The Takeaway: A Q&A With John Lambros on M&A and AI in the Digital Media Sector
How has the digital media sector performed over the past 12 months?
Broadly speaking, digital media was clearly impacted by the recession and inflation concerns over the past 12 months and felt it earlier than most other sectors because of the dependence on advertising and/or the consumer in most business models. Most companies experienced some form of fallout from the broader market environment in 2022, whether that was higher running costs or a drop in revenue growth owing to a pull-back in ad spend. The uncertainty of the future and inability to guide forward numbers with reliability became an increasing issue impacting public company valuations. As we move into the latter half of 2023, however, and look toward 2024, we’re hearing a more cautiously optimistic tone across the sector. Some businesses have used the period to accelerate growth by establishing more diversified monetization models, including subscription, e-commerce, and affiliate sales to name a few. Others have focused on rationalizing operations and driving toward greater profitability. And of course, AI is on the tip of everyone’s tongue.
Can you elaborate on the impact of AI on the digital media sector?
We love AI—it will become a tool that will harness incredible productivity and ultimately creativity across every sector, but especially in digital media and in those areas where technology, software, and content intersect. In terms of the creator economy, AI will accelerate what software has already started, which is the breaking down of the traditional (linear) barriers to creativity, giving users the ability to make, collaborate, and distribute content more easily, globally, and more broadly than ever before. We’re seeing the power of AI evolve at a rapid pace and predict the capabilities for systems like ChatGPT to expand tremendously over the next year. Utilizing AI while navigating the complexities of IP ownership will undoubtedly be one of the more complicated issues that will need to be addressed (as we have already seen in the negotiations around both the SAG and WGA strikes).
As companies continue to embrace AI, establishing and maintaining trust will become increasingly important. AI’s ability to help equalize content creation by making it more accessible means that trust will become a key brand differentiator. Consumers are still going to rely on brands they trust to navigate information, and they’ll continue to steer to authentic voices versus machine-made content. There is the opportunity for companies to differentiate themselves and engender trust based on how much and how well they focus on integrating human ability with AI technology.
How are media brands capitalizing on this?
As one example, we are already seeing video game studios utilize AI to accelerate game development. As an example, basic character artwork that historically may have taken a game developer a week or more to create can now be created via AI with minimal guidance in a matter of minutes. Such AI tools are expected to reduce game development time and cost, which could be a long-term positive for the video game industry.
Like broadband ubiquity and the smartphone revolution before it, AI will be integrated into everything we do at some level, and there will be helpful and harmful consequences. To put it in perspective, we recently hosted a Midsummer Music Tech dinner with a number of leading music industry executives, tech companies, labels, and investors in the sector. We were joined by a leading industry analyst from MIDiA Research, Tatiana Cirisano, and in the Q&A after dinner, the topic of AI came up. After a healthy discussion, what we concluded, at least for now, was that AI will challenge both the establishment (in this case, the major labels) as well as the artists, but that the “remix culture” we are in right now—this cross-over between music creation and social media—offers an opportunity for new revenue streams around music. We’ll need rights protections and a legal framework, but actually, the technology and payment platforms are emerging to help accelerate creativity while also providing a foundation for monetization and protection of original IP. Ultimately, whether you are thinking about music or sports (from professional teams to franchises like F1), video games, or content brands (like Marvel Comics or Barbie), the media world will need to increasingly center its next phase of growth around fandom, identity, and creativity. Honestly, amidst all the changes—and we know how much we hate change—the future looks extremely exciting for digital media.
What has led to this cautiously optimistic attitude?
Our macro-optimism comes fundamentally from the shift to digital consumption, which continues. Companies that can gain scale and achieve profitable growth (whether via social media, streaming video, audio/music, sports, and video games) will emerge as the winners and the consolidators in a world where size, growth, and profitability matter. We are also true believers in the growing importance of the creators and the creator economy, which is set to continue to drive industry growth and disrupt traditional models. It is a primary driver of growth in users and revenues across the leading social media platforms today and is already having a large impact across the audio/music industry. We expect the creator economy will impact virtually every corner of the media landscape (as a driver of growth and change) over the next 10 years.
Other reasons for optimism heading into 2024? Uncertainty and concern around the macroeconomy have subsided and a growing view that most of the rate increases are now behind us. With more confidence in a potential “soft landing” and the potential for lower rates heading into 2024, digital media companies are well set up to return to growth after a mixed 2023 and greater profitability (after having spent the past 12+ months rationalizing cost structure). Additionally, ad-driven media companies expect the upcoming election cycle to provide another catalyst for growth. Lastly, and importantly, while it may not have a huge impact on 2024, media companies may also start to feel productivity and cost benefits from AI tools, thus positively impacting profitability in 2024 and beyond.
Though not out of the woods, the sector is in a very different place compared to 12 months ago. Google, Amazon, and Meta’s historical dominance over ad spend is starting to lessen, with advertisers turning their support towards other ecosystems. Brands—which I will define broadly to include a business or a personality/creator—have more tools, software, CRM, and analytics to manage the engagement and monetization of their audience and, in turn, present them as desirable targets for advertisers.
Will we see an increase in transactions in the second half of 2023? What themes/trends are you looking out for?
We’re seeing an active market in late 2023, with both the M&A and financing markets set to perform well in the back half of the year. There is a large backlog of deals on the horizon—a combination of a hangover from last year, as well as new deals coming to market. While the market is particular about what it wants, it remains open to high-performing companies wanting or needing to transact.
In terms of what to expect, there is going to be more scrutiny on whether a company’s actions match its statements. We’re still in “show me” mode. It is imperative that companies present a “profitable growth story” to the investor community. This includes maintaining an open dialogue around their projections and plans to evolve, their spending, and their core growth initiatives. Many of the companies we are talking to have expressed increased confidence in their business plans—a promising sign for the year ahead. Bottom line: The market wants to believe in forecasts and growth plans again, and as we move out of economic uncertainty, this comes into focus more easily.
So, what’s The Takeaway?
We’re back—and we believe that the worst seems to be behind us as we head into H2 2023 and 2024. Significant change is creating new opportunities for both investment and M&A in diverse areas of digital media as broad as streaming (video and music), video games, creator tools, the future of audio, social platforms, and influencer markets and in a variety of advertising models. The combination of considerable cash still on the sidelines, combined with lower market valuations and the prospect for flattening or (possibly) lower interest rates, creates a very positive environment for M&A and consolidation opportunities.
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