With the outlook for the global economy getting gloomier by the minute, there’s ample expectation that a recession could be in the offing.
But whether there is or isn’t one is beside the point for Naveen Sarma, senior director of S&P Global Ratings, a veteran credit analyst focused on the media business. An economic downturn doesn’t have to cross into recession territory in order to have consequences for the entertainment and technology industries in myriad ways.
“If consumers feel stressed and stretched, and they choose to cut back on spending, that ultimately will impact the media and entertainment sector, even if there isn’t a recession,” said Sarma on the latest episode of Variety’s “Strictly Business” podcast.
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From advertising to cord-cutting, there’s all sorts of indicators he’s keeping an eye on as a bear market takes hold. Chief among his concerns is all the streaming services fighting for subscription dollars that may find competition stiffen if there’s less dollars to go around.
“What happens when you go into a recession and consumers look at how much they’re spending on the streaming services? They’re spending a lot of money and they decide they’re going to cut back on the number of services or they’re not going to stick around as long as they previously did,” said Sarma. “And that’s got implications for operating metrics, cash flow metrics and the financial performance for the media companies.”
Rising interest rates is one key metric of importance to Sarma because he anticipates that having a chilling effect on the consolidation that has been trending in the sector in recent years. “The cost of capital has gone up considerably, and that definitely has hurt dealmaking and M&A,” Sarma noted. “We’ve heard anecdotal stories of deals getting to the finish line, but dying because of expensive financing.”
“Strictly Business” is Variety‘s weekly podcast featuring conversations with industry leaders about the business of media and entertainment. A new episode debuts each Wednesday and can be downloaded on iTunes, Spotify, Stitcher and SoundCloud.