This is not a blip
When change happens it often takes the perspective of looking back years, or even decades, later to appreciate just how meaningful that change was. Other times, it happens so fast that it can be difficult to appreciate its magnitude because people become desensitised to the perpetual torrent of bad news. It is the latter situation in which we find ourselves now. What appears to be a succession of unrelated events (war, political crisis, climate change, inflation, etc.) are actually all indicators of a wider and connected wave of change that is going to reshape the world. And not just for a matter of months, but for a generation, perhaps more. It is tempting to think that the entertainment and consumer tech industries are, at the very least, insulated. But they are not.
First, let us look at all of the main components of the change and disruption:
· Energy prices: Driven in large part by the Russo-Ukrainian war, energy prices are skyrocketing, with affordability ramifications for both consumers and business (big and small). This morning, the UK energy regulator announced its new spending cap, which will translate into a three-times increase in fuel prices on an annualised basis.
· Climate change: Europe is experiencing what may be its worst drought in 500 years, with shrunken rivers revealing Roman remains, medieval hunger stones (warning readers the end is near if they can read the stone), ghost villages and even WWII battleships. Wild fires rage (again) across Europe and in the US, while China is now facing its worst heatwave on record. This is also affecting fuel, with hydro-electric power providers expecting a major output shortfall in winter due to lower water levels. There have already been power outages in China. Climate change may even reduce wind power output.Meanwhile, France is struggling with its nuclear output. There is already talk of energy rationing for both consumers and business while some countries have already started.
· Covid: The pandemic has not gone away and will likely be back in winter. We are still dealing with the economic and societal dislocation it caused, and governments are still dealing with the effects of vast state expenditure on vaccines and economic support, which may soon be compounded with further payments to struggling households.
· Food: Global grain supplies were escalated by the Russo-Ukrainian war, but food prices across the board are soaring, with some staples in the US increasing by 38%. Multiple factors are at play (including increased cost of transport and labour), but also climate change (drought slashed coffee crops in Brazil while potato growers are expecting much reduced crop yields due to drier soil).
· Inflation: The combined effect of food and fuel price rises is rampant inflation, with all of the above factors exacerbating the situation. The IMF forecasts global inflation to reach 8.7%, with some markets forecast to reach 18%. Even some digital subscription prices are being increased to catch up. Pay is not keeping up, resulting in the fastest fall in real terms pay on record. The subsequent cost-of-living crisis is resulting in widespread strikes in France, Germany, Spain, the US, and the UK, as well as across major global companies, such as Starbucks and Amazon.
· Spending squeeze: As prices rise, many poorer income families will be faced with stark choices, such as ‘heat or eat’. With governments (rightly) trying to lessen the impact on lower-income households via UBI payments and fuel payments disposable income levels, a second-order consequence for digital entertainment is that middle income groups, such as older millennials, will potentially feel the pinch more, not being eligible for as many state payments but still facing the same cost increases. Millennials are, of course, the lifeblood of streaming subscriptions across music, video and games.
· Interest rates: As central banks try to tackle inflation by raising interest rates they have raised the cost of debt, which has the second-order consequence of not only making the business of music catalogue acquisitions tougher, but impacting any business which relies on debt, from Netflix to tech start-ups. This will, in turn, impact the entertainment market, both directly and indirectly.
· Recession: All of the above will likely culminate in a global recession. But, unlike previous recessions, this one may be a full employment recession. Which means people will still have jobs, but they will have much less disposable income.
In normal times, we might be facing one of these challenges, but now we face all of them with cumulative and interconnected effect. The result will most likely not just be a blip that lasts for a year, but, instead, what will be a realignment of the global economy, and that is without even considering the dramatic changes to the global geo-political situation with Ukraine and Taiwan.
It is difficult for any of us to properly grasp how all of these changes will reshape the world, because the combination of factors is unprecedented in modern times (particularly because of climate change), which means that no one alive has experienced this before, and so all our reference points have limited use.
Even though the entertainment economy pales in importance compared to most of these factors, it will, nonetheless, be shaped by it, with the attention recession adding further spice. Subscriber declines and slowdowns will likely be a near-term impact, but the longer-term shifts will be more meaningful. This could manifest in a multitude of different ways, such as the rise of bundles (e.g., Apple One, Amazon Prime, Google One and Play Pass); the growth of the creator economy; and the long-term rise of ad supported and integration of ads into subscriptions, such as Netflix and Disney+.
Might consumers turn more to entertainment as times get tough? Sure. Might they start engaging more with digital entertainment because they cannot afford to go out as much anymore? Yes. But whatever direction(s) the entertainment market goes, two things are clear: 1) change is coming, 2) the companies that do best will be those that are willing to embrace and drive change.
As the traditional Chinese curse goes “may you live in interesting times”.