Known Unknowns in Media and Entertainment
Apr. 18, 2011 4:20 PM ET
Harold L. Vogel, CFA's Blog
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Harold L. Vogel, Ph.D., CFA, is CEO of Vogel Capital Management in New York City and former Adjunct Professor of Finance and Economics, Columbia University Graduate School of Business. He is author of Financial Market Bubbles and Crashes, 3rd ed. (Dec 2021), Entertainment Industry Economics, (10th ed. 2020), and Travel Industry Economics, (4th ed. (2021). Articles include "An Analytical Review of Volatility Metrics for Bubbles and Crashes (with R. Werner), International Review of Financial Analysis, March 2015.
Known Unknowns in Entertainment and Media
Optimism has returned and the worst for the economy seems to be over. Just last month, stock prices of many advertising-dependent media and entertainment companies reached heights not seen in years. And the latest technology has opened opportunities to make money from both production and distribution of programming content in new ways.
Unfortunately, however, the whole foundation on which the optimism rests is fragile and filled with cracks that all go back to thirty years of world economic expansion built on mountains of government, consumer, and business debts. The hair-of-the-dog remedy for relieving this massive hangover is…more debt. That’s how the Euros are basically trying to fix the debt problems of Greece, Ireland, Portugal, Italy, and Spain. Collectively, these countries, plus post-earthquake Japan account, for a significant portion of global consumption of media and entertainment, and it will be a long time before growth of spending here resumes.
The debt-based government stimulus policies pursued by the U.S. Federal Reserve – so-called quantitative easing (QE) – are not much different from those applied in Europe. Although QE props up stock prices, it tends to further impoverish those with already low incomes by sharply raising prices for essentials such as food, and especially fuel, which is imported and paid for in newly debased dollars. My guess is that this will drain demand for movies, $150 monthly cable plans, video games, and trips to Disney World.
No one knows how or when implosion of this global debt load will deteriorate into another major financial crisis, but it will likely be sooner rather than later, and when it does, the volatility will likely be extreme and confidence-shattering. This is the overall known unknown – a term coined by former Defense Secretary Donald Rumsfeld.
More specifically, consider the following important known unknowns relating to entertainment and media:
· Cord-cutting on cable is dismissed as being equivalent to an insect bite on the arm of the cable companies. But these video subscription service providers will try to tack their rising monthly broadcast retransmission fees onto the consumer’s bill. They’ll try to do the same in response to rights fee increases that will accompany renewals of the major sports league broadcast contracts that are soon to be negotiated. All of this comes at a time when most household budgets – adjusting to rapidly rising costs for fuel and food and high rates of unemployment and underemployment– have been under more pressure than at any time in the last decade. How much the attempt to pass on such cost increases will accelerate cord-cutting is a known unknown. But even with a modest amount of such cutting, the likely effect on cable and broadcast industry margins will be to the downside.
· Another known unknown relates to the pay-wall schemes being implemented by publishers of all kinds. Include the New York Times and TV-Everywhere participants such as Time Warner and Comcast. No one really knows if content distributors can, on balance, extract extra profits from these schemes. Are pay-wall cash increments sufficient to offset audience losses and diminished advertising income?
· The Netflix model of providing conveniently streamed and competitively priced content represents an important threat to studio pricing power and profitability. Although Netflix will soon be paying much more to buy fresher programming and will start producing its own original programming, it will nevertheless be the probable catalyst in lowering the aggregate average price paid by video distributors for studio output. Video kiosks have the same effect. So the likely direction of prices is known, but the magnitude of the effect on studio profitability isn’t.
· The economic dilemma for content owners and their distributors is that the amount of content and advertising space in new media is infinite, but time available for consumption is finite. This means that the competition for attention is greater than ever before and to maintain value, even the best content libraries will require relatively expensive advertising and marketing. How much marketing is required to maintain mindshare and library value is again, a known unknown.
· Will the divestiture strategies – Time Warner splitting off cable and Viacom splitting into two pieces – prove to be smarter and more profitable than Comcast’s buying of NBCU? The Comcast-NBCU union appears to be energized by an oblique recognition that the growth potential of video, telephony, and Internet subscription profits is now relatively limited. The opportunity to gain a pricing and competitive advantage by largely reserving high-quality content for Comcast customers alone and by denying the same to competing service providers might have served as justification for the merger. But regulators allowed the deal only under the condition that the content is made available to other distributors on reasonably similar terms. So, will the deal work out and yield real benefits to shareholders? If so, will it drive more M&A activity? These are more known unknowns.
There’s not enough space here to go into other entertainment industry known unknowns, of which there are many, including questions about 3D movie demand and the effects of abbreviating release windows. But speculating on known unknowns is easy; it is making guesses about possible unknown unknowns that are difficult.
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