Global Marketing Monitor: Weekly Market Trends (April 24, 2021)

WHAT YOU’LL READ ABOUT THIS WEEK:

In this week’s note, we focus on inflation. As we heard from several packaged goods companies reporting earnings this week, significant rises in costs for key manufacturing inputs – doubling or more versus pre-pandemic levels in some cases – are leading to plans to raise prices to consumers this year.    

Inflation is also playing out in prices for streaming video services. Consumers are demonstrating a willingness to continually pay more for similar offerings, as evidenced by Netflix’s results this past week. That inflation is supporting the company’s willingness to continue investing in content, which the company estimates will amount to $17 billion this year.

One place inflation is not occurring to the degree that some might prefer is in European football. The failure of the Super League to take off as planned could consequently open up opportunities for marketers if clubs who have not maximized their commercial activities look for new ways to do so. 

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Input inflation is rising for marketers, and so are prices for consumers.  Consumer packaged goods companies reporting earnings results in the past week spent some time discussing inflationary conditions impacting their input costs for agricultural goods and commodities, packaging materials, transportation costs, and whether we look at the past year or past two years.   For example, data from Refinitiv shows that prices for soybeans and corn at the end of April 2021 are up by almost double over both April 2020 and April 2019 levels (prices were down a little in April 2020 over April 2019).  Or consider that the current level of the Baltic Dry Index – a measure of transportation costs – is up four-fold over last year and three times over the two-year ago level.   Media – also a critical input for many of these companies – is seeing inflation that is much more modest by comparison.

While manufacturers have tools at their disposal to limit the degree to which costs are passed through (by finding different combinations of inputs to use in their products, or by otherwise finding more efficient processes to produce them), plans are afoot to raise prices for consumers in many instances.  So far, consumer price inflation expectations are elevated vs. pre-pandemic periods, although relatively modest in an absolute sense.   According to economists’ consensus estimates also tracked by Refinitiv, in the US consumer price inflation is expected to rise 2.6% in 2021 and 2.2% in 2022.   In the Euro Zone expectations are for 1.5% in 2021 and 1.2% in 2022.   In China expectations are for 1.6% in 2021 and 2.3% in 2022.   However, macro-economic measures of inflation may not fully capture the changes that manufacturers make to their product line-ups in terms of premiumization (a shift of focus to more expensive goods) or reducing the typical size of a given unit to be sold.

Inflation is taking root for consumers who buy television products as well.  Media is also experiencing inflation in the form of consumers paying higher prices for video services, whether newer SVOD subscriptions or traditional pay-TV offerings.  This week we saw this play out when Netflix reported its first-quarter results posting revenue growth of 24%, benefitting from higher subscriber levels, but also stronger pricing: constant currency average prices were up by 9% in the US and Canada, 4% in EMEA, 3% in Latin American and 5% in APAC.

Increases in pricing and aggregated spending are helping to cement Netflix as an industry juggernaut, as the company is now planning to spend $17 billion on content this year.  That spending will be distributed around the world as illustrated by announcements the company would spend $300 million in Mexico, $500 million in South Korea and more than $1 billion in the UK.   All of this activity – which probably accounts for around a tenth of all spending on professional video content globally – then drives comparably high shares of viewing or otherwise reduces churn and makes consumers more willing to pay higher prices.

Streaming services continue to take a share of TV viewing.  Underlying tailwinds of growth – such as consumer preferences for high-quality professional content and ad-free or ad-light environments paired with easy access via connected TVs – are strong for SVOD-based content and other streaming services, which continue to take a meaningful share of viewing relative to traditional television services.   In the US, from data covering the end of the full month of March via Nielsen, we can see that internet-connected device (“ICD”)-based viewing – as good a proxy for total streaming as any other data-point – rose for all people ages 2+ during the quarter by 8.5% year-over-year and 52% over the first quarter of 2019.   (Total use of television declined in the first quarter of 2021 vs. the first quarter of 2020 by 11%, largely because of the difficult comparison with the early stages of the pandemic).  ICD viewing as a percentage of total TV rose from 17.5% to 21.3% year-over-year.   Looking at people under the age of 34, ICD viewing rose from 32% of TV viewing to 39% as total TV ICD consumption fell 5.7% and total TV usage fell 23%.  Comparing the first quarter of 2021 with the first quarter of 2019, viewing of ICD-based content rose 27% while total TV consumption fell by 23%.

AT&T’s HBO Max is another beneficiary of similar trends.  Those tailwinds are also supporting AT&T’s HBO division, which saw global revenues rise by 29% in the first quarter of 2021.  During AT&T’s results presentation, the company showed that they now have 40.6 million US subscribers to HBO and HBO Max via wholesale and retail (DTC) channels, including their own bundled sales but excluding sales to commercial subscribers, such as bars and hotels.  This can be compared to 30.3 million subscribers via wholesale and retail channels one year earlier.

An important source of growth for HBO Max has been its significant ongoing expansion in content costs – including spending directed to its own studio business – which amounted to $1 billion in the quarter, vs. just under $600 million one year earlier.  Across all of Warner Media, programming expenses amounted to $15 billion, and as HBO Max expands internationally, related spending will continue to grow as well.

So far, all of this content has supported significant volumes of viewing: on its earnings call, company management indicated that its viewers are spending two hours per day per account.   By comparison, based on Nielsen’s estimate that Netflix accounts for 7% of all TV viewing, across Netflix’ much larger US subscriber base, they probably see just over one hour of viewing per day.

Traditional Pay TV is showing a continuation of prior quarter trends.  Of course, at least some of the growth in direct-to-consumer video services is offset by declines in traditional pay-TV, which we also saw in AT&T’s results.  The company lost 15% of its domestic subscriber base year-over-year and now has 16 million subscribers vs. 22 million two years ago and 25 million at the end of 2017.   Further, subscribers associated with the company’s vMVPD service AT&T Now are no longer disclosed but presumably came in below the 656,000 figure disclosed at the end of December.  For reference, that product peaked at 1.9 million subscribers as of September 2018.  Similar, if less extreme, results were produced by Verizon for its FiOS TV service, which lost 7.3% of its subscribers year-over-year during the most recent quarter.   Higher pricing – ARPUs for AT&T’s premium subs were up by 6% – is helping to mitigate the total revenue decline.   This has played out more broadly in the pay-TV world, as consumers shift some spending to streaming services while reducing what they spend on traditional offerings.  Collectively these efforts lead to higher volumes of spending on video in total.

A lack of sufficiently high inflation in certain sports rights fees could produce opportunities for marketers.  One place where inflation has not played out as some would hope is in television rights fees for top tier European soccer.  Over the course of the past week, we saw many of Europe’s top teams agree to form a new “Super League” designed to maximize revenue for its charter members, arguably at the expense of the domestic leagues they are also part of and soccer more generally.  The arrangement has seemingly fallen apart for now, at least.  While not necessarily directly related to their recent disappointments in rates of increases in fees for television rights to domestic leagues nor the pandemic’s effects on the economics of the business, many teams are clearly keen to enhance their revenue bases.   As a result, if there is an upside to the failure of the Super League to establish itself, marketers may find that some teams will be more open-minded to finding ways to work together.  Clubs that have not yet set themselves up to maximize related opportunities may consequently invest more resources in developing themselves as commercial operations and find new ways to help connect brands to culture through the lens of the sport.