The top media analyst at big credit ratings agency Moody’s said the SVOD world is splitting into two tiers and that smaller players like Discovery, AMC Networks and Lionsgate are “probably going to need to partner up in some fashion or be acquired … to achieve the girth necessary.”
If not, said Moody’s Neil Begley, Senior VP, Corporate Finance Group, “They’ll be relegated, and that might be fine, to being a Tier 2 provider. But churn will be high and it will be hard to get the attention of folks as an SVOD platform on a standalone basis without having consistently superior content that attracts people in their own right.”
He spoke Thursday at the Goldman Sachs media conference, a three day event with earlier presentations by Discovery, working on a new DTC offering, and Lionsgate’s Starz, where exec talked up the global growth of its OTT app. Both view their products as niche ad-ons to larger services, or what Begley calls Tier I.
“The future of television distribution is clearly here. It’s direct to consumer SVOD and it’s AVOD, and more of the money that has traditionally been spent in linear television needs to be gradually moved into this space. And … it’s all about scale. Scale to attract the talent and to achieve the lowest cost per viewing hour, with the goal of being what we would refer to as a Tier I platform.” He described Tier 1 as global, with lots of subscribers and “a regular cadence of original exclusive content released across all genres and territories and backed up by a deep and broad library for consumer. Sort of comfort food between those new original launches.”
Netflix is clearly there. Disney+ “appears to have all the makings and markings” and HBO Max “also appears to be there, although I think they made an error in their pricing that could stall their growth – or we think will stall their growth,” Begley told investors at a Goldman Sachs media conference.
“So what that means is that everybody else is either way too small in terms of how much they spend on content and they’re still heavily reliant on the linear programming,” he said.
Others are on the SVOD “bubble,” like Comcast, which recently launched Peacock, and ViacomCBS. “I really like what I am hearing out of the company and their efforts to consolidate the rebrand. I think they’re heading in the right direction,” he said of the Bob Bakish-led company which just unveiled Paramount+.
He also gave a shout-out to AMC Networks CEO Josh Sapan. “He’s really done an outstanding job in being able to find talent.”
Begley also mentioned MGM, another indie in the entertainment space, as likely needing a partner or buyer.
Begley’s opinion matters because Moody’s is one of a handful of big agencies that rate corporate debt, guiding fixed income investors on how risky it is or not to buy a company’s bonds. Higher risk means higher interest rates that can be a big expense. Begley was among the first in the financial community to issue a COVID warning report for media back in January.
The second quarter ended in June was the low point, Begley said, anticipating a gradual, choppy return for the rest of this year into next. “That means we’ve got live sports back on television, that means people are essentially going out and spending money. Whenever advertisers feel that people will open their wallets they tend to get in front of that with ad spending.”
“Auto being one of the largest advertising sectors has recovered nicely and my understanding is that delivery of cars are back, so there is inventory, so that’s all a good story for content providers. We don’t expect them to be anywhere close to being back, but it does support their recovery story and support their generation of free cash flow,” he said.