Recession and the Media, Entertainment & Gaming Industries
During a time characterized by extreme market turmoil, valuation correction, and looming recession concerns, Alignment Growth has compiled a retrospective focusing on the key themes that guided consumer behavior within our target investment sectors, Media, Entertainment & Gaming (“MEG”), during the last recession in 2007–2009.
Our thoughts and analysis are included here for our fellow MEG investors and industry participants.
Those who worked in the industry during the Global Financial Crisis remember how the subprime mortgage implosion of mid-2007 led to the most prolonged recession since the 1930s, claiming storied institutions like Lehman Brothers and AIG as its victims.
Businesses reacted promptly, slashing discretionary spending and payrolls. By late 2009, advertising spending fell 16% from 2007; consumer confidence plummeted to the lowest levels since the CCI’s inception in 1967; and the economy lost more than 8 million jobs that took over six years to regain — one of the longest recoveries in American history. For comparison, the US recovered over 20 million COVID-induced job losses in under two years.
The “Great Recession” put the resiliency of the US consumer to the test.
With this backdrop, one would expect consumer spending on MEG to decline precipitously since it is a discretionary part of our everyday expenditures. In fact, the broader Leisure & Hospitality Personal Consumption Expenditures (“PCE”) contracted 4.4% in 2009.
Inspired by a recent analysis from Jefferies, we looked deeper into the performance of key MEG sub-sectors in the 2009 trough year.
While no industry sector can be truly immune to protracted macro-economic downturns, the data below illustrates the resiliency of MEG. Perhaps surprisingly, in 2009, consumer spending across these categories grew 0.8%.
After all, escapism matters even more when the times are tough!
As we survey the current macro-economic landscape, it is clear that initial cracks in the growth engine of the American consumer are starting to emerge again. As such, Alignment Growth is focusing on the following key learnings to guide our investment decisions in what will undoubtedly be choppy waters ahead:
1. Compelling End-user Value Proposition: Financial headwinds force consumers and businesses to scrutinize their spending, starting with higher-ticket items
· Among the highest-priced MEG experiences, theme parks and music concerts faced steep declines in attendance and on-location spending in 2009. At the same time, the more affordably-priced box office, headlined by blockbuster sequels to Harry Potter and Transformers, and Avatar, shattered all prior records.
· With Netflix streaming still in its infancy, Pay TV subscriptions that delivered hours of entertainment daily continued to grow, even though consumers were already beginning to look for alternatives to the $100+/month and ever more expensive “cable bundle.” Similarly, the compelling value of unlimited commercial-free streaming audio for $12.95/month continued to drive subscriber growth for satellite radio.
2. Tech-enabled Disruption: Macro-economic dislocations prompt consumers and businesses to re-examine their established habits, benefitting the disruptors
· The last recession accelerated print media’s demise by Facebook, Google, and other then-disruptive digital platforms. As a result, online advertising increased even in 2009 despite the broader ad market malaise.
· Digital games, which combine easy access with engaging social gameplay, including free-to-play (F2P) games supported by micro-transactions (MTx), took off in the late 2000s, as consumers felt less compelled to spend $49.99 on games sold in retail. After Apple enabled iPhone in-app purchases in 2009, F2P games propelled the industry’s meteoric rise over the following decade.
3. Balance Sheet Strength: A strong balance sheet protects shareholder value in a downturn and enables strategic flexibility to invest when “others are fearful”
· The fallout in the local radio and TV industry from the last recession is a stark reminder that reoccurring revenues, like advertising, are far from recurring, like Pay TV or SaaS subscriptions. Two years of double-digit advertising revenue declines pushed numerous station groups to the brink of survival as their cash flow evaporated and leverage spiked.
· “Dry powder” deployed to gain market share or pursue M&A during recessions can pay off in strides. Liberty Media’s 2009 opportunistic bail-out of Sirius XM will go down as one of MEG’s greatest examples of shareholder value creation.
4. Power of Premium IP: Premium IP tends to be more resilient when spending on ‘secondary’ categories is curtailed
· HBO reported subscriber growth in 2008–2009 despite its significant monthly upcharge on top of already-pricey Pay TV subscriptions, on the back of insatiable consumer demand for its “must-see” premium dramas, like The Sopranos.
· Attendance and revenue performance at Disney theme parks outperformed the rest of the industry during 2008–2009.
Within Alignment’s growing investment portfolio:
· The powerful value proposition of Crunchbase for sales and business development professionals and other prospectors combines best-in-industry private company info and access to decision-makers with superior pricing flexibility relative to other solutions. As such, we believe Crunchbase is well-positioned to continue to gain share in the $70 billion market for sales intelligence solutions even in a recession.
· Fever has been disrupting the live experience space shattered during COVID by using big data to identify, optimize and scale events suitable for the pandemic, including drive-through events and intimate Candlelight Concerts. Fever’s deep understanding of its users enabled premium IP owners, including Netflix and Warner Bros., to transform what used to be a marketing cost into profit-generating live engagements with the fans of their core franchises, including Stranger Things and Harry Potter.
We welcome comments and feedback on our analysis and observations. Please do not hesitate to contact our team at info@alignmentgrowth.com to discuss this further.
Sources: Public company filings, press articles, US Bureau of Labor Statistics, FRED, ESA, ESPN, Statista, IDC, Box Office Mojo, and Alignment Growth estimates
About Alignment Growth
Alignment Growth partners with category-leading companies in the Consumer and Business Media, Entertainment, and Technology industry sectors. With its team’s multi-decade track record of senior executive operating, strategy, and deal-making experience at global Fortune 500 companies, Alignment Growth provides value-added capital solutions to help its portfolio companies achieve their growth ambitions. Additional details are available at www.alignmentgrowth.com.
