This is not a blip

When change happens it often takes the perspective of looking back years, or even decades, later to appreciate just how meaningful that change was. Other times, it happens so fast that it can be difficult to appreciate its magnitude because people become desensitised to the perpetual torrent of bad news. It is the latter situation in which we find ourselves now. What appears to be a succession of unrelated events (war, political crisis, climate change, inflation, etc.) are actually all indicators of a wider and connected wave of change that is going to reshape the world. And not just for a matter of months, but for a generation, perhaps more. It is tempting to think that the entertainment and consumer tech industries are, at the very least, insulated. But they are not.

First, let us look at all of the main components of the change and disruption:

• Energy prices: Driven in large part by the Russo-Ukrainian war, energy prices are skyrocketing, with affordability ramifications for both consumers and business (big and small). This morning, the UK energy regulator announced its new spending cap, which will translate into a three-times increase in fuel prices on an annualised basis.
• Climate change: Europe is experiencing what may be its worst drought in 500 years, with shrunken rivers revealing Roman remains, medieval hunger stones (warning readers the end is near if they can read the stone), ghost villages and even WWII battleships. Wild fires rage (again) across Europe and in the US, while China is now facing its worst heatwave on record. This is also affecting fuel, with hydro-electric power providers expecting a major output shortfall in winter due to lower water levels. There have already been power outages in China. Climate change may even reduce wind power output.Meanwhile, France is struggling with its nuclear output. There is already talk of energy rationing for both consumers and business 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 caused, and governments are still dealing with the effects of vast state expenditure on vaccines and economic support, which may soon be compounded with further payments to struggling households.
• Food: Global grain supplies were escalated by the Russo-Ukrainian war, but food prices across the board are soaring, with some staples in the US increasing by 38%. Multiple factors are at play (including increased cost of transport and labour), but also climate change (drought slashed coffee crops in Brazil while potato growers are expecting much reduced crop yields due to drier soil). 
• Inflation: The combined effect of food and fuel price rises is rampant inflation, with all of the above factors exacerbating the situation. The IMF forecasts global inflation to reach 8.7%, with some markets forecast to reach 18%. Even some digital subscription prices are being increased to catch up. Pay is not keeping up, resulting in the fastest fall in real terms pay on record. The subsequent cost-of-living crisis is resulting in widespread strikes in France, Germany, Spain, the US, and the UK, as well as across major global companies, such as Starbucks and Amazon.
• Spending squeeze: As prices rise, many poorer income families will be faced with stark choices, such as ‘heat or eat’. With governments (rightly) trying to lessen the impact on lower-income households via UBI payments and fuel payments disposable income levels, 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 rates: As central banks try to tackle inflation by raising interest rates they have raised the cost of debt, which has the second-order consequence of not only making the business of music catalogue acquisitions tougher, but impacting any business which relies on debt, from Netflix to tech start-ups. This will, in turn, impact the entertainment market, both directly and indirectly.
• Recession: All of the above will likely culminate in a global recession. But, unlike previous recessions, this one may be a full employment recession. Which means people will still have jobs, but they will have much less disposable income.

In normal times, we might be facing one of these challenges, but now we face all of them with cumulative and interconnected effect. The result will most likely not just be a blip that lasts for a year, but, instead, what will be a realignment of the global economy, and that is without even considering the dramatic changes to the global geo-political situation with  Ukraine and Taiwan.

It is difficult for any of us to properly grasp how all of these changes will reshape the world, because the combination of factors is unprecedented in modern times (particularly because of climate change), which means that no one alive has experienced this before, and so all our reference points have limited use.

Even though the entertainment economy pales in importance compared to most of these factors, it will, nonetheless, be shaped by it, with the attention recession adding further spice. Subscriber declines and slowdowns will likely be a near-term impact, but the longer-term shifts will be more meaningful. This could manifest in a multitude 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 rise of ad supported and integration of ads into subscriptions, such as Netflix and Disney+.

