Cyclical excuses for structural problems?

The cost-of-living crisis dominates the headlines, so it’s no surprise to see a slew of media leaders blaming the economy for poor revenue and profit performance. When such claims abound, it is often wise to ask whether the cycle really is to blame, or whether underlying structural problems might be the problem.

I had this thought when reading of developments at Viaplay, the Scandinavian media company (formerly NENT) that has been expanding across Europe. The CEO has been replaced amid deteriorating financial performance and the company blames macroeconomic headwinds and cost-of-living crisis for disappointing subscriber progress and falling ad revenues. All would be well, it seems, if not for the pesky economic cycle. A more likely explanation is that the business model is flawed, small content bundles are not well suited to pay exploitation, and standalone sports players always lose money.

Meanwhile, the streaming revolution more generally is running out of steam with industry news full of stalling subscriber numbers and cancelled shows. Amid a sea of disappointing results, much is made of challenging economic conditions and consumers forced to rationalise their portfolio of streaming options. The real story, however, is the move to streaming was a bubble that is rapidly deflating. Content costs are too high, bundles are too small, technology and subscriber management costs are too large. Beyond Netflix, few others will make money, let alone generate enough to compensate for the old model they abandoned.

What of TV advertising, the critical underpinning of investment in UK content? Here the latest data is troubling. ITV in Q1 spoke of Total Advertising Revenue down 10% year-on-year, within which traditional NAR and sponsorship was down 17%. Q2 looks like it might be worse. Channel Four and many traditional US media companies are reporting similar numbers and across the board the economy is blamed.

One problem is that the economy is not as bad as those looking for something to blame want to claim. Things are certainly not buoyant, but neither are we in recession with the economy stubbornly delivering modest real GDP growth. A second problem is that blaming the cycle carries an implicit claim that an upswing will soon deliver better outcomes. Sadly, things are unlikely to get much better: real wages are falling; interest rates have returned to “normal” levels; and both parties have pledged spending discipline. Subdued growth looks likely for the foreseeable future.

Which begs the question, what if recent weakness in TV advertising is more structural than cyclical? Failing to spot the difference is the mistake the newspaper industry made after the global financial crash. The loss of classifieds to the internet was one thing, but display was surely different and when revenue turned down after 2008 this was attributed to the cycle. But the decline kept going, and it was many years before the industry accepted this was structural, not cyclical. Two lessons emerge from this period. First, the correct diagnosis might only be clear in retrospect. Second, a structural decline can be triggered by a cyclical downturn – the money leaves in a cyclical downturn, but never comes back when the cycle rebounds.

Of course, TV is still TV, the best medium bar none for brand building, but the case for structural weakness is getting serious. Alongside persistent digital pressure from adjacent categories (Google for search, Meta for social, Amazon for retail advertising), the proliferation of new video advertising options continues, with streamers adding ad-funded tiers, YouTube growing its share of viewing and FAST channels on the increase. The PSBs can fish in these new ponds too, and are showing solid digital growth, but these are more contested ponds and the PSBs are not always the biggest fish. Most alarmingly, PSB viewing continues to fall, especially among critical younger cohorts, so the price of TV keeps rising. This has been true for a while, without obvious consequence, but the elastic can only stretch so far before it snaps.

The jury is still out on this debate, and things might yet improve if the economy turns up, but the possibility that this is a structural turning point is real. Honesty is more important than optimism at such times and if this is a structural shift, more radical thinking might be needed. Let’s not follow the newspaper industry and wait five years before concluding, with perfect hindsight, that 2023 was a turning point.