We're nearly two-thirds of the way through 2021 and the U.S. media and entertainment industry is still working to put the effects of the COVID-19 pandemic behind it. That said, the recovery in the advertising-focused media sectors has been more robust than in other sectors because advertising spending began recovering in the third quarter of 2020 and will, in aggregate, surpass pre-pandemic levels (in 2019) by the end of 2021. The out-of-home (OOH) entertainment sectors haven't fared as well as those focused on advertising because the previously encouraging pace of recovery in these sectors has been modestly slowed by consumer and government reactions to the spread of the delta coronavirus variant. While we still expect OOH entertainment revenue to recover in 2022, it could take until 2023, or beyond, for the credit metrics of the participants in this segment to fully recover given their higher debt levels following pandemic.

For the rest of the year, we will remain focused on the pace of the recovery in OOH entertainment, the post-pandemic future of the film industry, and--most importantly--when the credit measures of industry participants will return to pre-pandemic levels. In addition to these topics, our focus will return to the same industry-specific themes that were front and center as of the end of 2019: the secular pressures affecting traditional linear TV as audience ratings decline and advertising shifts to digital platforms; determining the winners and losers in the global streaming service wars; and industry consolidation. We expect these key topics to dominate our conversations for the remainder of the year and into 2022.

The U.S. Advertising Sectors Are Leading The Recovery Of The Media Industry In 2021

Since the start of the second half of 2020, U.S advertising spending across most media segments has rebounded at a strong clip. We now expect U.S. advertising revenue to rise by 14.5% in 2021, which is a significant increase from our previous 7.8% growth forecast. This stronger-than-expected recovery is due to the continued expansion of advertising on digital platforms, which--other than in April 2020 when digital advertising declined--hasn't missed a beat despite the pandemic. We raised our expectation for 2021 digital advertising growth to 25%, which is well ahead of our previous expectation of 12%. In addition, the recovery in spending on local and national TV advertising and billboards is outpacing our previous expectations. On the other hand, we anticipate the level of spending on radio advertising will only return to 90% of 2019 levels by the end of 2022 before continuing to decline. Further, we don't forecast transit advertising will recover to pre-pandemic levels until 2022/2023. For a longer discussion of current U.S. advertising trends, please see "Rebooting The U.S. Media Sector: Double-Digit Advertising Growth Can Thank Digital," published Sept. 1, 2021, on RatingsDirect.

The Spread Of The Delta Variant Has Slowed The Recovery In OOH Entertainment

Through the first six months, the OOH entertainment sector improved at a faster pace than we had anticipated. This reflected the quick relaxation of social distancing and attendance restrictions by governments and health authorities as large portions of the population received vaccinations, COVID-19 case counts declined, and--most importantly--consumers showed a strong desire to escape their homes and attend concerts and sporting events and visit theme parks. However, based on recent industry announcements cancelling fall concert tours or delaying the theatrical releases of some upcoming films, we believe the recovery of the U.S. OOH entertainment sector has modestly slowed amid elevated consumer health and safety concerns related to the spread of the delta variant and new government-imposed mandates requiring masks, proof of vaccination to enter entertainment venues, and event capacity restrictions. Despite these near-term concerns, we believe the OOH entertainment sector's recovery is outpacing our previous assumptions.

We believe the strong demand for entertainment options indicates that our concerns about potential consumer reluctance to re-engage socially were inaccurate. Starting in 2022, we expect most OOH entertainment sectors to expand at a faster rate than the legacy advertising-based media sectors as consumers embrace experiential entertainment over passive legacy entertainment. We assume concerts, theme parks, sports, and other live action events (such as e-sports) will benefit from this trend. Movie theaters, on the other hand, are the one OOH entertainment sector that is unlikely to return to pre-pandemic consumer engagement levels because movie studios are increasingly prioritizing film distribution via streaming services rather than theatrical release.

