Published January 9, 2022 | 3 min read
Key Points
- Macroeconomic conditions are threatening consumer demand and spending, putting pressure on firms across the spectrum of advertising, media and software.
- Media companies have broadened their streaming focus from subscriber growth to now prioritize a path to profitability.
- Green shoots and mitigation tactics are helping firms stay resilient, but potential downsides may threaten if the challenging environment persists.
RBC Capital Markets gathered TIMT investors, experts and company executives for its annual conference in New York. The two-day event featured keynotes, fireside chats and one-on-one meetings, and the undercurrent through it all were the macroeconomic pressures that every vertical is facing, from software to payments to adtech.
Macroeconomic pressure on spend
For most companies, the question is whether the wider economic picture, particularly inflation and recessionary pressures, will cut spending in the sector. There was a healthy dose of investor skepticism around IT spending patterns into 2023 from software investors. They see long-term opportunities, but right now, macro pressures are ensuring they focus on the things they can control, such as product cycle, pricing power, competitive displacements, partner expansion opportunities, or expanding margins.
Similar issues came up in discussions with internet companies, where durability of demand and their ability to offset for a macro tidal wave – if it comes – were key topics. So far, although there was a material slowing back in the spring with the onset of the Russia-Ukraine war, rising rates and inflation, consumer demand hasn’t seen the deterioration that was feared. Within the sector however, certain marketplaces have taken rate leverage that can help offset a moment of macro weakness, and other firms, such as web design, have idiosyncratic drivers that could also keep them buoyant.
Advertising is another area where weakening demand has immediate effect. Just as the pandemic-related headwinds started to dissipate, the combination of recessionary fears, inflation and geopolitical conflict have continued uncertainty, and it seems likely that there won’t be a seasonal bump in Q4 again this year. However, executives in the sector for the most part believe their profitability is durable, due to leverage in their models and the ability to adjust spending if demand remains depressed.
Media firms focus on profit
Macro headwinds have also come at a crucial time for streaming-centric media companies. After gaining subscribers at a dizzying rate during pandemic lockdowns, now these firms are prioritizing a path to profitability. Key speakers talked about leaning into pricing power, being more flexible with content windowing strategies and focusing more on efficiencies. As companies have continued to invest in programming, the added utility for the consumer is giving some air cover to services raising their retail pricing. Combined with an evolving advertising opportunity and greater focus on cost management, each management team is clearly focused on turning a profit.
From a content perspective, they’re likely to shift even more heavily into proven franchises in the coming years. Premium IP is still in high demand, but companies are particularly focused on content that has a higher chance of larger, more dependable returns. This is translating into more disciplined decision-making in content choices.
For linear media firms, ad trends have softened. Marketers are holding back given macro uncertainty, although how much spending has fallen seems to depend on the company. Some firms said that demand was even weaker than it was during COVID, although some markets in Europe and Latin America were faring better. There’s also a sense that streaming opportunities for traditional media firms may be more modest and “much messier” than previously anticipated.
Green shoots vs deteriorating macro conditions
As companies come under these macro pressures, they’re looking for an upside, and cable companies may have found one. Broadband subscriber growth has decelerated over the last year given headwinds from muted move activity across the U.S., growing competition (especially from fixed wireless), market saturation, and mobile substitution. Companies have focused on pricing power and the ability to push through rates or up-tier customers to stay competitive, but a continuous concern for investors has been the potential cost to upgrade networks.
Comcast’s new disclosure that the all-in costs to launch multi-gig services and lay the foundation for Full Duplex Data Over Cable Service Interface Specification (DOCSIS) 4.0 is less than $200 per home passed – well below expectations of $250 to $400 – which should alleviate concerns over a looming capex cycle for cable. Meanwhile, promotions centered on converged offers around broadband and wireless are starting to reap rewards.
Payments processing and IT services firms talked about a “bifurcation of demand”, with a combination of elongated sales cycles and a more cautious tone around the macro environment heading into 2023. That bifurcation is occurring by function of product mix, demographic/geographic exposures and verticals served, so that some firms, particularly those catering to the financial services market, remain upbeat. Mid-sized financial institutions are currently well capitalized and are possibly prioritizing the implementation of digital experiences to compete with larger companies. Meanwhile, while firms participating in financial markets, such as asset managers and investment funds, are increasing their level of outsourcing as fees compress during market declines.
Another common theme across some of the companies in all sectors was the mitigation of inflation-driven expense increases (predominantly wage inflation) through price increases and productivity gains. However, given the dynamic macro environment, there’s potential downside risks from a consumer slowdown and enterprise spending and hiring in 2023, as well as greater pushback on pricing if the economic environment worsens.
This content is based on commentary and analysis from RBC Capital Markets' Global Technology Internet Media and Telecommunications Conference hosted in New York, NY on November 15-16 2022. For more information about the conference, please contact your RBC representative.