The August sell-off of media stocks can be explained by two core factors: digital disruption and the global economy. The early August media stock sell-off is attributed to the uncertain future of the TV and film industry, which is in the midst of a digital disruption. The late August sell-off is driven by the weak global macro-economic environment. But both factors point to one fundamental call for action: Media and entertainment firms must face the digital transformation head on, considering how consumers are embracing Internet-based video services.
Data: Dow Jones Industrial Average - Broadcasting and Entertainment Index, compared to the Dow Jones... [+]
It’s not to say that industry executives aren’t working on it. Dean Hallett, Executive Vice-President of Operations and Strategy, and CFO at 20th Century
Melva Benoit, an executive consultant for the industry, states, “Content is king. Quality content is expensive to produce, and there will always be room for content creators to innovate and monetize quality content, even in a digital world.” But that content needs to be monetized effectively, and that is much more difficult in an increasingly commoditized digital distribution environment. As digital distribution technologies advance, consumers will be less concerned about the provider of bandwidth to stream video to a mobile device, as long as it works. In the future it may be like electricity, where the only time one cares is when it doesn’t work.
In addition, consumers are shifting their dollars to inexpensive digital streaming video services, as opposed to the more expensive pay-TV subscriptions. And this will only be fueled as the global economic slowdown motivates more viewers to seek inexpensive subscription video-on-demand services, while cutting the cord on pay-TV. Therefore, existing streaming services like Netflix and Amazon Prime, and new ones like DISH's Sling TV, will increasingly compete with the expensive cable and satellite bundles, which will inevitably hurt established distribution margins. This raises uncertainty about the future profitability of traditional distributors.
But the increasing deterioration of distribution margins may also indirectly affect TV and film producers. In a commoditized distribution environment, there is pressure for distributors to compete with price. And that, as I have argued before, can in turn dangerously end up commoditizing quality content. The fact that many millennials and Gen Z’s are starting to see
Finally, the industry must develop a concerted strategy against piracy, which only exacerbates the commoditization of content and its distribution. Most academics and industry experts now agree that the industry loses with piracy, and my most conservative estimate of that loss is in the billions of dollars. It will take years and a dedicated effort, but if piracy is corralled and contained, it should also help bring back investor confidence.
Executives only have to look at what happened in other industries that did not react in time, like music. With commoditization, all in the value chain lose, including artists. Notice how artists in music, TV, and film are increasingly struggling to get paid fairly for royalties from digital streaming services.
In my view, investors will reward those who develop and implement solid digital strategies going forward. Some efforts must be industry-wide, like the battle against piracy. Other efforts will be firm-specific, like competitive moves to offer differentiated streaming services with quality content. Regardless, the August media-stock sell off calls for action by media and entertainment companies to face the digital transformation head on.
