Entertainment industry disruption: the fight for your free time

June 2022

Key Points

  • From Amazon’s takeover of MGM Studios to Spotify’s shift into audiobooks – the entertainment landscape is rapidly changing
  • This disruption creates new investment opportunities
  • It’s not just intellectual property creators and distributors that are of interest, but also the firms providing the technologies they require

© Shutterstock / Wachiwit

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Against the echo of gunfire, an arm thrusts into view grasping for a bejewelled glove. There’s a flash of light and the grinning face of supervillain Thanos is revealed – not in a movie but a 2018 video game trailer.

Fortnite’s ‘mash-up’ with Disney’s Avengers sequel was the first of many. Developer Epic Games went on to repeat the trick with other companies’ characters, as well as real-life stars including the singer Ariana Grande.

Such crossovers, in which different companies let their intellectual property assets mix for mutual benefit, are becoming increasingly common. They represent a rethinking of old ‘walled garden’ rules. They’re also evidence of how quickly the entertainment world is changing.

Other examples of this new dynamism include the rise of TikTok and its short-form videos, Spotify shaking up how we listen to music, podcasts and soon audiobooks, and Amazon gaining the rights to the James Bond franchise after acquiring MGM Studios for $8.5bn.

WATCH: Investment manager Robert Wilson discusses the future of entertainment in his Disruption Week briefing

“The idea that Bond could be used to help sell toothpaste or shoes by attracting consumers to sign up to Amazon Prime is a totally new concept,” says investment manager Robert Wilson, who took part in Baillie Gifford’s recent Disruption Week webinars.

For an asset manager focused on the long term, this degree of disruption creates exciting avenues to explore.

“One of the most interesting contextual elements is the decline of the younger generations’ interest in offline social institutions, such as local sports clubs, religious organisations and unions. That means people have more free time and want new ways to create social meaning and identity.

© Columbia/Eon/Danjaq/Mgm/Kobal/Shutterstock.

“That’s combined with a Moore’s Law-like progression in technology that facilitates creativity, increases the availability of content and lets people be more social online.

“It all creates a very broad set of opportunities.”


Platforms, picks and shovels

As a stock-picker focused on long-term growth, Wilson says he finds it helpful to divide the entertainment industry into three categories:

  1. Content creators
    Firms involved in the making of games, books, films, music and other media.

  2. Distribution players
    Companies providing access to professional and/or user-generated content via proprietary internet platforms or other means.

  3. ‘Picks and shovels’ providers
    Businesses making the underlying technologies that enable the above. The phrase is thought to originate with Mark Twain: “When everyone is looking for gold, it's a good time to be in the pick and shovel business.”

Baillie Gifford’s strategies tend to focus on opportunities among the second and third of these groups. Wilson describes this as “erring on the side of neutrality,” in the sense that portfolios have little exposure to companies whose fate could turn on a singular media product being a hit or flop.

He gives Spotify and TikTok’s owner Bytedance as examples of distribution players.

And he says NVIDIA is an example of a ‘picks and shovels’ firm. Its graphics processing unit (GPU) chips and CUDA software drive machine learning-based recommendation engines and push the bounds of video game imagery.

“They have the best technology and people recognise that,” he says.

Epic Games also fits into this category because of its Unreal Engine, a tool it offers to game developers to create detailed 3D environments. It is free to use, but Epic takes a cut of royalties once sales of a title pass $1m.

“It allows developers to focus on the mechanics and social aspects of their games, what makes them fun, as opposed to getting into the weeds of how the lighting or sound is generated,” Wilson says. “It’s a really intelligent bet by Epic and one reason I’m particularly excited about the firm.”

Some companies cross the lines between these categories.

Microsoft, for example, is paying $69bn to add Activision Blizzard to its roster of games studios. It distributes titles via its Xbox Game Pass. And it provides cloud computing technologies via its Azure service. Likewise, Amazon covers all three bases.