Might consumers turn more to entertainment as times get tough? Sure. Might they start engaging more with digital entertainment because they cannot afford to go out as much anymore? Yes. But whatever direction(s) the entertainment market goes, two things are clear: 1) change is coming, 2) the companies that do best will be those that are willing to embrace and drive change.Whatever direction(s) the entertainment market goes, two things are clear: 1) change is coming, 2) the companies that do best will be those that are willing to embrace and drive change.

As the traditional Chinese curse goes “may you live in interesting times”.

The attention recession has hit Spotify too

Spotify added two million subscribers in Q1 2022. Yes, this incorporates the impact of 1.5 million lost Russian subscribers and is set against Netflix having lost 0.2 million subscribers over the same quarter. But while Spotify did well to not suffer the same fate as Netflix, it was not able to buck the broader trend affecting the entertainment market: the attention recession. The attention recession is the combined impact of: 1) the end of the Covid entertainment boom (consumers have less time and money as pre-pandemic behaviours resurface); 2) economic headwinds (rising inflation and interest rates), and 3) the geo-political situation (the Russo-Ukrainian war). Spotify’s Q1 earnings provide further early evidence of the attention recession’s impact. Spotify’s earnings were shaped by all three.

Looking at the ad-supported and paid users of a number of leading digital entertainment companies that have already reported their Q1 2022 results, a clear trend emerges: paid user growth slowed in Q1 2022, while free users continued to grow strongly. With consumers having less time on their hands and less money in their pockets, free is growing faster than paid.

Entertainment monetisation trends followed an almost mirror opposite of user behaviour. The first quarter of every year is typically down from the preceding fourth quarter for ad businesses, with the Q4 advertiser spend surge receding. Yet the declines in Q1 ad revenues for Snap and YouTube were both significantly bigger in 2022 than in 2021, with a combined drop of 22% compared to 13% the year before. Snap’s Evan Spiegel even went on record to explain just how problematic a quarter Q1 2022 had been and how there are growing concerns about the outlook for ad spend. This is because, as consumers have less disposable income, they buy less, which means advertisers get lower returns on their spend. Ad revenue is most often an early victim of a recession.

Conversely, Q1 2022 subscription revenues were up slightly, though much less so than in Q1 2021, and Spotify’s premium revenues were down 1%. Nonetheless, the key takeaway is that subscription monetisation was less vulnerable in the first phase of the attention recession. While free services and tiers benefited from incoming cost-conscious users, they were not able to harness the shift commercially. 

As MIDiA said back in 2020, all companies were going to feel the impact of the attention recession, which we identified was imminent following the pandemic. It is a case of simple arithmetic: more time and more spend during the pandemic benefited all companies. Post-pandemic, both of those increases recede, which means that all entertainment companies have to fight hard to hold on to their newly-found boosts to revenue and users, let alone grow. When we made that prediction, it was before the additional elements of economic and geo-political trends raised their heads. Rising inflation is going to hit all consumers’ pockets (with food and fuel prices being particularly hit), forcing many households to make trade-offs between essentials and luxuries. 

Though Spotify’s move to wind down Russian operations was admirable, it illustrates how the impacts of the Russo-Ukrainian war on digital entertainment will be both varied and far reaching, not least because of its impact on inflation due to its disruption of global food and fuel supplies. 

We are living in ‘interesting times’ and the future is always uncharted, but especially so now. 

Forget peak Netflix, this is the attention recession

Netflix’s Q1 2022 results caused a stir, with subscriber numbers down by 0.2 million from one quarter earlier. Some are calling this ‘peak Netflix’, but this is not a Netflix-specific issue. The decline illustrates that Netflix does not operate in isolation, and is, instead, but one part of the interconnected attention economy – an attention economy that is now entering recession. This is a recession that MIDiA first called back in February 2020, and that the wider marketplace has started to wake up to.

The attention recession – after the boom

When MIDiA made the prediction of ‘the coming attention recession’ over a year ago, we identified that once the world started returning to pre-pandemic behaviours, the Covid-bounce in entertainment time would recede, creating an attention recession. The attention economy had already peaked back in late 2019, which meant that the pandemic and its lockdown attention boom delayed the inevitable negative effects of companies that are competing in a now saturated attention economy. During the lockdown boom, media time went up by 12% and all forms of home entertainment boomed, but as we warned at the time, the effects were temporary, so entertainment companies needed to plan for post-lockdown life. 