Not Clear What The Post-Pandemic Global Film Industry Will Look Like

Even before the pandemic, the global film industry was under intense secular pressure because studios were pushing for more flexibility around the length of the exclusive theatrical release window. In addition, an increasing number of films (most notably dramas and comedies) skipped theaters and were released directly on streaming services. Then the pandemic struck, which severely affected the entire film industry and accelerated the preexisting secular shifts. For example, for the 455-day period from Feb. 28, 2020, (the release of Universal's "The Invisible Man") to May 28, 2021 (the release of Disney's "Cruella" and Paramount's "A Quiet Place Part II"), no major films (except for Warner Bros.' film slate including "Tenet", "Wonder Woman 1984", and "Godzilla vs. Kong") were released in theaters. Even as theaters have begun reopening and the backlog of movie releases begins to clear, we believe the pandemic will lead to permanent changes in the film industry. This is because recent trends, including the growing importance of in-house video streaming services to the media companies, the new shorter (most likely settling in at 45 days versus the historical 75-90 day) exclusivity window, and the potential for non-exclusive theatrical windows, has shifted the balance of power toward the film studios and away from theater operators. While the theaters need film releases to survive, the media companies now have other release options for their films and are less reliant on traditional theatrical releases. That said, the studios still need theatrical release to "eventize" their big budget, high-profile films and the theaters do have some opportunities, including to work with Netflix, Apple, Amazon, and other independent streaming services to release their films in theaters (despite the likelihood for a shortened release window) and by expanding their offerings to encompass non-film events, such as concerts and sports.

This secular shift in the film industry has also changed the role of movie studios within global media companies. While their role as primary content creators remains unchanged, studios no longer have final say in how their content is distributed, be it by theatrical release, through an in-house streaming service, or by selling it to a third-party streaming service. While Walt Disney Co. is the only media company to officially organize its operations around this strategy, other media companies are increasingly taking a similar approach. These changes will affect their revenue and profitability and determine how the movie industry recovers from the pandemic, which could have long-term negative ramifications for our credit ratings on both movie studios and exhibitors.

The Inevitable Decline Of Linear Television

While the pace of cord cutting has been modestly slower than we forecast thus far in 2021, the audience ratings for linear TV are deteriorating at an alarming pace. According to Nielsen, total day audience ratings declined by 15% year-over-year for the four major English-language broadcast networks and by 18% for the cable networks despite the return of original programming and sports. Clearly, consumers are watching less linear TV and this increasingly includes sports (for example, ratings for the 2020 Tokyo Summer Olympics declined by 40% versus the 2016 Rio Summer Olympics), news, and special events (the ratings for the Academy Awards declined by nearly 56%). Not only do we not forecast that this rate of decline will improve, we believe it is far more likely to accelerate. The media companies are increasingly prioritizing placing new content on their owned direct-to-consumer (DTC) streaming services rather than putting them on their legacy linear TV networks, which could accelerate the pace of audience losses. In addition, we believe the ratings declines for linear TV could worsen because the media companies are increasingly adding sports programming (both the NFL and NHL have included streaming rights in their broadcast TV packages) and news (WarnerMedia is preparing to launch CNN+ in 2022 to compete against Fox's Fox Nation streaming service) to their DTC streaming services. Over time, these audience declines will further weaken the operating and financial performances of linear TV operators. On the advertising side, the reduction in viewership will likely weaken the demand from advertisers and pressure industry pricing, which is something that we have been concerned about for years but have yet to see materialize. In addition, declining audiences will impact the networks' carriage negotiations with the pay-TV distributors. While we are already seeing this with the regional sports networks (RSNs) and premium cable networks, we believe the runway for the broadcast networks and local TV stations is longer. Coupled with paid-TV subscriber declines, distributors will push back harder on per-subscriber price increases, which will likely begin to reduce affiliate revenue--the bedrock of the media industry's cash flows.

It's Still Too Early To Pick Winners And Losers In The Streaming Wars

It is still the beginning stages of the rise of DTC streaming services, thus we believe it is too early to assess their long-term performance metrics or pick winners and losers. All the major media companies have finally launched their own domestic DTC streaming services (ViacomCBS' rebranding and relaunch of CBS AllAccess as Paramount+ on March 4, 2021, being the most recent). The last 18 months have also been unique because the pandemic kept people in their homes. While this unexpected captivity led to very strong new subscriber growth, it also shut down most film and TV production, which may have negatively affected the streaming services' subscriptions in the first half of this year due to the lack of new content to attract sign ups and consumers' gradual returned to their pre-pandemic lifestyles. We believe the new content production pipeline is now almost fully open and note that streaming services already rolled out a lot of new content in the second half of the year, which will likely support their new subscriber growth and retention. However, the pace of their operating losses--as media companies continue to spend billions on their DTC streaming services for content, technology, and marketing--will be equally as important for their credit quality. We anticipate that media companies could increase their spending beyond their current guidance if they see opportunities to attract more subscribers. While likely a positive for new subscriber growth, this increased spending could depress both their EBITDA and cash flow and delay their ability to reach break even on their DTC streaming services. We don't expect this delay to affect our credit ratings on most media companies unless the increase in their spending is significant or occurs in conjunction with another action that elevates their leverage. In many cases, the media companies have already recognized the potential for elevated spending and higher leverage and have been taken actions to build a leverage cushion.

