Insight

What media companies need to prioritize now: Customers, cash, cost and capital

Rapidly shifting market dynamics drive need for a coordinated strategic response from all media companies

Michelle Wroan

Michelle Wroan

National Media Industry Leader, KPMG US

+1 213-955-8657

In my previous blog I introduced three coordinated series of actions that media businesses should undertake in response to COVID-19 challenges: 1. Resilience, 2. Recovery, and 3. New Reality.

Today, I will discuss the immediate actions media companies should take to preserve cash, maintain a strong connection to their customers, and position themselves for business continuity. These “Four Cs” – Customer, Cash, Cost, and Capital – are a handy way to think about the top priorities in these turbulent times.

Customer

COVID-19 has a good-news/bad-news impact on the media industry’s customer growth. It has led to a spike in streaming and broadcast TV viewership. For example, Netflix added 15.8 million subscribers in Q1 2020, twice as many as in the previous quarter. On the other hand, cord-cutting is likely to accelerate with the cancellation of sports and other live events. Additionally, churn of streaming subscribers could increase due to rising unemployment, causing consumers to make choices among their streaming services.

Under these conditions, it is essential to evaluate the shifts in customer data. Companies should perform revenue analytics and model churn risk to understand changes in demand patterns and the resulting implications for pricing to be able to react swiftly. Media companies can use this analysis to identify high-value/high-risk customers and proactively develop mitigation plans, such as establishing a Renewal War Room or reviewing contract renewal price options to understand trade-offs between time commitments and discounts from the customer perspective.

Cash

Changing circumstances and the economic downturn are impacting liquidity, with some media subsectors impacted more than others. Without physical attendance at theaters and other venues, many are unable to generate cash flow. Even those businesses that are positively impacted by an increase in subscribers and users may face liquidity issues based on their level of reliance on ad revenue. For example, online and social media businesses have, on average, 6 months worth of cash to cover opex without any incoming cash flow, compared with about 5 weeks for broadcasters.

Businesses should assess how their cash and liquidity levels can support them through times of disruption. Further, businesses should identify opportunities to improve working capital positions, using rapid diagnostics and impact assessments for accounts receivable, accounts payable, ability to monetize existing content libraries and archives, etc., and access any funding opportunities the CARES Act provides to quickly optimize cash flow for the business.

Cost

Many companies have initiated furloughs and layoffs to minimize costs as productions, venues and events shut down. However, to ensure liquidity throughout the upcoming recession, businesses should identify any discretionary costs that can be reduced, such as media, PR, and advertising—in particular, anything related to postponed shows, films, or events. It is a good time to align support functions to peer benchmarks and future demand, which might include consolidation of back and middle office departments. This will best position businesses ahead of a GDP shift, which impacts the profitability of media businesses differently, depending on subsector.

Capital

Capital expenditure has grown in line with revenue for most media companies over the past 10 years (capex held steady at about 1 to 3 percent of revenue from 2009-19).  However, with production halting and live entertainment venues (concert halls, stadiums, theme parks) out of use for an extended period, businesses should assess capex to reduce and reallocate as needed to meet future demand scenarios. Anything that isn’t driving revenue, saving costs, or otherwise obligated should be reviewed for possible elimination or postponement.

Risk and compliance issues around the Four Cs

When addressing the Four Cs, businesses should not overlook new risk and compliance issues resulting from COVID-19, which might include new health and safety protocols, as well as the implementation of new touchless, digital technologies. Any decision should take into account the costs of these changes and the increased health and safety risks for customers and employees, and potential negative reactions for failing to do so.

Immediate actions that preserve cash, give confidence to customers and employees, and ensure business continuity through cost containment will better position companies for recovery.

Learn more about how technology, media and telecommunication companies are playing a crucial role in addressing the COVID-19 challenge.