When it comes to the UK media and entertainment industry you’ll find companies generating revenue from the sub sectors: books, films, TV production, news, gaming, advertising and information publishing.
The media and entertainment sector is complex and competitive as companies vie for our attention. These companies are cyclical businesses that sit under the consumer discretionary category, which, like travel and fashion, is heavily dependent on our spare cash.
It’s also heavily impacted by the peaks and troughs of the economy and prone to volatility. When the economy is humming along, so too will consumer confidence thus helping this sector to outperform.
However, when the economy dips or contracts and consumers feel the squeeze there’s a knock-on effect for media and entertainment and the sector can underperform.
Still there is a great deal of enthusiasm about the sector's future growth prospects by company CEOs.
PwC's latest CEO survey shows increased optimistism as 33% (vs. 26% last year) say they are "very confident" about their company's business growth prospects in the next year.
CEOs expect areas of growth in streaming and video-on-demand (VoD) services, improvements in content discovery, and the rise of mobile video.
In its 2016 Media Metrics report, Deloitte & Touche stated that the top 100 UK’s largest media and entertainment companies generated £87 bn in revenue and grew by 6% annually.
Further it projects these companies to break the £100 bn mark in five years.
Punching above its weight
The sector is a bit top-heavy with the top ten companies accounting for 68% of the total industry revenue.
|1. Facebook UK||73% (social media)|
|2. Google UK||44% (advertising)|
|3. Fox UK Productions||40% (film)|
|4. The7Stars UK||38% (advertising)|
|5. Vancouver Topco||37% (magazines)|
|6. John Wiley & Sons||36% (information publishing)|
|7. Tinopolis||28% (TV)|
|8. Liberty Global||25% (TV)|
|9. Discovery Communications Europe||23% (TV)|
|10. Thomson Reuters (Professional) UK||22% (information publishing)|
* Excluded: Omnicom Media Group UK and Newsquest Media Group as their growth is due to change of reporting from company-only to consolidated during the three year period. Source: Deloitte & Touche Media Metrics 2016 report
What affects the entertainment sector’s share prices?
Because the entertainment sector is cyclical it’s business performance and strategy will be sensitive to the wider economy and macro factors such as: economic; demographics; technological changes as well as legal, political and social conditions.
More specifically, the macro environment can comprise of interest rate changes; competitive threats to the sector (more on this later) and even changes in cultural taste or consumer behaviour.
For example, if you’re old enough, you may remember having to get home in time to watch a particular TV show. Now many people don’t have to affix their schedule to a TV show they simply download and “binge watch” or play catch up.
Martin Sorrell, CEO of WPP is similar to Warren Buffet in that shareholders pay attention to his letter to shareholders. Sorrell provides commentary not only on the business but also the global economy.
WPP is a global communications services provider yet Mr Sorrell in its 2016 annual report, shows the interconnectedness of global macro events and business.
He covers not only technology, but also the short-termism displayed by many corporates and even the likely impact of President Trump’s infrastructure spending plans.
He writes: “If these plans become reality, they are likely to boost growth and inflation, perhaps delivering a two- to three-year Keynesian/Trumpian boom.
But what we gain on the US domestic swings we may lose on the international roundabouts, given the inherent unpredictability of President Trump’s impact overseas.”
Advertising spending waxes and wanes with the fortunes of the wider economy. George Salmon, analyst at Hargreaves Lansdown, illustrates: "ITV, for example, after the Brexit vote happened, since then they have seen a decline in their customers’ spending on TV spots and so forth. Obviously they charge a lot for that space if the economy is booming and you’ll find people will pay a lot more. If confidence is more fragile you’ll find that it starts falling away."
What can make one company buck the trend?
Those companies that are successful have something unusual to bring to the table; for Hargreaves Lansdown's Salmon its an enduring competitive advantage that distinguishes those that are best in class.
TV has the benefit of a long tradition and deep understanding of its end users and remains attractive to advertisers for its extensive reach.
He notes that when it comes to a metric like viewership when clients want to reach a guaranteed national audience at prime time they are likely to turn to a company, such as ITV, that has TV programmes with large ratings.
A company such as Sky, on the other hand, makes a fraction of its revenue from advertising and is more subscription-based.