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Disney's strategy, ad spending to highlight challenging media market in 2023

As 2022 comes to a close, the outlook for major media companies and their revenue in 2023 is seen as being challenging as more streaming TV options battle it out for the pot of advertising dollars.

That's part of an assessment of the media and entertainment market from Bank of America analyst Jessica Reif Ehrlich, who said that with "limited visibility" ahead, the ad market is set to remain choppy next year due to a number of factors that will set the tone for the streaming industry, in particular.

Those factors include the ongoing moving of ad budgets from traditional TV to streaming platforms, and how companies are able to make up lost revenue.

Ehrlich said that ad budgets shifting from "linear viewing" to streaming services, new ad-supported streaming options and the growth of "retail media networks" such as Amazon (AMZN) "will all increase wallet share of advertising budgets" at the expense of traditional linear advertising.

Ehrlich said that while many media companies are involved in ad-supported streaming, without significant changes to their advertising loads, "We remain skeptical they will be able to fully recoup lost linear advertising dollars on a one-for-one basis" over the long term.

Among the companies that Ehrlich said stands out, but not in strongly positive way, is Disney (NYSE:DIS). The media and entertainment giant has been roiled recently by the surprise firing of Chief Executive Bob Chapek, and the return of retired CEO Bob Iger to the company on a two-year contract. Ehrlich said that investors and the media industry have largely "celebrated" Iger's return, and she called Iger "a strong, well-rounded and charismatic leader."

However, Ehrlich said that "bringing the magic back at Disney could take time" as Iger faces multiple strategic and operational decisions that will affect Disney (DIS) in the years to come.

Those decisions include how to restructure the Disney Media and Entertainment Division [DMED], which includes Disney+, whether to adjust price increases at Disney's (DIS) theme parks, options for Hulu and whether or note to spin off ESPN and other linear TV networks Disney (DIS) owns.

Ehrlich said Iger is likely to move quickly on restructuring, which could lead to more management departures like that of Kareem Daniel, the former head of DMED whom Iger ousted in one of his first moves upon returning to Disney's (DIS) CEO office. Ehrlich expects Iger to spend more time assessing other matters before making large-scale strategic changes.

"We expect Iger will be deliberate in evaluating all of these options and it could be several months until we have more definitive clarity on his longer-term vision," Ehrlich said.

Content spending also remains a major issue for media and entertainment companies, which Ehrlich said is "moderating" for now as Netflix (NASDAQ:NFLX) and other media companies have suggested they are trimming their content budgets. "We believe inflationary pressures on content spending will continue [into 2023]," Ehrlich said "Which suggests a stable content budget year-over-year implies either a lower output or increased mix toward cheaper [content] alternatives."

One area where content demand is expected to remain high is sports rights. Ehrlich noted that Amazon's (AMZN) securing of Thursday night National Football League games, and Apple's (NASDAQ:AAPL) new exclusive deal to stream Major League Soccer matches show that "demand for sports [should] remain robust for the next several years."

With all the different moving parts affecting the media sector, Ehrlich said the industry is "inching closer to the tipping point" of a new wave of business consolidation. Ehrlich said "handicapping the precise timing of any transformational deal is difficult" but that there is one company among all others that could set a round of buyout and deals in motion.

"We believe Bob Iger's strategic vision for Disney could be a potential catalyst depending on the direction he takes," Ehrlich said. "The resulting disruptive impact would likely start a domino effect across the industry."

Disney (DIS) gave some insight into where it could be headed with its recent annual business report.