Will 2024 bring good tidings to media and telecom companies? That's unlikely

It is human nature that a new year brings optimism and hope.

For executives, investors and workers in the entertainment and telecommunications industries, 2024 will be disappointing.

Maybe that's too grinning. Some things will get better. The actors' and writers' strikes are over. The 2024 U.S. presidential election should help boost advertising dollars as global TV ad revenues will fall 18% this year, according to media investment firm GroupM.

Companies like Warner Bros. Discovery And Disney cut thousands of jobs and drastically reduced content costs to boost free cash flow and pay down debt. That could give investors a reason to be more optimistic about their business prospects next year. Disney recently reinstated its dividend for early 2024 after suspending it for more than three years.

Yet older media companies, including Disney, continue to Big global, Warner Bros. Discovery and ComcastNBCUniversal's NBCUniversal has been trying to figure out what investors want since retreating from the subscription streaming video growth story that dominated 2020 and 2021. Warner Bros. Discovery and Comcast have outperformed the S&P 500 in 2023, albeit barely. Disney and Paramount Global have underperformed.

The prevailing narrative for 2024 appears to be one of uncertainty on three key fronts: interest rates, regulatory policies and overall growth prospects. The industry would need more clarity on all three issues by 2025 to make progress, said Corey Martin, managing partner at entertainment law firm Granderson Des Rochers. Next year will likely be about preparation for action rather than actual transformation, Martin said.

“2024 is likely to be a year of continued uncertainty,” Martin said. “It's really a continuation of a pattern we've seen since mid-2022.”

After the benchmark Interest on 10-year government bonds hit a 16-year high in October, and rates have fallen as the Federal Reserve said it plans multiple cuts in 2024 and beyond. The Fed's overnight interest rate is between 5.25% and 5.5% – significantly higher than rates since the 2008 financial crisis.

Rate cuts next year could push transformational dealmaking into 2025. If media or technology companies want to acquire large assets and don't have the cash on hand, they will want to wait for cheaper money.

“At the end of November, I had lunch with the CEO of a major studio, and what he expressed is the uncertainty about operating in this monetary policy environment,” Martin said. “What is the cost of capital? Am I better off betting until 2025, where I have more clarity on when rates will fall or remain static?”

Still, major deals could be announced in 2024, assuming the process to close them will take 12 to 18 months. By then, companies can expect interest rates to drop to levels more in line with the past decade.

Shari Redstone has been in discussions in recent months to potentially sell National Amusements, the controlling holding company of Big globalThat's according to people familiar with the matter who declined to be identified because the discussions are private. If that deal comes to fruition in 2024, it could trigger a wave of strategic transactions, including the sale of moribund cable networks to private equity firms, across the media and entertainment industry, regardless of the macroeconomic environment.

National Amusements declined to comment.

Three CEOs of major media and telecommunications companies told CNBC privately that they hope for new regulatory policies – perhaps in the form of a change in presidential administration – to facilitate the necessary consolidation. Existing rules restricting ownership of regional channels prevent or discourage companies such as Sinclair, Tegna, Next star And Gray television of merging.

There is additional concern that Federal Trade Commission Chair Lina Khan or other regulatory leaders appointed by President Joe Biden in 2024 and beyond will not take kindly to the combination of cable and wireless assets. Although companies in Europe own both, cable ownership is still separate from wireless network operators in the US. Companies like Comcast and Charter along with either one AT&T, Verizon or T-Mobile could increase companies' pricing power and eliminate competition, which Khan would likely view as anticompetitive.

There's also an ongoing dance between NBCUniversal, Warner Bros. Discovery and Paramount Global. Many media viewers assume that two of those three companies could merge, leaving the third without a dance partner. How regulators would view a combination of these assets is yet to be determined. A deal between NBCUniversal and Paramount Global that would bring together the broadcast networks CBS and NBC under one corporate roof seems like a straight non-starter without divesting either network.

“There will be a final round of industry consolidation,” said John Harrison, media and entertainment leader at EY Americas. “Structurally, it is not economically healthy for streaming. Companies need to get their cost structures in order now that linear TV is declining. But there's a hesitation to pull the trigger on something big when you know how quickly the disruption is happening. and you need an 18 to 24 month review process to get a deal approved.”

If the two presidential candidates are Biden and former President Donald Trump, relief may not come. Trump's Justice Department blocked AT&T's acquisition of Time Warner before a judge overturned the decision. Trump has also been publicly hostile to NBC and parent company Comcast, calling CEO Brian Roberts a “slimeball” last month in a post on the ex-president's social media platform Truth Social.

Ironically, this could make some companies less burdened by regulatory issues. If executives feel that both Republican and Democratic administrations could pose an obstacle, boards could decide sooner rather than later to move forward with transformational deals. If a deal is blocked, they can try their luck in court.

Since the 'Great Netflix Correction' of 2022, there has been no clear growth story for media and entertainment companies. Cable operator shares continue to move up and down as home broadband is added or removed – a worrying trend that could see growth stalling in 2023. AT&T And Verizon The shares have been neutral for more than a decade, even though they gained fixed wireless customers this year and will likely add more next year.

The number of traditional TV subscribers has fallen again by millions this year. As eyeballs shrink, so will advertising dollars. Next year will also likely be another year of industry losses for most major streaming services. Disney, Paramount Global and NBCUniversal have all identified 2025 as the first full year of profitability for their flagship streaming services.

Media executives have been right-scaling their businesses in 2023 and cutting back on content spending to accelerate the profitability of their key streaming services. Warner Bros. Discovery CEO David Zaslav's pay package was changed so that his bonus is linked to his company's free cash flow and debt repayment. Disney announced last month that cost savings for the year will be $7.5 billion – $2 billion more than the previous target of $5.5 billion.

But the sector remains stuck at low valuations compared to two or three years ago. Disney is preparing for a proxy battle with activist investor Nelson Peltz and former CFO Jay Rasulo, who plan to campaign for board seats based on Disney's poor performance relative to the S&P 500.

“The [Disney] board and CEO [Bob Iger] appear unconvinced that things will get better,” Peltz's Trian Fund Management said in a statement Thursday.

Beyond financial metrics, several executives have personally acknowledged that morale has become an increasing concern at traditional media companies. When uncertainty is so high, there are few clear growth prospects to generate excitement and layoffs are rampant, it is difficult to create cultures of prosperity and retain top talent. One director noted that he increasingly hears from colleagues that running media and entertainment companies is no longer as fun as it was five or ten years ago.

2024 should be a turning point year for the sector. Conditions will improve, or they won't. If they don't, expect fireworks in 2025.

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.

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