European Media Faces the Great Restructuring

Innovation in platforms and content delivery continue to drive change for European Media, including robust M&A activity in music, publishing, advertising, broadcasting and satellite services. 

As a whole, the sector has underperformed the wider market in 2019: European Media is up 13% in 2019, lagging the broader market’s roughly 18% return, but the sector is narrowing the gap on a total return basis. A larger question persists, however: Amid all the changes, what will the landscape for the sector look like over the next decade?

Here are three areas investors should watch:

The streaming wars intensified in 2019, as some of the most popular platforms faced competition via a string of new offerings from legacy media conglomerates and big tech. The ramifications are significant for the nature of TV viewing and in the competition for—and cost of—content.

For their part, European broadcasters plan to answer the challenge with their own investment in over-the-top (OTT) streaming platforms. One European broadcaster has already announced that its initial investment has tripled from the original forecast. Stay tuned to see whether other broadcasters follow suit and whether their smaller scale puts them at risk of being swamped in the OTT market.

The incremental investment from launching these platforms could also put further strain on revenues and expenses, which were already challenged by a drop in advertising revenues as audiences moved away from free television. 

Disruption is also afoot in the guise of the industry’s structural change. Several smaller European broadcasters have begun tentative efforts to form larger blocs and M&A activity continues among content producers as independents are swept up by larger production/distribution houses.

Since 2020 will see the launch of additional new streaming platforms from both U.S. media companies and European broadcasters, the battle will likely play out in dramatic fashion throughout next year. 

For publishers, Facebook may offer the biggest news. In a recent statement, Facebook said it is now willing to pay for high-quality journalism. Though Facebook’s CEO, Mark Zuckerberg, has said the company shouldn’t be in the content curation business, he has suggested that this new initiative will promote high quality news sources—and pay for their content.

Moreover, he suggests, there is the potential for “better monetization for publishers,” adding that Facebook may "dramatically increase the distribution and, if it's successful, the monetization” of high-quality content for producers in the firm’s “ecosystem," a potentially valuable revenue addition to the hard pressed news industry.

As we enter 2020, advertising agencies—like the media sector-- remain under structural strain. Slowed growth in ad revenue has intensified fee competition, while clients’ transparency demands around agency business practices have sparked procurement pressures.

In addition, the dominant owners of digital ad inventory are putting pressure on agency media-buying margins, while the shift to digital has diminished the traditional role of agencies in favor of consultants and tech companies. Finally, creative agencies have come under revenue pressure from the rise in digital advertising spend.

Agencies have responded in part by buying data businesses to facilitate their efforts at one-to-one marketing: using data to interact directly with individual consumers rather than pushing a uniform broad message. By focusing on personalized brand-building, the aim is to move away from so-called “wasteful” mass-message efforts. Three of the big five agencies now own data assets and the other two “rent.”  The intrigue in 2020 will be to see which approach gathers steam.

A final note for advertising is the rise of digital outdoor channels as a structural growth business. The flexibility and freshness of digital billboards and the ability to buy inventory in an automated fashion—what’s called programmatic—is driving tremendous growth in the medium. Digital outdoor has been identified as the second-fastest growing ad medium in 2017-20 at roughly 12.5% growth per year, with only mobile internet (21.5%) growing faster. 

For investors, the media landscape presents a host of questions over the new decade. With the first signs of better pricing power, will Fast-Moving Consumer Goods producers return to the advertising market and boost revenues?  How will European linear network TV advertising cope with the expansion of the big streaming players? Will pan-European consolidation moves for broadcasters continue? With 2020 shaping up to be another disruptive and revelatory year, investors will look to get some answers sooner rather than later.

For Morgan Stanley Research on key Tech, Media and Telecommunications themes ask your Morgan Stanley representative or Financial Advisor. You can also visit the TMT Barcelona 2019 page.