Industry Consolidation Has Accelerated Due To The Need For Greater Content And Geographic Scale

Media has historically been a national industry with only a few companies achieving truly global prominence. Netflix and its global streaming service changed that paradigm. Now, any company that wants to compete directly with Netflix talks about securing both more content and greater geographic scale (preferably global). As Netflix has expanded, the company has put tremendous competitive pressure on regional media companies that don't have the depth of content or the subscriber scale to compete head to head. Over the last few years, we've taken several ratings actions on smaller non-U.S. media companies, including Brazil's Globo Comunicacao e Participacoes S.A., that have materially weakened their credit profiles by trying to roll out their own DTC streaming services to compete against Netflix and other global streaming companies.

In light of the importance of increased scale, the pace of industry mergers and acquisitions (M&A) has intensified this year due to several major media transactions, including Discovery's proposed merger with WarnerMedia, Amazon's proposed acquisition of MGM, and Univision's proposed merger with Grupo Televisa's content and media assets. All three companies have global aspirations and these transactions, which include both film and TV libraries and content production capabilities, will help address the seemingly insatiable appetite for content to feed their global streaming services. In addition, several smaller independent production companies have put themselves up for sale. One company, Hello Sunshine, was purchased by a newly formed media venture backed by Blackstone Group.

Aided by the favorable conditions in the debt markets and the rise of non-traditional companies flush with cash (such as special-purposed acquisitions companies [SPACs]), we expect the level of M&A activity to remain robust across the entire industry as industry players (media companies, sponsors, and tech companies) evaluate their strategies and consider how to meet their needs. While the large global media companies will look at every possible transaction, we don't expect them to aggressively pursue these smaller companies given their preference for internal content investments over leveraging acquisitions, as well as the steep valuations that these potential acquisition targets are demanding. Thus, we expect more non-traditional media companies to get involved, such as with the Hello Sunshine transaction. Given the high costs of building out a new streaming service, we expect some media companies to follow Comcast's and ViacomCBS' lead and look for partners to share the costs.

Credit Measures--What To Do With All That Cash?

As the global economy continues to recover, the immediate risk facing our credit ratings on most media companies has diminished significantly. Through the first eight months of the year, we have taken significantly more (a 3-1 ratio) positive ratings actions (raising ratings or revising outlooks from negative to either stable or positive) than negative actions on companies in the industry. As the economy continues to recover, we could take additional positive rating actions if media companies remain disciplined and return their credit metrics to pre-pandemic levels.

Companies that sought extra liquidity by issuing incremental debt or preferred equity in 2020 must now determine what to do with the excess cash on their balance sheets. We don't expect the vast majority of these companies to use the cash to fund special dividends to their shareholders, to purchase stock, or to pay down their upcoming maturities. Instead, we expect most companies to prioritize the cash to fund organic growth opportunities, increase their content investments, or to fund capital investments. We understand the strategic rationale behind this decisions and believe that these investments could enhance their credit quality over the long term. Still, this would likely delay the recovery in their credit measures. Therefore, we would likely refrain from upgrading those companies that we downgraded during the pandemic until their metrics return to pre-pandemic levels.

Related Research

• Rebooting The U.S. Media Sector: Double-Digit Advertising Growth Can Thank Digital, Sept. 1, 2021
• Despite The Pandemic, There Are Good Signs Ahead For U.S. Outdoor Advertising, July 8, 2021
• The Global Music Industry Is On Track To Hit A New High Note When It Comes To Revenue Growth, June 16, 2021
• Consequences Of And Lessons Learned From The AT&T-WarnerMedia-Discovery Transaction, May 25, 2021
• The Post-Pandemic Recovery Will Be Coming Soon To A U.S. Movie Theater Near You, April 29, 2021
• How The Decline In The U.S. Television Ecosystem Could Squeeze Credit Ratings, April 22, 2021
• Gauging The Business Risks Of Local U.S. TV Broadcasters, April 15, 2021
• Rebooting The U.S. Media Sector: 2021 Advertising Trends Are Nicely Up, With Some Sectors Lagging, April 12, 2021
• The U.S. Broadcast Radio Sector's Recovery Is Now Set To Drag Into 2022, March 4, 2021
• Here's What The U.S. Media And Entertainment Sector Has In Store For 2021, Jan. 6, 2021