In this commentary, we preview what we think will be the key trends affecting the U.S. media and entertainment industry in 2025. We believe the sector's U.S.-based diversified companies could see better operating and credit metrics as several achieved cash flow breakeven for their video streaming businesses in 2024 and should see further cash flow growth next year. Whether this translates to better credit quality will depend on the pace of credit metric improvement and where the companies stand versus the metrics needed for S&P Global Ratings' current credit ratings on each.

Hopes For Increased Industry M&A May Be Dashed

Both industry companies and investors have high hopes for significant M&A activity in 2025. This is particularly true for those TV station operators with elevated leverage that have struggled with secular pressures on both affiliate fees and advertising, but are counting on relaxation of the FCC's rules on ownership and national coverage to allow for industry consolidation. In addition, we expect the incoming Trump Administration to be more supportive of M&A activity. In particular, this could increase the potential for spin-offs of media assets that are in secular decline (such as cable networks) and for mergers among legacy media and entertainment companies.

Yet despite this industry discussion and speculation we don't think many sizable deals will materialize for a number of reasons:

• A wide difference in perceived value between potential buyers and sellers. Sellers point to continued cash flows and see long-term value. Buyers are more skeptical about the long-term viability of the sector and ascribe no terminal value.
• A lack of capital among potential strategic buyers. The combination of depressed equity prices and high leverage leaves strategic buyers with limited capital resources to finance potential acquisitions.
• A changing regulatory framework for TV station operators that likely requires input from Congress, which seems unlikely to be a near-term priority.

The film studios release more films into the theaters--and more potential blockbusters

After being decimated by the pandemic and then the two Hollywood strikes, domestic box offices' metrics continue to improve. Thanksgiving week's record-breaking results, in which three blockbuster films (Walt Disney's Moana 2, Comcast Corp.'s Wicked, and Paramount Global's Gladiator 2) amassed over $400 million in domestic ticket sales, suggests that consumers will still flock to movie theaters if presented with compelling content. Still, as of Dec. 5, the 2024 domestic box office remained 11% below its 2023 level and 26% below its 2019 level, due in part to holes in the release slate resulting from last year's writers and actors strikes. We expect the domestic box office to strengthen in 2025 due to more wide releases (more than 2,000 screens) and, in theory, the potential for more blockbusters. In particular, Disney has three Marvel releases (versus just one in 2024) and an Avatar film, and Warner Bros. Discovery has planned 12 releases (versus 11 this year), including a highly anticipated Superman movie in June. In all we expect box office to improve to about $9.3 billion versus about $8.4 billion this year though this remains far below $11.4 billion in 2019.

Advertising remains strong even as trends for legacy media and digital media diverge

Advertising in the U.S. continues to be robust, ahead of our 2024 expectations, despite macroeconomic issues, in particular the underlying financial health of the U.S. consumer. We attribute this strength to consumers continuing to spend despite their perceived fears about the U.S. economy, the emergence of cross-border advertisers, in particular those based in China who have spent robustly in the U.S. and Europe, and the entrance of new e-commerce advertisers.

We currently expect overall advertising in the U.S. to grow 4.3% in 2025, although trends continue to diverge between legacy media and digital platforms. Legacy media, with the exception of outdoor, should experience continued mid-single-digit percentage declines as audiences continue to shrink and advertisers find alternative media to reach consumers. In contrast, search, social, retail media, headlined by Amazon, connected TVs, and streaming will grow at double-digit percentage rates and expand share of ad spend while national TV, local, TV and radio will see declines (with local performing better than national). National TV's headline numbers will reflect mid-single-digit organic declines as well as the impact of a non-Olympics year. And local TV will face the loss of what has been record political advertising spending this year. We believe risks to our forecast will generally come from macroeconomic issues and geopolitical risks from a trade war between the U.S. and China, including high tariffs, that could adversely affect Chinese-based advertisers. In addition, the Trump Administration may seek to ban or limit pharmaceutical advertising on TV. Pharmaceutical advertising skews toward national television and the loss of this key vertical could hurt television (though we expect the overall impact to be neutral as pharmaceutical companies should move those ad dollars to other media).

Streaming graduates to next-generation streaming 2.0

After four years of experimentation and missteps among the legacy global diversified media companies, we believe 2025 could finally be an inflection point in the industry's multi-year transition to streaming from linear TV. Although the legacy media companies demonstrated that they can get to breakeven profitability in 2024 (Comcast's Peacock service was the only one not to report a positive EBITDA quarter this year), they will need to prove that they can get even better and attain long-term double-digit profit margins.

Disney recently guided for 10% operating income margins by 2026 and for longer-term double-digit operating income margins. And Warner Bros. Discovery Inc. expects to substantially exceed its $1 billion streaming segment EBITDA target in 2025. The scaling of advertising on streaming will be a key component for profitability growth. At the moment, most streaming services don't have enough subscribers on ad-tiers to attract significant advertising dollars, in particular those advertising dollars that are departing linear TV. We believe this revenue stream will take time to evolve as the streaming services price to encourage faster growth of ad-tier subscribers and the streaming services bundle their services, offering advertisers greater scale in subscribers and ad inventory.

