Will 2024 bring good tidings to media and telecom companies? That’s unlikely

It’s human nature for a brand new 12 months to bring optimism and hope.

For executives, traders and staff within the leisure and telecommunications industries, 2024 is ready to disappoint.

Maybe that is too grinchy. Some issues will get higher. The actors’ and writers’ strikes are over. The 2024 U.S. presidential election ought to assist enhance promoting {dollars} as international TV ad revenue is on pace to decline 18% this year, in accordance to media funding agency GroupM.

Companies corresponding to Warner Bros. Discovery and Disney reduce 1000’s of jobs and dramatically slashed content material prices to enhance free money circulation and pay down debt. That may give traders a cause to be extra sanguine about their enterprise prospects subsequent 12 months. Disney recently restored its dividend for early 2024 after suspending it for more than three years.

Still, legacy media corporations together with Disney, Paramount Global, Warner Bros. Discovery and Comcast‘s NBCUniversal are attempting to work out what traders need since pulling again on a story of subscription streaming video progress that dominated 2020 and 2021. Warner Bros. Discovery and Comcast have outperformed the S&P 500 in 2023, although simply barely. Disney and Paramount Global have underperformed.

The overriding narrative for 2024 seems to be one in every of uncertainty on three key fronts: rates of interest, regulatory coverage and general progress prospects. The business ought to have extra readability in 2025 on all three matters to propel it ahead, mentioned Corey Martin, managing companion at leisure law firm Granderson Des Rochers. Next 12 months will most likely be outlined by preparation for motion quite than precise transformation, Martin mentioned.

“2024 is probably going to be a year of sustained uncertainty,” mentioned Martin. “It’s really a continuation of a pattern we’ve seen since the midpoint of 2022.”

After the benchmark 10-year Treasury yield hit a 16-year excessive in October, charges have come down because the Federal Reserve mentioned it is planning for a number of cuts to are available in 2024 and past. The Fed’s in a single day borrowing price is at between 5.25% and 5.5% — considerably elevated from the place charges had been because the monetary disaster of 2008.

Rate cuts subsequent 12 months may push transformational deal-making to 2025. If media or expertise corporations need to purchase massive belongings and haven’t got the money available, they will need to look forward to cheaper cash.

“I had lunch in late November with the CEO of a major studio, and what he expressed is uncertainty around operating in this monetary policy environment,” mentioned Martin. “What is the cost of capital? Am I better served punting until 2025 where I have more clarity when interest rates come down or remain static?” 

Still, main offers might be introduced in 2024 with an assumption that the method of closing them will take 12 to 18 months. By that point, corporations might guess on rates of interest falling to ranges extra in keeping with the previous 10 years.

Shari Redstone has held talks for the previous few months to doubtlessly promote National Amusements, the controlling holding firm of Paramount Global, in accordance to folks acquainted with the matter who declined to be recognized as a result of the discussions are personal. If that deal happens in 2024, it may kick off a wave of strategic transactions, together with promoting dying cable networks to personal fairness corporations, all through the media and leisure business whatever the macroeconomic setting.

National Amusements declined to remark.

Three CEOs of main media and telecommunications corporations privately informed CNBC they’re hoping for brand spanking new regulatory coverage — maybe within the type of a presidential administration change — to make wanted consolidation simpler. Existing guidelines that cap regional broadcast station possession forestall or deter corporations corresponding to Sinclair, Tegna, Nexstar and Gray Television from merging.

There’s extra concern Federal Trade Commission Chair Lina Khan or some other regulatory leaders appointed by President Joe Biden in 2024 and past will not look kindly on the mixture of cable and wi-fi belongings. While corporations in Europe personal each, cable possession continues to be separate from wi-fi community operators within the U.S. Bringing corporations corresponding to Comcast and Charter along with both AT&T, Verizon or T-Mobile may improve company pricing energy and remove competitors, which Khan would probably see as anti-competitive.

There’s additionally the continuing dance between NBCUniversal, Warner Bros. Discovery and Paramount Global. Many media watchers assume that two of these three corporations may merge, leaving the third with no dance companion. How regulators would view a mixture of these belongings continues to be to be decided. A deal between NBCUniversal and Paramount Global, which might put collectively broadcast networks CBS and NBC underneath one company roof, looks like a regulatory nonstarter with out divesting one of many networks.

“There will be a final round of consolidation in the industry,” mentioned John Harrison, EY Americas media and entertainment leader. “Structurally, it’s not sound in terms of the economics for streaming. Companies need to get their cost structures right as linear TV winds down. But there’s a hesitancy to pull the trigger on anything massive when you know how fast the disruption is taking place, and you’re looking at an 18- to 24-month-long review process to get a deal approved.”

If the 2 presidential nominees are Biden and former President Donald Trump, aid might not be coming. Trump’s Department of Justice blocked AT&T‘s acquisition of Time Warner earlier than a decide overturned the decision. Trump has additionally been publicly antagonistic towards NBC and mother or father firm Comcast, calling CEO Brian Roberts a “slimeball” as not too long ago as final month in a publish on the ex-president’s social media platform Truth Social.

Ironically, that would make some corporations much less bothered by regulatory points. If executives really feel each Republican and Democratic administrations could also be obstacles, company boards may determine to approve transferring ahead with transformational offers sooner quite than later. If a deal is blocked, they’ll strive their luck in court docket.

Since the “Great Netflix Correction” of 2022, there is not a unifying progress narrative for media and leisure corporations. Cable operator shares proceed to transfer up and down on dwelling broadband additions or subtractions — a regarding development with growth stalling in 2023. AT&T and Verizon shares have been caught in impartial for greater than a decade, whilst they’ve gained fastened wi-fi prospects this 12 months and probably will add extra subsequent 12 months.

Traditional TV subscribers again dropped by the millions this 12 months. As eyeballs diminish, promoting {dollars} can even decline. Next 12 months can even probably be one other 12 months of business losses for many main streaming companies. Disney, Paramount Global and NBCUniversal have all pegged 2025 as their flagship streaming companies’ first full 12 months of profitability.

Media executives have spent 2023 right-sizing their companies and pulling again on content material spending to speed up profitability paths for his or her flagship streaming companies. Warner Bros. Discovery Chief Executive David Zaslav had his pay package altered in order that his bonus is tied to his firm’s free money circulation technology and debt payback. Disney introduced final month its price financial savings for the 12 months might be $7.5 billion — $2 billion more than its earlier goal of $5.5 billion.

But the business stays caught at depressed valuations relative to two or three years in the past. Disney is preparing for a proxy battle with activist investor Nelson Peltz and former CFO Jay Rasulo, who plan to marketing campaign for board seats primarily based on Disney’s poor efficiency relative to the S&P 500.

“The [Disney] board and CEO [Bob Iger] appear to have no conviction that things will get better,” Peltz’s Trian Fund Management mentioned in a press release Thursday.

Beyond monetary metrics, a number of executives privately acknowledged morale has turn out to be an growing concern at legacy media corporations. When uncertainty is so excessive, with few clear progress prospects to generate pleasure and layoffs rampant, it is exhausting to generate cultures of prosperity and retain high expertise. One govt famous he is more and more listening to from friends that working media and leisure corporations simply is not as enjoyable because it was 5 or 10 years in the past.

2024 must be an inflection 12 months for the business. Either circumstances will enhance or they will not. If they do not, anticipate fireworks in 2025.

Disclosure: Comcast is the mother or father firm of NBCUniversal, which owns CNBC.

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