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The U.S. media and entertainment sector's shift toward a streaming-centric ecosystem represents an existential transition akin to the print media's move to digital platforms. We expect 2024 will be a pivotal year in determining the winners and losers—with the latter likely to outnumber the former.
What We're Watching
Even as the ongoing film awards season lends its sheen to the U.S. media and entertainment industry, a number of players in the sector are left looking for a brighter spotlight with the shift from legacy distribution platforms to direct-to-consumer streaming continuing apace.
Amid changes to consumer behavior that were accelerated by the pandemic (amplifying dependence on digital distribution and platforms), the industry has struggled to profitably adapt and/or pivot to these secular changes. Additional disruption came from the actors and writers' strikes that brought the sector to a near-standstill for nearly the entire second half of last year, forcing companies to yet again delay or cancel projects—and also providing the industry with an opportunity to significantly scale down budgets to address profitability concerns.
As a result of these transformative secular trends, our two-year forecast for the global media and entertainment sector remains negatively biased.
Most recently, S&P Global Ratings on Feb. 23 placed its ratings on New York City-based diversified global media company Paramount Global, including the 'BBB-' issuer credit rating, on CreditWatch with negative implications. Paramount's cash flow metrics are weaker than similarly rated industry peers, with worse declines because of its smaller scale, less business diversification, and slower direct-to-consumer ramp up.
What We Think And Why
From a ratings perspective, the media industry's evolution toward a lower-margin streaming-centric ecosystem necessitates a different analytical focus than that of industries where leverage is the driving factor for credit quality. In our view, it's important to look closely at media companies' cash flow metrics alongside leverage to determine credit quality—especially for those that are building out streaming platforms.
We believe media companies' free operating cash flow will generally be weaker moving forward than historical levels. Cash flows from linear TV businesses will almost certainly continue to degrade rapidly, as subscribers "cut the cord" and advertisers migrate to streaming platforms. At the same time, margins and cash flows generated by direct-to-consumer streaming businesses will likely be lower, because of the need for increased spending on content, required technology investments, and higher marketing and subscriber-acquisition costs. While there will be opportunities for media companies to lure consumers and advertisers as they make the transition to streaming, the digital environment is more competitive than the traditional linear model and features greater customer churn.
Still, some streamers (most likely the larger, more-established players such as Netflix, Disney's Hulu and Disney+, and Warner Bros. Discovery's Max) will figure out how to reach profitability over the next few years.
What Could Change
Against this backdrop, we will be closely watching if media companies can increase streaming profitability faster than linear-TV operating metrics decline, and the outcomes for media companies with weaker streaming prospects. The sector's encore—whether streaming can approach the historically very profitable business of linear TV, which enjoyed revenue from both advertising and subscriptions—remains uncertain.
We expect streaming losses to moderate this year, but it may be too early to speculate on long-term profitability. (Outside of Netflix, no other major media company has had sustained streaming profitability.)
Mergers and acquisitions (M&A) may be the clearest path for the media sector to survive intact—but consolidation is difficult in the current environment. Regulatory resistance, the high cost of capital, and sizable differences in perceived valuations could limit significant M&A across the industry this year.
Still, a brightening economic outlook should give media companies some measure of tailwind. We now expect U.S. real GDP growth of 2.4% this year—up from our November forecast of 1.5% and only slightly below the estimated 2.5% expansion last year. The more resilient-than-expected jobs market that played a part in fueling our revision should underpin the consumer spending that is key to the sector. Additionally, the industry's return to new content production will help normalize profitability and cash flow metrics in the second half of 2024.
Writers: Molly Mintz and Joe Maguire
This report does not constitute a rating action.
| Primary Credit Analysts: | Naveen Sarma, New York + 1 (212) 438 7833; naveen.sarma@spglobal.com |
| Jeanne L Shoesmith, CFA, Chicago + 1 (312) 233 7026; jeanne.shoesmith@spglobal.com | |
| Secondary Contact: | Alexandra Dimitrijevic, London + 44 20 7176 3128; alexandra.dimitrijevic@spglobal.com |
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