U.S. Media And Entertainment: Looking For The Winds Of Change In 2025

U.S. Media And Entertainment: Looking For The Winds Of Change In 2025

Naveen Sarma December 18, 2024

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Key Takeaways

U.S.-based global diversified media and entertainment companies could see better credit measures given cash flow results for their video streaming, but much depends on the pace of improvement.

Advertising remains healthy, led by sports programming and next-generation streaming, but the secular divide between legacy media and digital platforms continues to widen.

Industry and investor hopes for stepped-up mergers and acquisitions may be thwarted by differences in perceived value, a lack of capital, and a need for Congressional action that may not happen.

In this commentary, we preview what we think will be the key trends affecting the U.S. media and entertainment industry in 2025. We believe the sector's U.S.-based diversified companies could see better operating and credit metrics as several achieved cash flow breakeven for their video streaming businesses in 2024 and should see further cash flow growth next year. Whether this translates to better credit quality will depend on the pace of credit metric improvement and where the companies stand versus the metrics needed for S&P Global Ratings' current credit ratings on each.

Hopes For Increased Industry M&A May Be Dashed Both industry companies and investors have high hopes for significant M&A activity in 2025. This is particularly true for those TV station operators with elevated leverage that have struggled with secular pressures on both affiliate fees and advertising, but are counting on relaxation of the FCC's rules on ownership and national coverage to allow for industry consolidation. In addition, we expect the incoming Trump Administration to be more supportive of M&A activity. In particular, this could increase the potential for spin-offs of media assets that are in secular decline (such as cable networks) and for mergers among legacy media and entertainment companies.

Yet despite this industry discussion and speculation we don't think many sizable deals will materialize for a number of reasons:

A wide difference in perceived value between potential buyers and sellers. Sellers point to continued cash flows and see long-term value. Buyers are more skeptical about the long-term viability of the sector and ascribe no terminal value.

A lack of capital among potential strategic buyers. The combination of depressed equity prices and high leverage leaves strategic buyers with limited capital resources to finance potential acquisitions.

A changing regulatory framework for TV station operators that likely requires input from Congress, which seems unlikely to be a near-term priority.

The film studios release more films into the theaters and more potential blockbusters After being decimated by the pandemic and then the two Hollywood strikes, domestic box offices' metrics continue to improve. Thanksgiving week's record-breaking results, in which three blockbuster films (Walt Disney's Moana 2, Comcast Corp.'s Wicked, and Paramount Global's Gladiator 2) amassed over $400 million in domestic ticket sales, suggests that consumers will still flock to movie theaters if presented with compelling content. Still, as of Dec. 5, the 2024 domestic box office remained 11% below its 2023 level and 26% below its 2019 level, due in part to holes in the release slate resulting from last year's writers and actors strikes. We expect the domestic box office to strengthen in 2025 due to more wide releases (more than 2,000 screens) and, in theory, the potential for more blockbusters. In particular, Disney has three Marvel releases and an Avatar film, and Warner Bros. Discovery has planned 12 releases (versus 11 this year), including a highly anticipated Superman movie in June. In all we expect box office to improve to about $9.3 billion versus about $8.4 billion this year though this remains far below

$11.4 billion in 2019.

Advertising remains strong even as trends for legacy media and digital media diverge Advertising in the U.S. continues to be robust, ahead of our 2024 expectations, despite macroeconomic issues, in particular the underlying financial health of the U.S. consumer. We attribute this strength to consumers continuing to spend despite their perceived fears about the U.S. economy, the emergence of cross-border advertisers, in particular those based in China who have spent robustly in the U.S. and Europe, and the entrance of new e-commerce advertisers.

We currently expect overall advertising in the U.S. to grow 4.3% in 2025, although trends continue to diverge between legacy media and digital platforms. Legacy media, with the exception of outdoor, should experience continued mid-single-digit percentage declines as audiences continue to shrink and advertisers find alternative media to reach consumers. In contrast, search, social, retail media, headlined by Amazon, connected TVs, and streaming will grow at double-digit percentage rates and expand share of ad spend while national TV, local, TV and radio will see declines (with local performing better than national). National TV's headline numbers will reflect mid-single-digit organic declines as well as the impact of a non-Olympics year. And local TV will face the loss of what has been record political advertising spending this year. We believe risks to our forecast will generally come from macroeconomic issues and geopolitical risks from a trade war between the U.S. and China, including high tariffs, that could adversely affect Chinese-based advertisers. In addition, the Trump Administration may seek to ban or limit pharmaceutical advertising on TV. Pharmaceutical advertising skews toward national television and the loss of this key vertical could hurt television (though we expect the overall impact to be neutral as

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