If 2016 is remembered for anything from an international entertainment perspective, it will be noted as the year of the paradox: when waves of right-wing anti-establishment and anti-globalization camps did, in fact, accelerate the pace of globalization. It is possible that in 2017, for example, more British companies will come under foreign ownership, while French corporate raider Vincent Bolloré increasingly targets Italy’s Mediaset.
All of this is happening as Europe seizes under the weight of a growing populist movement and the increased threat of terrorism — with deadly attacks already spreading from Paris to Brussels, Nice and now Berlin. Here we take a look at some of the key moving parts of the European Union and the potential resultant industry shifts ahead in 2017.
The European economy as a whole has been cool for a number of years. International sales agents will be the first to say how increasingly tough pre-sales have become, and the depression of markets such as Spain, Italy and Greece has been reflected in the acquisition business. The UK, however, had typically been a bright spot during the murky hangover of the last financial depression, and investors always had turned disproportionately to the UK because of its strength.
On June 23, Britain’s decision to leave the European Union in a 52% to 48% public vote, launched shockwaves throughout the UK, kicking off a major surge of anti-establishment and right-wing sentiment that rippled through much of the Western world. In the media industry, the plummet of the pound sterling affected box office returns for Hollywood studios and saw a massive reduction in stock prices, devaluing British companies in dollar terms.
With no sign of recovery on the horizon – a hunt has been on for the government’s Brexit strategy for months — what does this mean for big entertainment companies?
One thing’s certain: For U.S. investors, it’s Christmas. Whether it’s swooping in to buy up major companies on the cheap or exploiting the currency value for filming in Britain, the exchange-rate decline is bound to continue a rush of blood to the head.
“The main consequence for Brexit is the collapse in sterling, which means North American companies will be hugely acquisitive in Europe,” says media analyst Alex de Groote. “They are in a good position.”
Indeed it’s fitting that Rupert Murdoch’s 21st Century Fox moved in to buy the 61% share of Sky that it doesn’t already own for £11.7B ($14.6B) this month, five years after the UK phone-hacking scandal forced the then-20th Century Fox to scrap a deal. The landscape is ripe: Share prices are down, and the UK government had a complete overhaul in the wake of the Brexit vote, meaning the Murdochs wouldn’t have to face any of the politicians who fiercely rejected the takeover back in 2011.
Along with Sky, another major British asset, ITV, certainly has been looking at more material changes than it has faced in a while.
“TV is a hundred-year-old business,” says Claire Enders of Enders Analysis. “For us to be concentrating on the fact that the peak is behind us is certainly not something that makes you want to jump up and down for joy. People are looking at companies such as Sky and ITV for purchase, and people are going to be much more opportunistic.”
“I think everything will be taken over,” says de Groote. “I think a lot of UK assets will be acquired by overseas acquirers within the next two years.”
Enders agrees. “The effect of Brexit is very likely to be there will be substantially fewer businesses in the UK and that their activities will not be focused on anything to do with the UK.”
It’s a total paradox and certainly not what any Brexiteer would have had in mind: A patriotic and populist move like the Brexit vote ultimately will put more British companies under foreign investment. Even the sale of the Financial Times to Japanese outfit Nikkei in 2015 feels like an ironic precursor for what’s to come.
To complement this, off of the back of the EU vote, advertiser confidence has seen a dramatic knock-on effect.
“Advertising is notoriously short term,” says de Groote. “And advertiser confidence could be affected by unstable politics. That’s what’s happened since Brexit, and a lot of that is down to political and economic uncertainty. Next year we will see the same outcome, which will undermine the revenue. We’re forecasting some seriously choppy waters in 2017.”
According to a report by Enders Analysis, total ad spend is actually anticipated to rise by 0.6% in 2017 “almost entirely due to digital growth, which is expanding the total ad market. Its share has soared from 1% in 2000 and is expected to hit 50% in 2017.”
Says Enders: “We’re expecting Facebook and Google to continue to grow their revenues by 20% plus a year. It will be even easier next year for marketers to say ‘we don’t need TV anymore.’”