We believe it's possible for media companies to achieve double-digit percentage margins over the long term as they continue to evolve their streaming business models. Specifically for 2025, we expect companies to announce international joint ventures and domestic bundling arrangements. These will help the streaming services gain scale, control operating costs by sharing infrastructure costs especially in second-tier international markets, and reduce churn. However, before these arrangements can be signed, we believe companies need to resolve a number of issues first, including who owns the consumer and the consumer's data, who controls the landing page, who sells the advertising, and how revenues are split. These are not inconsequential headwinds.

The sports broadcast rights bubble continues to expand

As was clear by the increase in the payments for the NBA broadcast rights this year, the importance of sports programming to both linear TV and streaming continues to grow. Sports remains the glue that holds the pay-tv bundle together and it's also a major component of what draws streaming subscribers. While the sports leagues could very easily license broadcast rights to the higher bidders (usually the tech companies), they recognize the broad ubiquitous reach that only the national broadcast networks have and which even the global stand-alone streaming services can't yet offer. As a result, we believe sports leagues will continue to split their broadcast rights between linear TV and streaming, putting tonnage and selected high profile games on streaming (which they used to do with cable) and most key events, such as playoffs and championship games, on linear TV.

Most major sports broadcast deals are locked up through 2028 and so we expect 2025 will be a relatively quiet year for renewals. Besides UFC and Formula One, whose agreements all expire in 2025, ESPN has an opt-out clause in its agreement with Major League Baseball beginning in 2025.

The NFL has the option to renegotiate its broadcast agreements after the 2029-2030 season. Investor concerns that the NFL will exercise this option and move its key Sunday broadcast packages to streaming-only services continues to overhang local TV broadcasters. Investors seem uneasy about extending debt maturities beyond 2029. We believe these investor concerns are overstated. We expect continued leakage of games to the streaming services (for example, Netflix broadcasting two Christmas Day games starting this year or a potential Sunday morning package containing international games) but not for wholesale changes in 2030.

Content remains king but he's gone on a diet

The 2023 Hollywood Writers Guild and Screen Actors Guild strikes gave the diversified media companies cover to re-evaluate content spending, and reset spending to lower levels starting in 2024. Although we expect a resumption in spending growth, it will be at a more moderate rate than in the last few years. Despite lower spending, we believe demand from the streaming services and legacy linear TV for quality scripted original content remains healthy and, as discussed above, red hot for sports programming. This demand for sports puts significant pressure on budgets for both original content and licensed content. As spending on sports programming continues to grow, media companies will have to closely manage their content spending, even cutting back on original programming. We believe this has significant implications for the broader film and television studio sector. Since the start of the streaming wars in 2019, we have seen a substantial expansion in support companies that service the studios. This includes talent agencies, studio lots, and project services and payroll providers. In addition, small independent production studios that had become a growing source of primarily TV content to the streaming services have seen projects cancelled after the strikes were settled and are struggling in the new lower spend environment.

The decline in linear TV continues unabated

We believe that linear TV in the U.S. will continue to decline at the current pace given no evidence that trends are improving or, at least lessening. Advertising on linear TV will continue to decline as advertisers follow audiences' ongoing migration to streaming options. This is more acute for general entertainment programming which is on pace for double-digit audience declines and ongoing pricing reductions for ad inventory. Revenue declines for sports programming will be much more limited, with audiences actually growing for some sports, in particular the NFL, and modest advertising price increases. We forecast overall pay-tv cord cutting remaining in the 7%-8% range annually. Sports, however, is a double-edged sword. It supports revenue stabilization and even some growth, but rising broadcast rights fees impair cash flows and depress margin.

Two years ago, we assumed the number of pay-TV subscribers in the U.S. would stabilize at around 50 million. We no longer assume that as the industry has surpassed that point without seeing a sustainable lessening in the rate of decline. The industry is addressing this set back by targeting operating cost cuts at the same rate as revenues decline, leading to generally stable margins. Thus far, the industry has had modest success as companies have cut back on content spending and consolidated ad sales teams. In general, most legacy media companies are in the early stages of this cost rationalization process and we believe they can squeeze more cost savings out of their linear TV businesses.

Two key data points to watch for linear TV in 2025 are:

• The long-awaited launch of Disney's ESPN flagship streaming service in next fall. This service could significantly disrupt the pay-TV bundle and accelerate its decline through increased cord cutting.
• Charter's bundled pay-TV/streaming strategy. Since its well-publicized affiliate renewal dispute with Disney in September 2023, Charter has amassed rights to offer most streaming services to its pay-TV subscribers. Charter plans to launch a bundled pay-TV/streaming offering in early 2025 and expects that such a bundle could slow the rate of cord cutting.

We believe in aggregate that Disney's ESPN launch poses a greater risk to the pay-TV ecosystem than the Charter bundle offers a stabilization opportunity.

Related Research

• Assessing The Credit Quality Of Large U.S. Media Companies (2024 Update), Oct. 14, 2024
• Credit FAQ: Can Warner Bros. Discovery Inc. Bounce Back After Being Blocked By The NBA?, July 30, 2024
• Sports Rights: The Jump Ball In The Streaming Ecosystem, June 18, 2024
• Outlooks Diverge For U.S. Local TV Broadcasters As Industry Faces Secular Challenges, April 15, 2024
• U.S. Advertising Forecast Powered By Digital, Jan. 2, 2024