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“Storm Clouds” Ahead – The Hollywood Reporter

enpassant by enpassant
June 22, 2022
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With economic anxiety at a boiling point, media and entertainment giants are beginning to feel the heat. In any downturn, advertising is often one of the first expenditures that big companies look at to trim costs, and with worries about a recession growing, Hollywood firms that rely on ad revenue are starting to take a careful look at the marketplace.

CEOs, CFOs and ad sales executives insist that they aren’t feeling any pain yet, though as one top executive tells The Hollywood Reporter, “you can’t ignore” the macroeconomic environment.

And while executives insist that their 2022-23 upfront negotiations are looking good, with high-single-digit increases year-over-year — at a Credit Suisse conference this week, NBCUniversal CEO Jeff Shell was “thrilled” with the results and Fox CFO Steve Tomsic said the network “achieved what we set out to achieve,” while Paramount CEO Bob Bakish was “very pleased” with how it went — worries are growing as they look beyond the upfront. “We’re not really seeing signs of it in our business yet, but in the scatter market, we are starting to see some weakness,” Shell said June 14. “Last year was hugely on fire in the ad market. So it’s still pretty strong, but it’s definitely weaker now than it was last week, last month, last year.”

“Advertising, it does have exposure, for sure, to the economy and to inflation. And it’s a little choppy at the moment,” Bakish said the same day. “So look, the market in general, visibility is mixed and there are some challenges in it given the economic headwinds. That’s true.”

It makes for an economic environment that has Bank of America analyst Jessica Reif Ehrlich writing of “storm clouds developing.”

Reif Ehrlich wrote in a blunt research note June 16, “The recent macro volatility is starting to have an impact on the advertising market. While companies that spend into a recession often emerge stronger, the market is tepid due to advertiser concerns over labor shortages, inflation and supply chain issues.” Already stories are beginning to trickle out of media and tech companies “slowing down” their hiring or planning cuts or buyouts, from Netflix and Vice to Warner Bros. Discovery and Spotify.

The media investment and analysis firm Magna, meanwhile, revised its 2022 advertising outlook downward June 14, from 12 to 9.2 percent, citing the broader economy. “The economic slowdown will really start to affect ad markets in the second quarter and third quarter, and Magna anticipates lower growth over the period second to fourth quarter, as well as throughout 2023,” the advertising and marketing company wrote in its revised analysis.

But advertising’s problems aren’t necessarily broad-based, and despite the negativity there are pockets of optimism. “I think there is probably an element of softness in things like linear entertainment, and same with programmatic more broadly,” Fox Corp. CFO Tomsic said at the Credit Suisse conference June 14, but he added that live sports and news remain bright spots. And of course, from now until November, media companies that own local TV stations are in line for a political advertising bonanza. “The weird thing about that is it’s still really segment specific, right? It’s not like the whole market is coming down by a specific amount,” Shell said.

Automotive, tech, crypto, dining, pharma and some CPG categories are suffering due to inflation and supply chain issues (and in the case of crypto, its own market crash), but categories like travel and entertainment (buoyed by a rebounding box office from Top Gun: Maverick and Doctor Strange in the Multiverse of Madness) are improving.

But uncontrolled inflation, stock market declines and recession probabilities can take their toll. After the dust settles on the 2022 election season, and with more clarity expected about the potential of a recession in the coming months, marketers and ad-supported media and entertainment companies will need to take stock of where things stand. And it might not be pretty. The combination of a robust upfront and political ad market with longer-term concerns could cloud some of the earnings data that comes in over the next few months.

Deals that were locked in during upfront negotiations and lucrative political revenue could give the illusion of a booming ad market, even if the scatter market begins to lag behind. It may not be until the early 2023 that the brunt of any economic downturn could be felt, which in turn would negatively impact next year’s upfront negotiations. And with Disney+ and Netflix set to launch ad-supported tiers by the end of 2022, the market would have even more high-quality competition that advertisers could turn to.

“What is the consumer going to look like on April 1 of 2023? It’s anybody’s guess, that’s an eternity from now,” Warner Bros. Discovery’s U.S. ad sales chief Jon Steinlauf said June 15. For companies betting on advertising dollars to turn around subscription streaming concerns, it’s a question they’d like to see answered sooner rather than later.

This story appeared in the June 22 issue of The Hollywood Reporter magazine. Click here to subscribe.





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