Online entertainment industry - “shaken, not stirred”

Amazon this week announced plans to acquire MGM in a transaction worth $8.45 billion – a deal that encapsulates some of the biggest trends of our time, including the convergence of big tech and entertainment and the way in which the pandemic has accelerated digital adoption. The acquisition is Amazon’s second largest after its $13.7 billion purchase of Whole Foods in 2017.

The transaction will position the Amazon Prime Video streaming service as a more formidable competitor to Netflix and Walt Disney, with around 4,000 films in the MGM catalogue. MGM is the Hollywood studio behind films like the James Bond and Rocky franchises. Its TV catalogue includes shows like The Handmaid’s Tale, Fargo and Vikings.

AT&T to merge entertainment and media assets

Earlier this month, AT&T announced plans to merge its entertainment and media assets with those of Discovery. This proposed merger brings together Warner Bros. Entertainment, which owns the Harry Potter and Batman franchises, with Discovery’s home, cooking, nature and science shows. Sony, meanwhile, announced plans to spend 2 trillion yen ($18.39 billion) over the next three years on strategic investments that include growing subscribers to its gaming and entertainment services.

The media streaming wars are heating up in the wake of a pandemic that has sparked a home entertainment boom. Despite blips such as Netflix’s disappointing Q1 results, this industry should grow from strength to strength. Research forecasts that the global over-the-top streaming market will surge from $121.11 billion in 2020 to $141.17 billion in 2021, representing a growth rate of 16.6%.

“The Internet is the greatest thing that ever happened to the entertainment industry.”

– Michael Ovitz, American businessman, investor, and philanthropist.

“I think that the Internet is going to effect the most profound change on the entertainment industries combined. And we’re all gonna be tuning into the most popular Internet show in the world, which will be coming from some place in Des Moines. We’re all gonna lose our jobs. We’re all gonna be on the Internet trying to find an audience.”

– Steven Spielberg

Global News

In a response to this shake-up, the Walt Disney Company plans to shut down 100 of its international TV channels by the end of 2021 as it plans to focus on its streaming services like Disney+. According to Bloomberg, Chief Executive Officer Bob Chapek said that “consumers are increasingly choosing to watch content online, and Disney wants to stay ahead of the trend”.
In the US, jobless claims fell to a new pandemic low of 406,000. Data shows that worker filings for jobless benefits fell again in the previous week, offering further hints of economic revival. Weekly applications have halved since January.
In different news from the US labour market, some companies are finding it hard to hire, despite high unemployment. Market commentators speculate this may reflect reluctance among Covid-wary workers to expose themselves to the virus, or may mean that some are disinterested in low-paying jobs while generous government support is still on offer. It will be interesting to see how this plays out as stimulus winds down and vaccines reach the majority of the population. The New York Times has more.
In a continuation of the inflation narrative, we have commented on in recent newsletters, some central banks are growing more hawkish. New Zealand and Canada’s central banks recently signalled a potential interest-rate increase next year. Financial markets also appear to be pricing in a potential rate hike from the Fed a year earlier than previously expected. The Bank of England is meanwhile expected to switch from rate cuts to a rate increase by late 2022. Central banks in the rich world are, however, likely to first start tapering down bond buying and other easing programmes before hiking rates.
In the UK, official numbers show that EU trade fell by almost a quarter at the start of 2021 compared with the same period three years ago. This is blamed on the new trade barriers caused by Brexit. A side effect saw China eclipse Germany as the UK’s biggest single import market for the first time. Imports from Germany fell by a quarter to £12.5bn in the first quarter.
Following on last week’s News Flash entitled “Green – not just the colour of money”, the oil giants are coming under increasing pressure from environmental groups, activist investors and regulators to transition to cleaner forms of energy. A Dutch court has ordered Shell to reduce its carbon emissions by 45% by 2030, compared with 2019 levels, after ruling that the oil company was partially responsible for climate change.
In car industry news, Ford has become the latest traditional auto manufacturer to announce credible plans to take Tesla on in electric cars and win. It is spending $30 billion by 2025 on electric vehicle development and expects 40% of its sales to come from these vehicles by 2030. Meanwhile, it’s becoming clear that the self-driving car revolution is still some way off. Uber and Lyft have all but given up on this space, and it seems as if autonomous vehicles may only become commonplace towards the end of the decade.
In Covid related news, the US is now recording fewer than 30,000 new Covid-19 cases a day on the back of its successful mass vaccination programme. Nearly half of Americans have received at least one vaccine shot.

Local News

In local entertainment related news, eMedia is planning to launch a streaming video offering called eVOD in July. Interestingly, earlier this year it was reported that the biggest streaming platforms in South Africa are Netflix and Showmax, with an estimated subscriber base of around 400 000 and 595 000 respectively. These figures are expected to soar, with Statistica projecting that the number of video streaming subscribers will reach 9 million by 2025.
According to Stats SA data, producer inflation increased 0.7% month-on-month in April, mostly in line with economists’ forecasts. The major contributors to annual inflation were food products, beverages and tobacco products, up 6.7%; products in the coke, petroleum, chemical, rubber and plastic category, which climbed 11.9%; and metals, machinery, equipment and computing equipment which increased by 8%. This is a significant increase on March’s 5.2%.
The rand rallied this week to its strongest level against the dollar since February 2019 and was trading below R13.80/$ at the time of writing. The question is how long this can last. This week’s currency research produced by our Investment Committee continues to show that the rand is trading stronger than fair value as determined by our model. It outlines three factors that are driving rand performance versus the dollar: South Africa’s attractive interest rate differential with all developed economies as well as many other emerging markets; dollar weakness due to the US Federal Reserve providing unprecedented liquidity into the US economy coupled with large fiscal stimulus; and a domestic trade surplus windfall due to high commodity prices. Importantly, there is no SA-specific risk being priced into the rand at present (as calculated by our model).
On the topic of the rand, the South African Reserve Bank (SARB) is considering issuing a central bank digital currency, or CBDC. Such a digital currency would be linked to the rand on a one-to-one basis, with its value protected by SARB’s monetary policy and inflation-targeting regime.
Finance Minister Tito Mboweni revealed that the ten most-indebted state-owned enterprises firms have an estimated R289.9 billion in loans maturing by the end of March 2025. They include Eskom, which has a total of R401 billion rand in liabilities. This is down from R484 billion a year earlier.
In other electricity related news, Absa, Investec and the Development Bank of Southern Africa indicated they could support a bid by a Karpowership to offer to supply 1,220 megawatts of power from ship-based, gas-fired plants. Karpowership’s contract is facing a legal challenge from DNG Energy.
Even as South Africa struggles to recuperate from the debt incurred by other state entities and the corruption scandals that surround them, plans for National Health Insurance (NHI) seem to be moving full-steam ahead. This week Ryan Noach, CEO of Discovery Health, pushed back against a “preposterous proposal” to nationalise medical aid members’ money to help fund the NHI.
Investigator Paul Holden connected the dots for the Zonda commission this week, showing how almost R50 billion of money lost to state capture by the Gupta family could be traced through invoices and bank statements. He warned that the true cost to the state is definitely higher.
Former President Zuma was back in court this week to answer a case that predates the state capture allegations unpacked at the Zondo Commission. He pleaded not guilty to charges surrounding alleged kickbacks linked to the multibillion-rand arms deal of the 1990s. Once charges are read and an accused pleads, the state cannot withdraw its case.