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As JPMorgan Chase CEO Jamie Dimon warns of an economic “hurricane” headed this way, most media and entertainment companies have yet to take cover. Dimon’s prediction, made during a June 1 analyst conference, comes as inflation remains high, the war in Ukraine pressures global commodities and the Federal Reserve appears poised to keep raising interest rates. While the U.S. added 390,000 jobs in May, according to the latest jobs report, that strength might further the Fed’s plans to hike rates in order to keep inflation under control and in doing so, maybe create a recession.
Asked about the potential of a slowdown at recent analyst conferences, company executives have largely dismissed the impact, with movie theater chain Cinemark holding to the position of being in a recession-proof industry and executives from video game publisher Take-Two Interactive acknowledging the possibility of a broader slowdown in entertainment — but not one that has a big impact on their company. “We’ve seen that over the years, people will cut back on larger forms of spending, vacations, more costly types of entertainment, but they still ultimately want to get out and do something,” Cinemark CEO Sean Gamble said May 24.
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A recession is far from assured, with the Fed continuing to try to thread the needle to reduce inflation. Dimon’s JPMorgan colleague David Kelly told CNBC on June 3 that he thinks there will be a “soft landing.”
And a stable outlook for personal finances might currently support consumer spending. While consumers are concerned about the economy, according to the University of Michigan’s most recent consumer sentiment survey, they are less concerned about their own prospects, with fewer than a quarter expecting to be in a worse financial position in a year.
But when Snap on May 23 lowered its own second-quarter revenue guidance, saying “the macro environment has deteriorated further and faster than we anticipated,” it spoke to the potential for a larger threat for digital advertising-based companies and beyond. The reaction to Snap’s disclosure essentially sent all technology and media stocks plummeting, though most have recovered from those losses.
If trends continue, Wells Fargo analysts see pressure on the advertising revenue of connected television providers such as Roku and Vizio Holding Corp., as well as advertising-based streaming services such as Paramount’s Pluto and Fox’s Tubi. “The length and depth of the recessionary slowdown will determine whether pain makes its way to the longer cycle areas of the ad market,” the analysts wrote in a May 23 report.
Supply chain issues might also squeeze the advertising revenue of broadcast networks and others, says Moody’s analyst Neil Begley, as automobile manufacturers, in particular, no longer need to advertise to get inventory out the door.
So far, other media and entertainment companies are likely waiting to see what develops before making any moves, says Begley. Hiring freezes can be the first sign of a recession, and slowdowns have already been reported at Snap, Netflix, Meta and others. But given the strong jobs numbers, Begley notes he would not be concerned until more widespread layoffs occur. “I think that it’s very unusual to think that we could sustain strong home values and sustain strong employment and see a recession,” Begley adds. “So a lot of people are sort of teetering on making decisions.”
However, that shouldn’t stop media and entertainment executives from planning for that hypothetical hurricane, even if it only ends up being a minor thunderstorm. Inflationary pressures alone are enough to force a rethinking of offerings. “In times of abundance, there is less scrutiny when it comes to individual performance of different types of media, or different products, if you will,” says Jana Arbanas, vice chair and U.S. telecom, media and entertainment sector lead for the consulting firm Deloitte. “But in a recession, that becomes a laser focus relative to the objectives of the products and whether they are meeting them.”
“Media companies really need to be providing options, and thinking about the constraints that a consumer is facing in a recession, where they are trying to fill up their tank of gas, or putting now really-expensive food on the table,” Arbanas adds. “These discretionary costs are going to get scrutinized. That can’t be avoided.”
One side effect of any possible economic downturn could be more aggressive maneuvers into free, ad-supported streaming (or “FAST” services, in industry jargon). While the advertising market would not be spared in a recession, if consumers do churn through subscription bundles more frequently to save money, FAST offerings could make for a soft landing pad and serve as a place to keep consumers in their content ecosystem.
Fox Corp. CEO Lachlan Murdoch, speaking May 18 during a conference hosted by MoffettNathanson, said that ad-supported streaming is “definitely a better business than SVOD.”
Murdoch added, “Particularly going into a potentially recessionary period or certainly high inflation period, free is a tremendous proposition.” He noted that his company is in the space through Tubi.
Price-conscious consumers would likely turn away from more expensive cable offerings in favor of lower-priced streaming services, Begley said. This could also mean consumers get rid of more expensive subscription streaming services — he counts Netflix in this category — in favor of others at a lower cost. But a recession could force change to an industry that, at least until the COVID-19 pandemic, was reluctant to embrace it. Now it could be facing a double whammy of business model upheaval: a pandemic, followed by a downturn.
“We’re seeing a lot of signals about how the future is shifting, so perhaps a recession will be what some media and entertainment companies need to really look hard to the future, and diversify, frankly, their set of products and offerings to engage and meet the consumer where they are at,” Arbanas says. “Recession or not, media companies need to be thinking about evolving for the future.”
This story first appeared in the June 8 issue of The Hollywood Reporter magazine. Click here to subscribe.