This means that Brexit will prove to be a fundamental historical change in that two American companies will control 75% of digital spend and will continue to grow at a faster rate. They’ll be in a much stronger position. And let’s not forget, while right-wing politics spewed notions of hunkering down, building walls and protecting borders, these borderless companies like Facebook, Amazon, Google and Netflix are skilled at finding major tax loopholes.
Broadcasters already have started cutting costs. The BBC benefits from the fact that it accepted a lower licence fee in June, making the corporation better off than the commercial channels. ITV cut 120 jobs in a bid to chop £25M ($30M) from costs for 2017, a move largely driven by the possible effects Brexit will have on the broadcasting and media buying business. Channel 4 and Channel Five might put off airing expensive productions so they don’t have to recognize their costs. Everything, it would seem, is on tenterhooks.
While Brexit will distance the UK from Europe, the Continent is not immune to its own political pendulum swings that are expected to impact the media and entertainment sectors. Major elections are still a way off in places like France and Germany, but analysts and executives remain cautious.
In the UK’s cross-Channel neighbor, there is growing momentum for the far-right anti-immigration National Front Party. Led by Marine Le Pen, who famously was the first international politician to extend her congratulations to President-elect Donald Trump on November 9, the party has increasingly gained a footing, particularly with young people.
It is widely thought Le Pen will have a stronger-than-ever showing in next year’s voting, though she currently trails Republican candidate François Fillon in the polls. Still, a French film industry exec says there is concern over Le Pen’s rise, but it’s too early to say what the impact would be. “I don’t think the National Front knows what they would do themselves,” says the exec.
Importantly, Canal Plus is the major funding source for French cinema, with a portion of its annual revenues flowing back into production. But its fortunes suffered in the past years due to increased competition in the lucrative sports-rights sphere, and Bolloré earlier this year declared there was urgent need for change.
It’s believed that Canal has been moving in a more positive direction, sorting out bundling and subscription sales to put it in a better position than it was a year ago. Still, reports circled this month that France’s largest telecoms group, Orange, was eyeing a stake in Canal Plus. If Fillon, the former Prime Minister who served under President Nicolas Sarkozy from 2007-12, advances, thinking is that a sale of Canal Plus to Orange would have an easier time passing.
Enders Analysis’ François Godard says, “If Fillon were to win and dispose of the state’s (23%) stake in Orange as he has promised, this could help. The latest deal between Orange and Bouygues Telecom was stopped because (former Minister of the Economy) Emmanuel Macron was afraid of Bouygues taking a controlling stake without paying a premium.”
But, if Orange “were to become fully driven by the stock market without government control, it could become more flexible in a deal with another telecoms operator and consolidation may be back on the agenda,” opines Godard. It could also be more flexible in a deal with Canal Plus, whereby Canal is sold and Vivendi gets a stake in Orange in return. Vivendi this month denied it was looking at a cross-ownership deal, but speculation remains.
A sale of the ailing pay-TV operator Canal, would be “consistent” with Bolloré’s thinking, suggests Godard, who contends the exec “seems to be more interested in free-to-air than pay-TV.” What’s more, selling Canal Plus to Orange, would make sense because of its inherently French nature, Godard contends. “If it can’t merge with a global corporation and doesn’t have the resources to build a global corporation on its own, then the only other option is to merge with a telco and give it strategic room to breathe.”
However, Bolloré recently has been increasing his stake in Silvio Berlusconi’s Italian giant Mediaset, which has a pay-TV component. Entering a deal for Mediaset points to a commitment to building a European pay-TV network.
Whichever path Bolloré takes with Canal Plus, it’s not believed there would be a major impact on film production arm Studiocanal. A successful business in its own right in and outside France, the company can finance pictures on its own and its fortunes are not directly tied to those of Canal Plus.
Turning back to Le Pen, Godard muses, “She would bring the unraveling of the European Union.” She’s already made suggestions that a “Frexit” would follow Brexit, pulling a Continental pillar out of the membership.
That might seem like a doomsday scenario, but it’s believed that even were that to happen, the French television and production industry is relatively isolated. “There are barriers so that it’s not deeply integrated into a European industry,” says Godard. “But, if Bolloré was about to buy Mediaset, the fact that (French commercial broadcaster) M6 is owned by Bertlesmann and the RTL group would come under question.”
