Hollywood should be very nervous about Facebook‘s first-ever drop in revenue in Q2 earnings on Wednesday, a painful benchmark brought on by a steep drop-off in advertising sales as the economy teeters toward a recession.
And studio chiefs should be really nervous about the social media giant’s warning on Wednesday that revenue through September will wane even further, somewhere in the range of $26-$28.5 billion, missing the $30 billion-plus that Wall Street was projecting. There’s a confluence of reasons: consumer are in belt-tightening mode, companies are reigning in advertising spend, and a strong dollar has eroded the value of overseas sales.
Those are not exactly economic conditions big entertainment companies, who depend on advertisers to hawk everything from luxury cars to campaign promises, want to hear at a point where they’re trying to convince investors that ad-tiered streaming options will grow subscribers. It throws into chaos expectations that streaming ad spending was supposed to surge nearly 40% this year to $21.2 billion — double what was reported in 2020, according to NewFronts sponsor IAB.
The parent company of Facebook and Instagram reported second-quarter earnings of $6.69 billion, or $2.46 a share, down from $3.61 a share last year, on revenue of $28.82 billion, down from $29.08 billion a year ago. Both results missed Wall Street projections for $2.54 a share and revenue of $28.9 billion, according to Yahoo Finance.
Meta’s shares slid 4.6% to $161.79 in after-hours trading, well off the 52-week high of $384.33. It was the first time the tech giant had reported a decline in revenue for the second quarter, and the company also predicted that growth in the third quarter could fall even more.
““This is a period that demands more intensity, and I expect us to get more done with fewer resources,” Meta Chief Executive Mark Zuckerberg told analysts on Wednesday, echoing comments he recently made to employees.
More intensity? Maybe he wasn’t listening to Richard Greenfield at Lightshed Partners, who has been warning about the ad market for months. Or MoffettNathanson analyst Michael Nathanson who has been warning CEOs to start focusing in on the upcoming recession that isn’t going to somehow skip media companies. Or dozens of other analysts who have been flashing signs of foreboding that an advertising slump would permeate through tech, streamers, and legacy entertainment brands.
Greenfield said all of Hollywood’s studios remain financially tethered to the shrinking multi-channel video bundle as their streaming services bleed cash to the tune of billions of dollars a year. Making matters worse, legacy television audiences is aging and provides only a “narrow reach” for advertisers.
“The same older eyeballs are seeing the same ads over and over again,” he said. “Brands want to reach consumers on ad-supported streaming services. Unfortunately, there are simply not enough premium, long-form content impressions (time spent on ad-supported SVOD services) available to shift tens of billions of ad dollars from linear TV.”
Nathanson’s Friday report started off like an account of a regular family summer holiday, only to then take a turn to focus on recession worries among media and entertainment industry investors.
“We think media investors are feeling something similar as they try to decipher the timing and shape of a potential economic slowdown,” he said. “To be clear those worries are not fanciful. Rather, a bevy of concerning advertising data points, especially from the digital companies so far, is driving this anxiety.”
Nathanson added to the angst being felt in media companies about a looming recession: “Are we there yet? Anyone with young children knows how hearing this question over and over on a road trip can wear on even the calmest driver.” The Federal Reserve is trying to battle back an official economic downturn with another interest rate hike on Wednesday.