When change happens, it often requires a perspective from the past, even years or even decades later, to truly appreciate how meaningful that change was. Sometimes, change happens so fast that it is difficult to appreciate its magnitude because people become immune to the continuous flood of bad news. Currently, we are in a situation where what appears to be a series of unrelated events (war, political crises, climate change, inflation, and so on) are actually indicators of a broader and interconnected wave of change that will reshape the world. And not just for a few months, but perhaps for a generation or even more. It is tempting to think that the entertainment and consumer technology industries are at least resilient. But the reality is different.
First, let’s look at all the main components of change and disruption:
Energy prices Driven largely by the Russo-Ukrainian war, energy prices have soared, with affordability implications for both consumers and businesses (large and small). This morning, the UK energy regulator announced a new spending limit, which will result in a threefold increase in fuel prices annually.
Climate change Europe is experiencing its worst drought in the last 500 years, with shrinking rivers revealing Roman remains medieval hunger stones (warning readers that the end is near if they can read the stone), ghost villages, and even World War II battleships. Forest fires rage (again) across Europe and in the United States, while China is now facing its worst heatwave in history. This also affects fuel, with hydroelectric power providers expecting a major production shortfall in winter due to lower water levels. Power outages have already occurred in China. Climate change may even reduce wind power output. Meanwhile, France is struggling with its nuclear output. There have been talks of energy rationing for consumers and businesses while some countries have already started doing so.
Covid The pandemic has not ended and is likely to return in the winter. We are still dealing with the economic and social dislocations it caused, and governments are still dealing with the effects of large state spending on vaccines and economic support, which may soon be exacerbated by further payments to struggling households.
Food Global grain supplies were worsened by the Russo-Ukrainian war, but food prices overall have soared, with some staple foods in the United States increasing by 38 percent. Several factors are at play (including increased transportation and labor costs), but also climate change (drought slashed coffee crops in Brazil while potato farmers expect significantly reduced crop yields due to drier soil).
Inflation The combined effect of rising food and fuel prices is rampant inflation, with all the above factors exacerbating the situation. The IMF predicts global inflation to reach 8.7 percent, with some markets forecasted to reach 18 percent. Even some digital subscription prices are being raised to catch up. Wages are not keeping up, resulting in the fastest fall in real wages on record. The subsequent cost-of-living crisis is resulting in widespread strikes in France, Germany, Spain, the United States, and the United Kingdom, as well as in major global companies, such as Starbucks and Amazon.
Spending squeeze As prices rise, many low-income families will be faced with difficult choices, such as ‘heat or eat’. With governments (rightly) trying to lessen the impact on low-income households through UBI payments and fuel payments, the second-order consequence for digital entertainment is that middle-income groups, such as older millennials, will likely feel more pressure, not being eligible for as many state payments but still facing the same cost increases. Millennials, of course, are the lifeblood of streaming music, video, and game subscriptions.
Interest rates As central banks try to tackle inflation by raising interest rates, they have increased the cost of debt, which has the second-order consequence of not only making the business of acquiring music catalogs more difficult but also impacting any business that relies on debt, from Netflix to technology startups. This, in turn, will impact the entertainment market, both directly and indirectly.
Recession All of the above will likely culminate in a global recession. However, unlike previous recessions, this one may be a full employment recession. This means people will still have jobs, but they will have much less income.
In normal times, we might be facing one of these challenges, but now we are facing all of them with cumulative and interconnected effects. The result is likely not just a spike that lasts for a year, but instead, it will be a realignment of the global economy, and that is without even considering the dramatic changes in the global geopolitical situation with Ukraine and Taiwan.
It is difficult for all of us to fully understand how all these changes will reshape the world because this combination of factors has never occurred before in modern times (especially because of climate change), which means that no one alive has ever experienced this before, so all of our reference points have limited use.
Although the entertainment economy is not as significant as other factors, it will be influenced by it, with the attention recession adding further spice. Customer declines and slowdowns will likely have a short-term impact, but the long-term shifts will be more meaningful. This could manifest in various ways, such as the emergence of packages (such as Apple One, Amazon Prime, Google One, and Play Pass); the growth of the creator economy; and the long-term rise of supported advertising and the integration of ads into subscriptions, such as Netflix and Disney+.
Consumers might spend more time on entertainment when times get tough. Certainly. Could they start engaging more with digital entertainment because they can’t afford to go out as much anymore? Yes. But whatever direction the entertainment market takes, two things are clear: 1) change is coming, and 2) the companies that will do best are those that are willing to embrace and drive change.