A return to a smaller and recently constrained, pre-pandemic attention economy was always going to be painful. We termed this contraction a recession because we knew there would be clear economic aftershocks. Not least because the impact has been unevenly felt. As the first signs of contraction showed, not all sectors were impacted evenly. Pandemic boom sectors, like audiobooks and podcasts, saw larger chunks of their newly-found consumption time disappear. Music clawed back some of its lost share. Video (Netflix included) fell, but social and social video buckled the trend entirely, not simply clawing back some lost share, but actually growing throughout the entire pandemic period to end it with more hours than when it entered it. The arithmetic is simple: total attention hours are falling, social is growing hours, therefore, the remainder of the attention economy collectively experiences a double whammy of decline of time and money. 

The wider economy is beginning to bite too

But, unfortunately, there is more. Since MIDiA made the case for an attention recession, the global geo-political and economic situations have changed – to put it mildly. Inflation was already spiking before Russia invaded Ukraine, and the war’s impact on grain and energy supplies will only accelerate inflation even further. Put simply, consumers will feel growing pressure, with wages racing to keep up with price rises. Discretionary entertainment spend will be one of the earliest victims. Video subscriptions inadvertently made themselves an easy target. The sheer volume of choice and competition, combined with rolling monthly subscriptions, make it all too easy to drop one subscription without seriously denting your overall video experience. But while streaming services now face a potential savvy switcher cataclysm, traditional pay-TV companies have their subscribers locked into legally binding, long-term contracts. It usually costs consumers MORE money to cancel contracts, defeating the purpose of trying to reduce spend. Consequently, we may even see the cord cutting / SVOD growth dynamic invert for a while.

Back in 2020, when we first started writing about the potential impact that an economic recession would have on entertainment, we identified that 22% of consumers would cancel one or more video subscriptions, and that 22% would downgrade from paid to free on music. Netflix’s earnings are the first signs of this consumer intent manifesting. Other subscription video on demand (SVOD) services should not consider themselves immune. Even if the economy was to stabilise tomorrow, the long-term outlook for SVOD will most likely be defined by savvy switchers continually hopping across services to watch the shows they want. SVOD subscribers had found themselves thinking the new boss looked pretty much like the old boss, having to subscribe to so many services that their SVOD spend ended up looking a lot like those old pay-TV bills. In a recession, consumers will need SVOD to deliver on the price benefit more than ever before. 

When price increase can be hindrance, not a help

A lot has been made of how great a job Netflix has done in increasing its prices while streaming music has not – heck, even I did it. Increasing prices above the rate of inflation may a) reflect Netflix’s actual market worth, and b) help drive revenue growth, but it makes Netflix exposed in a hyper-competitive SVOD market that is entering an attention recession and, potentially, an economic recession. 

Circumstances may well look very different for music. Firstly, the vast majority of music subscribers only have one subscription, so if you cancel, you lose all the benefits of a paid account, not just a slice of choice. Secondly, music subscriptions have reduced in real terms because they have not kept track with inflation. In fact, prices have hardly moved at all in 20 years. While this has long been seen as a problem, in the current circumstances, it might be an asset. Music subscriptions represent good value for money, and with inflation pushing upwards, they will represent even better value for money as every month passes. Perhaps now is not the best time for music price increases.

Reasons, not ways, to spend attention

So, with all this doom and gloom, how can entertainment companies survive – perhaps even thrive? Long term, annual billing for digital subscriptions is a logical step, but for those who do not have them, now is not the best time to try to commit to large payments, unless there is some serious discounting in place. Multi-format bundles, like Apple One and Amazon Prime, will also be well placed. Ad supported services will also do well. But it will take more than clever billing and bundling. It will require a fundamental reassessment of the relationship with the audience.