But employing the mental model helps Wilson consider each activity and seek out new opportunities for clients.

And he notes that he isn’t ruling out pure-play content creators being potential investments, so long as they carve out a niche for themselves.

Wilson offers A24 as an example of one such private company Baillie Gifford has explored. The film and TV studio dedicates itself to creating ‘ultra-premium’ content. By focusing on being a place talented people come to make interesting and novel output – such as the Oscar-winning film Moonlight or the provocative TV teen drama Euphoria – A24 has created a ‘flywheel’ in which each of its successes drives the attraction of further creative talent.

In cases such as this, Wilson suggests, being acquired by a distributor or trying to evolve into one could be self-destructive.

“The more you integrate supply-chain elements and try to capture more of the economics, the harder it becomes because you can trap yourself into producing a particular type of content,” he explains.

“And if that content suddenly lacks the audience you thought was there, you no longer have the same level of flexibility to change. And that can really hurt a business.”


Netflix v TikTok

Wilson notes that one advantage of being a generalist investor rather than a specialist gaming analyst, for instance, is that he gets to consider the entertainment sector as a whole.

That encourages him to compare companies that are involved in different activities but nevertheless compete for people’s free time, which can be illuminating.

For example, Wilson highlights the disparity in the amount of time Netflix and TikTok attracted in 2021.

“TikTok effectively had twice the level of aggregate engagement as Netflix,” he explains.

Estimated number of minutes watched in 2021


Source: Prof G Analysis, Company Data, Statista, Wall Street Journal.


“The revenue distinction is even more stark, and the profit distinction starker still. That’s because TikTok’s input costs are lower – it’s a user-generated content platform, while Netflix invests heavily in shows and films.

“It’s too soon to know what Netflix’s long-term competitive position will be. But this shows how some models in the entertainment space are profound in ways we haven’t seen before.”

That’s not to suggest Netflix doesn’t still have good growth prospects.

Wilson noted that Netflix has about 220 million subscribers, which is still far short of the two billion or so people paying for a TV service of some kind.

And while he acknowledged that it has struggled in some markets, including India, Indonesia and parts of Africa, a forthcoming advertising-supported subscription tier might help address this.

“Netflix is not operating as a US domestic company trying to go global, but as a genuinely global company. That’s a journey that very few companies have been on.”


Metaverse misgivings

Baillie Gifford takes the long view. That involves considering what the world could look like a decade-plus from now and which companies might thrive.

So what happens if you stretch the horizon to 2050?

If you believe the hype, we’ll spend most of our time in the ‘metaverse’, an amorphous term for an immersive computer-generated place to play and socialise. But Wilson evaluates the investment opportunity on his own terms.

“The word metaverse conflates a lot of different ideas,” he says. “And I’m wary of claims that they will all come true at once and all the value will accrue to one company. So I try to peel the ideas apart.

“But I do think we are set for meaningful increases in virtual reality [VR] and augmented reality [AR] technology, and in the monetisation of games as they become increasingly social worlds.”

Sony and Meta currently lead the field in terms of VR entertainment.

But Wilson believes companies like Roblox could be poised to benefit too. It already encourages third-party developers to create new items and experiences on its gaming platform and then lets others play and purchase them with Robux, its virtual currency.

© Shutterstock / Miguel Lagoa

The firm has only dabbled with VR to date but has laid foundations for the future.

“They’ve spent a long time working on their technology, achieving a good market fit with school-age children and enabling developers to create compelling content. Now we’re seeing them expand into other categories beyond games and attracting a slightly older audience too.”

Wilson adds that there are rich opportunities for picks and shovels companies too. Epic Games’s frequent ‘extended reality’ updates to its Unreal Engine, for example, mean developers already widely use it to create VR and AR experiences.

“The things being enabled in terms of creativity make this broad sector hugely exciting,” says Wilson.

“And if you’re willing to be a long-term patient investor in select companies, gains should follow over time.”


Words by Leo Kelion


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