We’d also expect “very negative consequences in advertising.” If France were out of the euro, uncertainty would be amplified. The first media to suffer would be ad-supported, says Godard, adding, “Then you’d expect barriers to be raised” to the likes of Netflix and Amazon.
Italy’s Prime Minister Matteo Renzi resigned at the start of December after a crushing defeat in the country’s referendum on his constitutional reforms package. He was beaten by populist group Five Star Movement, led by former stand-up comedian and blogger Beppe Grillo, a Donald Trump supporter determined to shake up the status quo.
Enders argues that this result spurred Fox’s pounce on Sky, citing a drop in the latter’s shares as the corollary for Murdoch’s move.
During the same week, Bolloré moved in fast on what was deemed as a “hostile takeover” of Mediaset.
“After the Italian election, frankly Murdoch had to move pretty quickly,” says Enders. “You could say the Italian election created the opportunity for both Bolloré and Murdoch to move in on these companies.”
The biggest looming change, most agree, is the potential acquisition of Mediaset by Vivendi. The French company indicated in late December that it is prepared to buy up to 30% of Mediaset, the legal threshold before an investor is required to launch a takeover offer for all shares outstanding, noted the Wall Street Journal.
The feud between Mediaset and Vivendi already was heating up earlier in the month as the French giant said it planned to buy up to 20% of shares in the Italian broadcaster. The move was another milestone in Bolloré’s strategy to expand into Southern Europe to create a non-U.S.-based global media giant and was the latest chapter in a long-running public battle between the two groups, which has seen them at locked horns since July when Vivendi backed out of an agreement that would have given Vivendi control of Mediaset’s pay-TV unit, Premium, and given the two companies 3.5% equity stakes in each other.
In the past few years, Godard points out, Mediaset has been losing money on pay-TV and saving money by cutting budgets in free-to-air. “Their strategy in pay-TV is a mistake, and Premium is a basket case,” he said. “Management is deluding themselves they would find some foreign savior as a partner.”
The Italian TV market is No. 3 in Europe, after the UK and Germany, and Mediaset has about 58% of that market. But, says Godard, “They seem very passive and creatively brain-dead.” While Sky Italia has made strides in drama with the likes of Gommorah and The Young Pope, Mediaset “has been doing the same shows for ages and follow reality format trends. What Sky Italia is doing is the most intelligent and creative on the Continent. Mediaset is the opposite.”
A Mediaset play by Bolloré would bring international scale that “could change the game in Europe,” says Godard.
Here, too, politics might play a role. While few see media tycoon and former Prime Minister Berlusconi coming back to power, Godard warns, “The government needs Berlusconi’s vote in the Senate.” The Italian government has raised concerns over “hostile” stake-building. Still, it’s currently unclear whether the government has the means to stop a proper takeover bid by Bolloré. “The Italian judiciary can be unpredictable and the Berlusconi family and Mediaset have some experience. But Bolloré has allies in Italy,” says Godard.
Whatever happens, we should know quickly, sometime before the next General Assembly. “Bolloré will not have a 30% stake (in Mediaset) and remain passive. If Vivendi doesn’t launch a takeover bid, it will at the very least ask for representation on the board.”
German companies are closely held, and the German economy typically is much more stable than surrounding markets. But it too is experiencing pains after a year that saw Chancellor Angela Merkel face opposition over her decision to welcome more refugees to the country. She will stand for election in 2017 and could face her toughest challenge during what has been a successful 11 years of leadership in Europe’s biggest economy.
Godard doesn’t see any immediate shifts ahead in Germany. Telcos, he says, don’t seem in a hurry to move into TV there and SVOD is on a slow growing curve. “It’s difficult to be really worried about the media market. We’re not seeing any political change in Germany that would directly impact the market.”
Views on how 2017 plays out are as mixed as the political opinions that shape today’s European Union.
Godard is eager to see how the Vivendi/Mediaset deal shapes up. “This will be an entertaining battle to watch,” he says.
Enders suggests, “There’s no good news for media companies for some while to come.”
De Groote strikes a balance: “The good news is that basically there has never been a better time to work in the media platform as there’s never been more disruption. The bad news is it has never been more complicated.”