Online advertising growth at big tech firms has flatlined, with real-term declines at Meta and YouTube. The weakness is concentrated in higher funnel ads.

Advertising is a leading indicator. A hardware slowdown is coming, services growth is stuttering, and businesses will want to save on cloud services.

Investors are hostile to attempts to spend through a downturn, but competition from TikTok and developments in AI demand targeted investment, while Meta is pot-committed to the metaverse. Tech giants are looking for savings elsewhere.
 

Cost-of-living pressures and tougher fixed competition drove VMO2’s revenues (just) back into negative territory this quarter.

Synergy benefits, however, delivered impressive EBITDA growth (+5%) with more to come as the Virgin Mobile MVNO shifts on-network next quarter.

We struggle to foresee convergence becoming the company’s next growth driver as trailed by the CEO, but the mobile outlook is fairly robust and there are steps that can be taken to shore up the pressurised fixed business.

Revenues were stable year-on-year in Q3, with UK growth offsetting Continental decline. All three markets posted positive customer net adds across the quarter.

Underlying profitability is improving, and although World Cup-related changes to the football schedule depressed net income in Q3, they will lift it in Q4.

A possible sale of Sky Deutschland would make sense if it helps the buyer reach superior scale within Germany.

Advertisers are rushing to create immersive virtual experiences to promote their brands, particularly on social gaming platforms with large built-in audiences. The interest shows no sign of waning.

We are in the very early days of metaverse marketing: formats are bespoke, costs are high and the data provided by platforms is rudimentary. Not all product categories are suited to a virtual incarnation.

The long-term promise is tantalising: advertising that is better than its real-world counterpart, that forges new relationships with customers, and that forms part of the product offering rather than just promotional activity.

For the media and entertainment industry the dawn of the metaverse, and the word soup of acronyms that accompanies it, is the latest high-profile technology wave that threatens to simultaneously upend established distribution models and reinvent both the experience and relationship with the audience.

Many companies will feel they have been here before. The last 25 years have seen technologies move from linear to on-demand and physical to digital; and devices from fixed, heavy boxes, to always connected and mobile-first. Some companies never recovered from these changes.

The next 24 months is a particularly useful window to invest at small scale and with limited downside risk. With audiences small but influential, there is opportunity to start early, develop robust test cases and establish new community-building and storytelling formats.

For the media and entertainment industry the dawn of the metaverse, and the word soup of acronyms that accompanies it, is the latest high-profile technology wave that threatens to simultaneously upend established distribution models and reinvent both the experience and the relationship with the audience.

Music is the media sector (outside gaming) that has moved fastest to experiment with metaverse applications, so far mainly on gaming platforms like Fortnite and Roblox, which provide a ready game-centric audience but offer little lasting innovation.

Music's metaverse potential beyond gaming is huge, led by artists who want a more dynamic online presence, though we anticipate a long trajectory towards mainstream applications as questions remain around formats, design, platforms, and monetisation.

The pandemic years boosted many businesses selling services on subscription in the UK: work-from-home gave people more time and money to widen the services they enjoyed in the home, such as gaming, entertainment and music, also boosting engagement with trusted news

The cost-of-living crisis dented the number of subscribers to OTT SVOD and news services in Q2 2022. Broadband and mobile are must-have; bundles of services (e.g. Sky’s pay-TV and broadband or mobile) are more resilient; yearly and multi-year contracts prevent churn relative to monthly contracts; and services that cater to passions (e.g. football) are always need-to-have

Subscription (or supporter) media and news services reaped the demand for trusted news through the pandemic, but now face a tough challenge to their toplines from the economic downturn—and also to transition to a sustainable business model for media audiences, while advertisers are also feeling the heat

Mobile service revenue growth rose to its highest level in over ten years (+4.5%) as a result of the operators’ higher-than-inflation price rises.

BT/EE fared best with broadly-applied, sizeable increases and robust churn while H3G’s more modest increases and later timing led to just a minor pickup in its service revenue growth—in spite of continued strong performance on the subscriber side.

There are some early signs of an increase in consumer bargain-hunting and some payment challenges, with B2B robust for now but with an increasingly rocky outlook.

Revenue decline accelerated in Q2 as the cost-of-living crisis appears to be impacting UK sales, but profits remained strong thanks to last summer’s Continental sports rights reset

In Italy, DAZN will return on Sky’s platform just in time for the new Serie A football season, filling a key gap in its aggregation strategy

Looking forward, thanks to its enhanced profitability, Sky has the flexibility to respond to the economic downturn using pricing and content

YouTube’s tepid quarter signals a two-track online ad economy with advertisers protecting search spend as an essential cost of sales while cutting online display.

YouTube faces a challenge to strengthen its brand and direct response ad products while sacrificing some income to Shorts, its answer to competition from TikTok, which we estimate added three times as much ad revenue as YouTube in H1.

Beyond the short term, brands need to generate new demand, and that cannot be accomplished at the bottom of the funnel.