Broad disruption stemming from the COVID-19 pandemic has created potentially significant challenges for legacy media companies, which were already facing major structural issues.
With every major sports event either suspended or cancelled, we are seeing what amounts to a large-scale experiment that is likely to lay bare the economics of the legacy television business. Many people are largely confined to their homes, and internet service providers could benefit—that is, unless they cannot keep up with demand. With movie releases being postponed, release calendars are likely to become unusually crowded when COVID-19 concerns abate, potentially resulting in exploration of alternative models.
In this instalment of our ‘3 Point Perspective’ series, Research analyst Kannan Venkateshwar, who covers US Media, Cable & Satellite Communications, outlines the head- and tailwinds facing the media sector today.
Sports suspensions could amplify structural issues
Sports programming is, in many ways, the last remaining anchor for legacy television. The suspension of almost every major sporting event is an unprecedented scenario for media companies. A range of national and regional networks will feel the effects of these cancellations and postponements, in more immediate ad revenue declines, as well as in distribution negotiations over the medium term.
While it is unknown whether canceled events will be rescheduled, TV advertiser behavior, which tends to be inert except in the face of major external shocks like this one, could change permanently. The absence of primetime sports inventory could force advertisers to shift spending more aggressively towards streaming service alternatives, possibly setting the stage for a lasting structural shift.
NBA games are the most watched sporting events in the US after NFL and college football
Source: Barclays Research, Sports Media Watch
The absence of sports on television could also become an incremental tailwind for streaming services, especially in a period where people are travelling less and spending more time at home.
Broadband operators could see tailwinds
Internet service providers are on the frontline as wide swaths of the population are encouraged to stay home. Residential broadband network peak capacity tends to be multiples higher than average usage, so there should be enough of a buffer to handle workloads over short periods. According to the Bureau of Labor Statistics, at present just 29% of the US workforce is employed in occupations that could be handled remotely, which also likely limits the overall impact.
Schools and colleges, however, could increase network loads, especially given moves by remote learning infrastructure providers to make more features available to schools free of charge.
This increase in bandwidth demand could become a structural tailwind for internet service providers by prompting households to upgrade to higher speeds at a faster pace. Once these upgrades happen, they don’t typically reverse path. This process could also help cable operators de-emphasize legacy video at a faster pace, thereby further hurting media companies.
Movie release delays could drive structural change
A number of studios have announced delays to major releases in recent weeks. Lower theatrical attendance due to health concerns or mandated shutdowns is likely to have a multi-year impact on release windows. Studios will have to either compete head to head with releases crowding into the same holiday windows later this year, or push titles into 2021. This could force studios to search for alternatives to monetise these titles, especially those which may not be released widely or which have smaller budgets.
The current situation may also provoke a change in release strategies. This could take the form of direct releases via paid video-on-demand services, where renting or buying the movie costs $20-30 in the window immediately after, or even overlapping with, the theatrical release. Alternatively, studios could choose to recoup their investment, especially in non-franchise titles, by licensing it on a cost+ basis to subscription streaming services.
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Kannan Venkateshwar joined Barclays in September 2008 and is currently a Director covering the U.S. Media, Cable & Satellite Communications sectors. Kannan has 13 years of experience across corporate and investment banking. Prior to joining Barclays, Kannan was with Lehman Brothers, working on cross-asset strategy research and responsible for publishing relative value trade ideas between debt and equity, equity options, and convertible bonds.
Prior to Lehman, Kannan worked at Bank of America and Citigroup in corporate banking, both as a credit officer for large corporates and in relationship management in India. Kannan earned a B.A. in Economics from University of Madras, India and an M.B.A. from the Darden School, University of Virginia. He also has a post graduate diploma in management from the Indian Institute of Management, Bangalore.
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