We all want to pick winners in the stock market. To that end, a critical consideration lay in identifying macro indicators — telltale signs of factors affecting that sector of the economy your stock picks operate in.
One sector where investors must carefully evaluate these macro indicators is the Entertainment industry. This industry is undergoing massive transformation. As a result, the impact to companies operating in this space, and their resulting stock prices, is significant.
Having served for years as my company’s resident expert on the Entertainment sector, including demoes of interactive connected TV experiences at a time when such devices were nascent (now they’re in three-quarters of all US households), I possess in-depth knowledge of what’s happening in the industry. So let me take you on a brief tour of the key macro indicators for Entertainment companies.
What are macro indicators?
First, let’s get on the same page about what’s meant by macro indicators. Put simply, a macro indicator is any piece of information that can help an investor decipher what is going on in the industry as a whole. This includes large-scale trends and other data that illuminate factors affecting the entire industry in order to evaluate current or future investment possibilities.
How to spot these indicators
A common factor that affects most sectors of the economy today is technology. Tech advancements marked a turning point for the Entertainment industry at the turn of the century when consumers shifted away from physical media to play music (CDs at the time), preferring digital music files with the advent of the iPod and iTunes. So when thinking about an easily identifiable indicator, look for tech advancements disrupting long-established patterns of doing business in that industry.
Another indicator is M&A (mergers and acquisitions) activity. If an industry has lots of fish in the sea, consolidation is likely on the horizon. This occurs because there are only so many customers for any given product or service. Only the best can survive when there’s saturation. Look for trends like the big corporate fish swallowing the guppies.
Lastly, follow the money. Evaluate the way companies generated revenues in the past to determine if it’s sustainable for the future.
Now let’s take a look at specific examples for the Entertainment industry.
The growth of streaming services
Netflix (NFLX) kicked off the current wave of disruption when they introduced the concept of streaming film and television content over the Internet. Way back in 2007, they began moving away from their signature red-envelope enshrouded DVDs-by-mail which, in its heyday, was a disruptor to video rental businesses like the nearly defunct Blockbuster Video. (There’s still one store left in the world.)
At the time, investors and consumers were dubious. But Netflix CEO Reed Hastings knew the convenience of watching content on any device, any place, any time was too appealing for consumers given how the same transformation occurred to the music business a few years prior. Since then, Netflix stock more than tripled from under $100 per share to over $300.
Today streaming services are exploding. Amazon (AMZN), CBS Corp (CBS), HBO and even Facebook (FB) offer original film content via streaming, and soon, Disney (DIS), Apple (AAPL) and others plan to follow suit.
Of course, the increased competition will put pressure on Netflix. While Netflix currently sits on the throne as king of the streaming services, its stock’s future prospects will be less certain.
This trend also means that if a company in the film and television arena is not offering (or plan to offer) a streaming service, they risk becoming obsolete. It’s one of the factors making media firms like Lionsgate (LGF) a questionable long-term investment. But streaming isn’t the only death knell for Entertainment companies with traditional media models.
The sunset of cable and satellite TV
The growth of streaming services comes at the expense of traditional TV providers, such as cable and satellite companies. It’s estimated that the number of people who “cut the cord” (i.e., canceled their cable or satellite subscriptions) grew to 33 million in 2018.
That shift is expected to grow each year, and in fact, the number of subscribers to streaming services is expected to exceed traditional pay TV subscriptions for the first time this year.
These factors kicked off a wave of mergers and acquisitions as companies try to reinvent their business models. Disney (DIS) is the latest Entertainment company in both the M&A and streaming game with its $71.3 billion acquisition of 21st Century Fox and plans to launch its Disney Plus streaming service later this year. These moves have allowed Disney’s stock to hit new highs.
It also means companies that rely on cable or satellite TV subscribers for a large part of its revenue, such as Dish Network (DISH), are at risk. Seeing the writing on the wall, Comcast (CMCSA) acquired NBCUniversal and plans to introduce their own streaming service next year. AT&T (T), who bought DirecTV only to see its subscribers head for streaming alternatives, is trying to offer a bundle of streaming solutions leveraging last year’s $85 billion purchase of the former Time Warner’s media divisions.
That’s not the end of the disruption. Advertising dollars, the bread and butter of traditional television, have finally started to see a decline, falling for the first time in 2017. That downward trend is expected to continue for the next few years with a temporary increase during the 2020 election year and then back to annual declines.
Advertisers are shifting their spend to digital video alternatives where they can capture better return on their ad buys thanks to the myriad data and advertising options offered in the digital world. This trend has benefited companies like YouTube and Facebook, who offer video content for free in favor of commercials.
The revenue shift to digital outlets is not just affecting television. Theater chains like AMC Entertainment Holdings (AMC) are struggling to adapt as consumer preferences for streaming content across devices results in theater attendance declines. This has translated into AMC’s stock price; formerly in the $30 range per share in previous years, it has since dropped by two-thirds.
Moreover, the new streaming media business model offers alternative sources of revenue, not just advertising. Some companies, like Netflix, use subscriptions to generate revenue. Others, like CBS, employ a combination; consumers pay a lower subscription fee supplemented by ads or pay more for a commercial-free experience.
As streaming content competition heats up, and technologies like blockchain unlock new revenue opportunities, only time will tell which revenue approaches will be the winners.
The last word
For investors who saw the macro indicators for the Entertainment industry early on, they had the opportunity to grab shares in companies leading the streaming pack at a great price. Even now, there’s still more upside for companies like Disney, who has a real shot at taking market share away from Netflix. That’s the power of macro indicators.
The Entertainment industry indicators touched on above are just the beginning. For instance, blockchain technology is being looked at as a means to stem piracy and enable micropayments (imagine paying for early access to an upcoming movie that streams onto your TV). Canny investors who see these signs have an opportunity to predict where an industry is going, allowing them to jump in early and watch their investments blossom.
Robert “Izzy” Izquierdo was inculcated into the church of finance by his investor father (who achieved millionaire status through stocks). Izzy has bought and sold stocks for decades. As a technologist who has worked at Silicon Valley companies to tech startups, Izzy pursues his dual passions as digital domain expert by day and Wall Street wanderer by night.