Streaming services took center stage during pandemic lockdowns only to come under pressure in 2021 when investors shifted their attention to live entertainment and sports. So now what? These media and entertainment trends are poised to impact investors in 2022.
The pandemic was a golden era for streaming media, as people sought stay-at-home entertainment instead of live events and theater-going. Now, with many consumers ready to venture beyond the couch, what media and entertainment sectors will capitalize on the shift?
“Approximately 70% of the companies in this sector should see 10% or higher revenue growth in 2022,” says Ben Swinburne, head of Morgan Stanley's U.S. Media Research group. “But while this demand strength is largely in place across the 25 companies in our coverage group, the ability to translate that strength into earnings upside varies widely.”
Which players in the entertainment economy stand to benefit from the current environment? Here's what investors need to know.
Streaming: Considering the Cost of Content
The transition from legacy to Internet media distribution has significantly reduced the fortunes of movie theaters and TV broadcasters, yet investors are still skeptical about the streaming video model.
On the one hand, roughly one billion households will transition to internet distribution or have already done so; that will mean strong revenue growth for streaming platforms. On the other hand, many of these platforms are part of legacy entertainment companies, so this growth comes at the expense of their other offerings, such as pay TV or home video.
Streaming has also become increasingly capital intensive, with spending expected to grow by more than 12%, compounded annually, between 2022 to 2025 due to an insatiable need for new content. So, while continued subscriber growth means improving top-line streaming revenue, rising content creation costs mean investors may keep their thumb close to the pause button.
Overall, says Swinburne, “Having seen outsized benefits in 2020 and lapping those benefits in 2021, streaming video faces a bit of a reckoning in 2022.”
Advertising: Giving Mad Men a Reason to Smile
With economies emerging from the pandemic, consumer spending will likely rise. So too will advertising, as companies strive to get their names in front of eager buyers. “In October, we nearly doubled our expectations for U.S. advertising growth in '21 and bumped '22 expectations to an above-consensus 14%,” says Swinburne. His team predicts the most rapid growth will come from emerging areas such as connected TV/streaming video and digital audio/podcasting.
A resurgence in U.S. advertising growth also bodes well for out-of-home (OOH) advertising. Digital billboards in small and mid-markets are cost-effective to build, and revenue is growing faster than rent expenses. As a result, OOH companies are well-positioned to deliver higher-than-expected margins.
As for the agencies that create those ads, a tight labor market means bigger paychecks for copywriters, designers and account staff, which could mean a cap on margins. That said, investors should keep an eye on emerging categories, such as mobile advertising networks.
The biggest caveat? Inflation. Morgan Stanley economists think inflation will soon peak, but should rising prices continue, consumer spending and, in turn, ad spend, may cool.
U.S. advertsing as a percent of GDP peaked in 2000, troughed in 2015 and has been steadily increasing.
Live Entertainment: Tapping into Pent-Up Demand
Among live events, sports are expected to generate 6% compound annual growth between 2022 to 2030 as providers fill seats and popcorn buckets to meet rising consumer demand. Already, the five largest U.S. venues expect to average about 20% more events in the first quarter of 2022 compared with the same time in 2019.
For the silver screen, highly anticipated superhero sequels are expected to bring people back to theaters. That said, pandemic-related production stoppages have delayed other marquee films. As a result, total domestic movie theater attendance may reach only 80% of pre-pandemic levels in the coming year.
At best, then, the media and entertainment sector may offer a cautionary tale. While the growth of streaming, advertising and live entertainment will drive strong revenue growth in 2022, investors should watch closely if they hope to avoid a box-office dud.
For more Morgan Stanley Research on the year ahead for North America media and entertainment, ask your Morgan Stanley representative or Financial Advisor for the full report, “Media & Entertainment—Here We Are Now, Entertain Us” (Dec. 15, 2021). Get more Ideas from Morgan Stanley's thought leaders.
