What’s ahead for technology, media and telecom (TMT) companies in 2024? A focus on operations and cost efficiencies in 2022 and 2023 after valuations overheated in 2021 is giving way to companies once again settings their sights on growth and profitability, albeit amid a guarded spending environment, according to Morgan Stanley’s bankers covering the sectors.
This cautious optimism was widespread among the companies and investors that gathered for the recent Morgan Stanley Technology, Media and Telecom Conference in Barcelona. Discussions also surrounded companies’ budding AI strategies, streaming’s maturation and sports assets in high demand.
“There is a lot of debate about how 2024 will evolve. There is continued concern around the macro environment, but there is also a far clearer sense of stability in the system heading into next year,” says Daniel Diamond, a Morgan Stanley investment banker focused on Software and Digital Services. “IT services remain in high demand because cloud migration and AI are critical themes, but large corporates are taking longer to make spending decisions.”
1. Companies Focus on IT Spending and AI
In the next two to five years, companies across industries will likely spend a healthy portion of their budgets on IT services, as capabilities such as cloud computing and storage, cybersecurity and business intelligence remain in high demand. However, they are also wary of inflation and its impact on margins, which is extending sales cycles for IT providers.
Within this environment of cautious spending, companies in different sectors are considering whether their growth strategies can be achieved organically, or if they should pursue mergers and acquisitions to obtain technologies or gain exposure to new addressable markets, according to Diamond. “Management teams are assessing their organic growth trajectory and profit margins and determining how that profile could be accelerated via possible acquisitions,” he says.
The other key issue for Chief Financial Officers, Chief Investment Officers, Chief Technology Officers and board rooms is defining their AI strategy, Diamond says. Many companies are in the process of engaging consultants who can share perspectives on how the space is evolving. They are also seeking opportunities to measure the impact of AI on operational improvements, such as more efficient marketing and communications, through key performance indicators. “Both companies and investors are trying to determine the winners—who will use AI to increase efficiency or supplement their addressable market—and the losers—who ultimately will be cut out of the value chain,” Diamond says.
2. TV’s Decline and International Expansion in Streaming
Companies’ cautious budgeting also affects ad spending. This has an adverse impact on linear TV networks, which already face structural challenges due to the rise of global streaming services.
The pace of decline for linear TV differs among geographies. Consumers deciding whether to switch to streaming are considering various factors, such as the quality of their local networks and broadband speeds and pricing. But according to Anfisa Loboyko, a Morgan Stanley investment banker covering media and content production, a broad linear TV downturn is only a matter of time.
One accelerator of TV’s demise is streaming platforms’ rollout of cheaper ad-supported tiers, as a way to widen the subscriber funnel and capture consumers wanting to save money in an inflationary environment, Loboyko says. “While all those streaming platforms have competed with TV for eyeballs, they have not as much, historically, competed for ad budgets because of their subscription models. But now, that is no longer the case.”
Broadcasters have been trying to capitalize on an ongoing audience shift to digital and mitigate linear TV declines by introducing their own streaming strategies. Investors are watching to see if they can compete with much deeper pockets of global streaming platforms, some of which are supported by big tech.
Media companies and investors are curious about whether mergers and acquisitions (M&A) could be a lifeline for broadcasters, but that path faces regulatory challenges, especially in Europe, Loboyko says. That has left some companies considering cross-border consolidation, in an attempt to gain scale and have a seat at the table with the world’s biggest streaming platforms.
While linear TV declines, streaming platforms’ growth has started showing signs of maturity, especially in the U.S. “The focus has shifted from growth at all costs to profitable growth,” Loboyko says. In addition to ad-supported tiers, streaming platforms are carefully considering international expansion by strengthening their local content proposition. Competition between local broadcasters and streaming services means that the winners have to provide differentiated offerings: “Content has to be truly local and culturally relevant,” Loboyko says.
3. Sports Assets: Digitalization and M&A
Amid the decline of legacy broadcasters and their ability to compete on sports rights acquisition, sports IP owners are trying to diversify their revenue streams, especially by tapping into new areas such as experiences, food and beverage concessions, merchandising and digital advertising. A big push for sports IP owners is seeking digitalization and incremental ways to sell their brands relative to traditional monetization channels, according to Paolo Della Rovere, a Morgan Stanley investment banker covering the sports industry. “Big sports are focused on technology as a key enabler of top-line diversification and cost efficiencies,” he says.
For example, geotargeted digital advertising is helping serve tailored regional ads to audiences watching sports online, while IP owners get the benefit of increased revenue from multiple advertisers for more focused content. Sports owners that focus on selling digital ads are also cutting costs associated with analog mediums, such as stadium billboards or paperboard banners.
The scarcity value of sports IP assets, compounded with rising consumer engagement, has attracted—over the recent period—private equity and other long-term investors into the space, Della Rovere says. “There is a very limited number of sports franchises, tournaments and leagues that can be acquired, and the others are not easy to replicate, which makes those assets incredibly valuable,” he says.
Tech platforms are continuing to invest in sports assets to boost customer acquisitions and improve their retention, Della Rovere says. For sports IP owners, partnering with those platforms may be advantageous because of the opportunity to tap into the massive distribution platforms of these technology behemoths.