March 18, 2023

Media giants signal ad market 'stabilized' after bruising 2022

By Alexandra Canal·Senior Reporter

Unfavorable macroeconomic headwinds and foreign exchange rates, coupled with decreased ad budgets amid a decline in linear TV and digital search trends, put the ad market through a particularly rough 2022.

Recent ad market softness comes as media giants like Disney (DIS) and Netflix (NFLX) have embraced ad-supported streaming alternatives as the race for subscribers escalates. With losses piling up just as fast.

Disney's direct-to-consumer division lost a whopping $4 billion-plus in its fiscal 2022, which ended on October 1. Paramount (PARA), meanwhile, reported a direct-to-consumer loss of roughly $1.82 billion last year.

Warner Bros. Discovery, which is now targeting $4 billion in cost savings over the next two years, reported a net loss of $2.1 billion in the three months ending December 31. The company previously reported a loss of $2.3 billion in Q3 and a $3.4 billion loss in Q2.

"The ad market feels to me like it's stabilized a bit," NBCUniversal CEO Jeff Shell said during the company's latest earnings call in January, pointing to increased improvements in categories like pharmacy, entertainment, and travel. "We're assuming it will stay weak for the first half of this year and then recover but who knows with this economy."

Advertising revenue within NBCUniversal's media division increased 4% in Q4, primarily due to incremental revenue from the FIFA World Cup as well as an increase in Peacock advertising revenue.

Looking ahead, the lack of cyclical events in 2023 such as the World Cup, Olympics, or U.S. midterm elections, will likely be a drag on ad spend in 2023.

According to data from media investment and intelligence company Magna Global cited by Forbes, those events greatly aided the battered industry with the domestic ad market totaling $318 billion last year — an increase of 8% compared to 2021. Magna estimates U.S. ad spend will grow by 3.7% in 2023, lower than its September forecast of 4.8%.

Sports, autos, pharma encouraging

Bob Bakish, Paramount Global CEO, agreed the back half of this year should see an ad market recovery, telling investors during the company's latest earnings call: "2023 will also be an important year with respect to advertising, where we are looking forward to an improvement in the market in the back half of the year."

"The ad market, as you know, has been cyclically tough and, like our peers, we felt this impact in 2022."

Ad growth within Paramount's TV media division decreased 7% year-over-year in Q4 amid lower impressions and an unfavorable impact from foreign exchange. Overall, the company saw a 5% decline in quarterly ad revenue after a 2% drop in Q3.

Still, Bakish said the company is "seeing early signs of stabilization in advertising," adding: "The sports marketplace continues to be active across the NFL, PGA, and NCAA. We like what we're seeing in travel and pharma — and recent activity in auto is encouraging."

Looking ahead, the executive warned, "the combination of streaming investment and the current state of the ad market will impact earnings and cash flow in 2023. We see that narrowing significantly in 2024, resulting in meaningful total company earnings growth and a return to positive free cash flow."

But not every media giant is fully convinced the market will improve.

A 'very slow' year for some

Warner Bros. Discovery (WBD) CEO David Zaslav said last month cyclical headwinds and ongoing secular challenges will likely pressure the company in the year ahead, especially as it relates to advertising.

Zaslav told investors he expects ad sales to be "very slow" in 2023 but, echoing his peers, is hopeful for improvements later this year. WBD's network advertising revenue tumbled by 17% in the fourth quarter, or 14% excluding foreign exchange, after falling 11% (ex foreign exchange) in Q3.

Similarly, Spotify (SPOT) CFO Paul Vogel told investors on a Jan. 31 earnings call: "Advertising in Q4, overall, it's definitely continued to be very up and down."

"In Q4, we outperformed our expectations. Admittedly, those were lowered expectations, [but] we actually outperformed those by about €50 million or so...and even within that we had two months that outperformed and one month that was pretty up and down."

Vogel said he expects similar trends in Q1 and, although the company feels confident about its ad stack and recent acquisitions, he reiterated the macro still remains "uncertain."

Spotify's Q4 ad-supported revenue, boosted by podcasting, grew 14% on a year-over-year basis to €449 million — accounting for 14% of total revenue.

Disney, Netflix embrace ad-supported products

Disney and Netflix debuted their respective ad tiers at a time when the ad market was in flux, but the move seems to have been a lucrative one — at least so far — with positive sentiment from both Wall Street and high-level executives.

Disney, which rolled out its ad-supported tier in early December, said it was "pleased" with subscribers' initial reaction to the new offering on its latest earnings call.

At the time of the debut, the company said over 100 advertisers bought inventory for the launch — bucking the trend of a global ad spend slowdown.

CFO Christine McCarthy told investors the ad-tier will not produce "meaningful financial impact" until later this fiscal year, but analysts have continuously argued the rollout was a "critical" needle mover for revenue.

"I think [the ad tier] moves the needle pretty substantially," Bloomberg Intelligence analyst Geetha Ranganathan previously told Yahoo Finance. "It's absolutely very, very critical, and they've done it at the right time."

Similar to Disney, Netflix is playing the long game when it comes to its recently launched ad-supported tier, which officially debuted in November.

The company is currently utilizing a fixed price model for advertisers (it would not reveal its cost-per-thousand rate) but said it's open to adjusting that model in the future.

According to Netflix Worldwide Advertising President Jeremi Gorman, the platform "nearly sold out all of its [ad] inventory" globally for launch. Another sign ad buyers are willing to spend on new growth areas, especially as consumers' viewing habits change.

In its latest shareholder letter, Netflix said engagement for ad-supported subscribers "is consistent with members on comparable ad-free plans, is better than what we had expected, and we believe the lower price point is driving incremental membership growth."

Netflix went as far as to say its ad business could be even larger than Hulu's, with CFO Spencer Neumann telling investors: "It's a multi-year path. We're not going to be larger than Hulu in year one, but, hopefully, over the next several years, we can be at least as large."