&E companies that maintain an agile mindset, coupled with an understanding of the interdependencies between old and new models, have the best chance of not only surviving but thriving in an environment of constant transformation.