U.K. media stocks have plummeted following Britain’s decision last Thursday to leave the European Union, known as Brexit. ITV’s share price, for example, has fallen 30% in just two days of trading. Brexit is likely to have six major consequences for Britain’s media sector, experts told Variety on Monday.
First, the uncertainty surrounding whether the U.K. will be granted full access to the E.U.’s single market after exiting the trading bloc is likely to prompt an economic downturn. This will have an immediate effect on advertising revenue at free-to-air broadcasters such as ITV, Channel 4 and Channel 5.
“In the last recession…TV broadcasting advertising revenue dropped by over 10%,” consultancy firm Ampere Analysis notes. This, in turn, will hit the broadcasters’ content-acquisition budgets, which will damage producers in the U.K. and elsewhere.
Second, as the economic downturn bites, British consumers will cut back on discretionary spending, including on pay-TV and streaming subscriptions such as Sky, Amazon and Netflix. However, this will come at a later point in the economic cycle than the effect on the advertising-funded sector, says Richard Broughton, a research director at Ampere Analysis.
Third, the falling value of the pound will reduce the amount that British broadcasters will be able to pay in dollars or euros to acquire shows produced abroad. Hollywood output makes up the bulk of that, but European shows will be affected, too.
Fourth, British producers will be hit by the fact that their shows will no longer qualify as European in the content quotas that apply across the E.U. This will drive down the price paid for them. ITV, which besides being a broadcaster is also a producer and international distributor of U.K. content, will be hurt by this, as will the BBC, says Alice Enders, head of research at Enders Analysis.
“The BBC is probably going to be worst hit. It is the No. 1 exporter of U.K.-made audiovisual content,” she says.
On the upside, the comparative cost of producing British shows will decrease because of the weak pound, and so they’ll be cheaper to make.
Fifth, international TV networks whose channels are uplinked from their European headquarters in Britain will no longer be covered by the E.U.’s Audiovisual Media Services Directive and may have to relocate to an E.U. country, says Guy Bisson, another research director at Ampere Analysis. “A lot of channels set up in the U.K. because of its lighter [media] regulations,” Bisson says.
Sixth, as the stock price of U.K. media companies fall, they will become acquisition targets for international companies. But on the flip side, their future revenue potential will be depressed, and so they will become less attractive to investors. This is particularly true of broadcasters like ITV that derive much of their revenue from advertising.
“The instability of the U.K. economy is something they will have to factor in,” says Tim Westcott, a senior media analyst at IHS Global. “They would think… ‘ITV is a major broadcaster in this economy that is clearly going to go through a period of turbulence, and who knows how long it is going to last. Maybe we’d want to think twice about buying into a big company in that environment that still gets most of its money from display advertising, which is clearly going to be affected by any changes in GDP and any changes in the business environment, like people cutting their marketing budgets.’”
Those in favor of Brexit contend that Britain’s new trade agreements with the E.U. and other countries will be as good as what Britain currently enjoys as an E.U. member, including complete access to the European single market. Enders, a former senior economist at the World Trade Organization, dismisses that idea. Even if it were true, it would take many years to put in place.
“It is going to be five to seven years before the rubble is sorted, before we are out of the E.U. and have completed the negotiations on whatever new trade agreements we wish to enter into on a reciprocal basis, and have had that ratified by the E.U. and by the U.K. parliaments and everybody else that needs to ratify it,” she says.
“We are talking here about five to seven years of uncertainty regarding market access to the E.U. The uncertainty is causing the financial market shocks that will affect the consumer pronto. And that consumer is what drives the advertising economy, the retail sector and everything else… Everybody is going to be impacted by this seismically.”
Another factor affecting British stocks is the political turmoil in the U.K. now, with the resignation of Prime Minister David Cameron and a mutiny in the senior ranks of the opposition Labor Party against leader Jeremy Corbyn. Scottish First Minister Nicola Sturgeon has also raised the possibility of a new independence vote for Scotland. “Nature abhors a vacuum,” Enders says.