The damage done to Hollywood by COVID-19 is just beginning, and will hasten the decline of theatrical moviegoing, TV advertising, pay-TV and other longtime features of the landscape, according to a sweeping new report by Wall Street analyst Michael Nathanson.
The analyst at MoffettNathanson reflected in the 25-page report on fallout from previous recessions over his 20-plus years as an analyst. He noted the demise of the CD, the DVD, radio ad growth and print ads all resulted from economic crisis. “Economic recessions act as an accelerant for evolving shifts in consumer and corporate behavior,” he wrote. “When facing unplanned declines in revenue, spending decisions have to be quickly re-examined as individuals and corporations re-assess the relative money for value hierarchies in their world.”
As 2020 began, Nathanson had noted some cracks in the “fundamental pillars of media.” Given the ravages of the pandemic and the resulting changes in business norms and consumer behavior, especially a “permanent” shift to streaming. “When this is all done, the top streaming platforms – Netflix, Amazon and Disney – will emerge with the lion’s share of scripted content creation,” the analyst wrote. “There will likely be fewer movie screens in the U.S., even fewer DVDs purchased and, thus, fewer films made for those long-optimized and windowed release cycles. In essence, those studios with SVOD platforms will have to move more quickly to accelerate their Pay 1 windows, which will harm the economics of other studios without such advantages.”
Unlike some doomsday prophets, Nathanson emphasized that as a self-described “cinephile,” he is neither hoping or expecting that consumers will abandon theaters en masse. “We are saying that as the ROI in the industry shrinks, studios will limit their investment in traditional theatrical releases.”
The report did not find Nathanson changing any of his ratings on media and entertainment shares. He reiterated his “buy” ratings on Disney and Fox Corp. “We believe Disney is the only company with a big enough lifeboat and the organizational will to come out of these secular changes in a strong position while Fox’s focus on live news and sports remains the right strategy,” he wrote. AMC Networks, Discovery and ViacomCBS are rated “neutral” because “current valuations will be supported by near-term cash flow yields.” He also lists Cinemark and Netflix as neutral.
The pay-TV bundle, already in decline, will see an increasing decline in customers. “The price of the traditional bundle will have to rise in the coming years which will push more non-sports fans out of pay-TV,” Nathanson wrote.
Advertising on traditional TV, which has remained intact despite large declines in viewing, has been due for a shakeout in the view of Nathanson and other analysts. “Unfortunately, that time is now and we are expecting to see major cuts in TV ad spend over the next few quarters,” he wrote. “In the mid-term, the shifts in consumer behavior towards streaming should move more ad spend to AVOD platforms like Roku, Pluto and Peacock, or SVOD hybrids like Hulu and CBS All-Access.”
Ad dollars spent on linear TV ads in the future “will be focused on live sports that will continue to offer relative efficient reach and news that deliver a consistent flow of older Americans for healthcare, financial and auto advertisers. In addition, networks that target endemic categories like the Food Network or HGTV will be relatively better off than networks that focus on general entertainment. Given brand safety concerns and an absence of premium content, we are cautious on the idea that Facebook, YouTube and other digital platforms will finally be able to get their hands on those outflowing linear TV ad dollars. Instead, it should flow to connected TV players.”