Morgan Stanley
  • Research
  • Nov 13, 2018

European Media’s
Ever-Changing Storyline

European media had a strong 2018, but consolidation, evolving content distribution methods and digital disruption are creating structural strain for the industry.

European media ends 2018 with two distinct narratives: First, share price performance has been surprisingly robust, albeit helped by some special situations including an auction between two U.S. media giants for one of the largest media businesses in the UK.

Despite concerns over structural shifts, the European Media sector offers exposure to some intriguing new market opportunities.

At the same time, much of the Media sector has come under structural strain, as changes in technology and content delivery drive robust mergers and acquisition activity in music, publishing, advertising, broadcasting and satellite services. These structural changes will no doubt continue, as businesses reposition in the face of a changing digital landscape.

For investors, here are three areas of structural shift to watch for in 2019: 

1. Agencies Under Pressure

European advertising agencies have seen some struggle in 2018, with evidence of increased fee competition in the face of slowing ad growth. Their clients have also been clamouring for greater focus on transparency of agency business practices, which has resulted in procurement pressures.

But the shift to digital has been the largest source of strain. The dominant digital ad inventory owners are putting pressure on agency media-buying margins, while the shift to digital has been diminishing the traditional role of agencies in favor of consultants and tech companies. Finally, creative agencies have come under revenue 

2. Broadcasters Wrestle with OTT

In Broadcasting, the growth of “over the top” (OTT) on-demand streaming services continues to cause headaches for free-to-air broadcasters. Penetration of the largest OTT provider represents more than 20% of households in the UK, Germany and Sweden—and will be above 20% in most of the big countries in Europe in the next five years.

Higher penetration of OTT threatens loss of audiences on linear channels, implicitly high inflation in TV advertising costs, and falling revenues. And the trend may only worsen. Based on the U.S. market, linear channel viewership tends to drop at the same rate that OTT penetration grows once penetration exceeds 20%.

The broadcast industry has responded by developing its own streaming video-on-demand projects, although that means increased spending in the face of falling advertising revenues. 

3. Satellite Services Shifts

OTT growth also affects the satellite services companies, two thirds of which provide satellite capacity for linear TV channels. The surging penetration of OTT platforms threatens the linear channel ecosystem and the satellite companies that support it

At the same time, new opportunities have opened up in data markets, as high-throughput communications satellites—which have more flexibility and capacity—create new and fast-growing opportunities in mobile broadband for businesses such as airlines and cruise ships.

New Opportunities for 2019

Despite concerns over structural shifts, the European Media sector offers exposure to some intriguing new market opportunities. Music is seeing one of the most dramatic turnarounds in fortunes with new distribution (music streaming) and new app-driven distributors, expanding the market again after years of decline.

eSports as a market is also seeing dramatic growth. Digital distribution channels, coupled with the growth of gaming in general, is helping create a eSports ecosystem with many of the same dynamics as traditional major league sports.

In addition, the evolution of digital outdoor advertising brings a remarkable new degree of flexibility and targeting potential to the industry, addressing advertisers fears over value, viewability and verification.  Digital outdoor also has the potential to combine the reach of TV with the targeting of digital in an outdoor space.

Finally, there are the unanswered questions: Given the first signs of better pricing power, will fast moving consumer goods advertisers return to boost the advertising market? Will European linear network TV advertising survive the onslaught of streaming services? Will the FCC approve the sale of C-Band spectrum—currently used for delivery of programming to satellite TV and satellite radio services—for 5G purposes? Investors are likely to get answers to some of these questions in 2019.

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 2018 page.