It’s not a blip
When a change occurs, it is often necessary to look back years, even decades, later to appreciate how significant that change was. Other times, it happens so fast that it can be difficult to appreciate its magnitude as people become desensitized to the perpetual torrent of bad news. It is in this latter situation that we now find ourselves. What appears to be a succession of independent events (war, political crisis, climate change, inflation, etc.) are actually all indicators of a larger, connected wave of change that will reshape the world. And not just for a few months, but for a generation, maybe more. It’s tempting to think that the entertainment and consumer technology industries are, at the very least, isolated. But they are not.
Let’s first look at all the major components of change and disruption:
- Energy tariffs: Driven in large part by the Russian-Ukrainian War, energy prices are skyrocketing, with affordability ramifications for consumers and businesses (large and small). This morning, Britain’s energy regulator has announced its new spending capwhich will result in a threefold increase in fuel prices on an annualized basis.
- Climate change: Europe knows what could to be its worst drought in 500 years, with narrowed rivers revealing Roman remainsmedieval hunger stones (warning readers that the end is near if they can read the stone), ghost towns and even WWII battleships. Wildfires are (still) raging through Europe and in the USAwhile China is now facing its worst heat wave on record. This also affects fuel, with hydroelectric power providers expecting a large generation shortfall in winter due to lower water levels. There have been power cuts in China before. Climate change can even reduce wind power generation.Meanwhile, France struggling with its nuclear production. There are already talking about energy rationing for consumers and businesses 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 has caused, and governments are still grappling with the effects of vast state spending on vaccines and economic support, which may soon be compounded by new payments to households in difficulty.
- Food: Global grain supplies have increased due to the Russian-Ukrainian war, but food prices across the board are soaring, some commodities in the US up 38%. Multiple factors are at play (including rising transport and labor costs), but also climate change (drought has reduced coffee harvests in Brazil while potato growers s expect much lower crop yields due to drier soil).
- Inflation: The combined effect of rising food and fuel prices is runaway inflation, with all of the above factors making the situation worse. IMF predicts global inflation to reach 8.7%, with some markets expected to reach 18%. Even some digital subscription prices are increased to catch up. The salary does not follow, resulting in the fastest decline in wages in real terms ever recorded. The ensuing cost-of-living crisis led to widespread strikes in France, Germany, Spain, United Statesand Great Britain, as well as in large global companies, such as Starbucks and Amazon.
- Spending cut: As prices rise, many low-income families will be faced with difficult choices, such as ‘heat or eat’. As governments (rightly) try to mitigate the impact on low-income households through UBI Payments and fuel payments levels of disposable income, 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 rate: As central banks try to fight inflation by increasing interest rate they have increased the cost of debt, which has the secondary consequence not only make the business of music catalog acquisitions more difficultbut impacting any business that depends on debt, netflix at technology start-ups. This will in turn impact the entertainment market both directly and indirectly.
- Recession: All of the above will be will likely lead to a global recession. But unlike previous recessions, this one could be a full-employment recession. Which means that people will still have jobs, but they will have much less disposable income.
Normally we might face any one of these challenges, but now we face them all with a cumulative and interconnected effect. The result will most likely not just be a year-long jolt, but rather what will be a realignment of the global economy, regardless of the dramatic changes in the global geopolitical situation with Ukraine and Taiwan.
It is difficult for any of us to properly grasp how all of these changes will reshape the world, as the combination of factors is unprecedented in modern times (particularly due to climate change), which means no one alive never experienced this before, and so all of our benchmarks have limited use.
Even if the entertainment economy is of little importance compared to most of these factors, it will nevertheless be shaped by them, with the recession of attention adding extra spice. Subscriber declines and downturns will likely have a short-term impact, but longer-term changes will be more significant. This could manifest in a myriad 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 increase in funded advertising and integrating ads into subscriptions, such as Netflix and Disney+.
Could consumers turn more to entertainment as times get tough? Sure. Could they start to engage more in digital entertainment because they can’t afford to go out as much anymore? Yes. But regardless of the direction(s) of the entertainment market, two things are clear: 1) change is coming, 2) the most successful companies will be those that are ready to embrace and lead change. , two things are clear: 1) change is coming, 2) the most successful companies will be those that are ready to embrace and lead change.
As the traditional Chinese curse says “may you live in interesting times”.