One of the key calls MIDiA made in our 2022 predictions report was the new need for reasons, not ways, to spend attention in the attention recession:

“[Entertainment companies] will not only lose time, but end up lower than pre-pandemic levels. With such fierce demands on their time, audiences will need to be given reasons, not ways, to spend their attention.”

This might also be the moment for the next generation of emerging tech majors like Byte Dance and Tencent who’s businesses have a strong focus on ad supported and monetizing fandom rather than the commodified model of monetizing consumption. As Facebook’s declining user numbers showed, even in the booming social sector, a realignment of the marketplace is happening.

In the attention recession, entertainment companies need to start appreciating that consumer attention is a scarce resource, not an abundant one – a resource that must be won, not claimed. Those who do not will be the most vulnerable to the vagaries of the attention recession.

The attention economy after the lockdown boom

The attention economy is the cornerstone of all entertainment businesses. Throughout the 2010s, it just grew and grew, with more and more digital entertainment options filling consumers’ downtime. Staring out of windows and being bored at bus stops was replaced by Netflix, Fortnite, Spotify, Instagram and TikTok. Then, as the decade drew to a close, the attention economy became saturated. Instead of competing for unused hours, everyone was competing with everyone else. Cue Netflix’s cofounder and CEO, Reed Hastings, to claim he was competing more with Fortnite than he was HBO. This binary equation did not have time to really bite before the global pandemic hit, suddenly turning back the attention economy clock. More people stuck at home with more time on their hands and money in their pocket resulted in a 12% boost to the attention economy. But it was clear that as soon as the time came for pre-pandemic routines to return, the temporary boom would fade, sending the attention economy into negative growth. That time has come.

The attention recession is here

When MIDiA first predicted the coming attention recession, it felt like a world away to most entertainment companies because the high tide of lockdown raised all entertainment boats. Most entertainment formats grew. But the thing is, some grew faster than the 12% average, while others grew more slowly. This meant that, in isolation, a given entertainment company might have reflected on record performance, while, in reality, they were losing ground on competitors – both within and beyond their respective industries. This was an esoteric concept when everything was up, but once pre-pandemic routines started to return, those that lost share during the lockdown era were the least well placed to deal with the attention economy contracting once more. Entertainment audiences developed new behaviours that were sustained over such a long period that they became habits – and habits can be hard to shake. 

By the end Q2 2021, 42% of the extra time gained during the pandemic had already gone. Combined average weekly entertainment hours had gone from 53.1 hours in Q4 2020, to 50.7 hours. While this was still up from the Q2 2020 total of 47.4 hours, the first phase of the attention economy’s contraction is clear to see. Crucially, though, the fall back was not evenly distributed. Games, news and audio (podcasts, audio books, radio) all fell by double digit percentages in Q2 2021, while music and video fell by much smaller amounts. Meanwhile, social media and social video actually grew. The arithmetic is brutally simple: if social grew while total time declined, their win was someone else’s loss.

The contraction still has much distance to run

With Covid infection rates rising, and lockdown measures returning in some markets, there is a reasonable chance that the contraction may lessen, or even pause, in affected markets in Q4 2021. But the underlying trend has an inevitability to it. Whether it is now or next year, the attention recession is going to bite – and it is going to bite hard.

In such a fiercely contested environment, every form of entertainment, from music, to video, to games, is going to need to give its audience reasons, not just ways to spend attention. Every minute of attention is going to be hard earned. 2022 and beyond will be shaped by fierce competition from entertainment companies that are trying to hold onto as much of their recently gained time as possible, which, in the finite attention economy, will mean others will not only lose time, but end up lower than pre-pandemic levels. Matters will be complicated further by consumers multitasking more than ever in order to try to squeeze in as much entertainment as their waking hours will permit. While this will tick the hours-spent box, it will devalue that time spent, to the extent that attention may not even be attention at all.

The findings in this post come from MIDiA’s latest report Attention economy: After the lockdown boom. The report contains detailed data and analysis of just how media consumption has changed across 15 different forms of entertainment. If you are not yet a MIDiA client and would like to learn how to get access to this insight, email stephen@midiaresearch.com.