Budget Constraints, Longer Sales Cycles, and Higher Funding Costs Are Not Going Away
Since IBC ended, I’ve seen multiple posts by attendees on LinkedIn commenting how the biggest theme they heard at the show was that customer’s budgets are smaller, sales cycles are taking longer, companies are spending more time evaluating products and services, and CFOs are having more say in the money that is spent.
Many at the show seemed surprised by these observations and are calling this a trend. It is important to understand that this is not a “trend”. It is the new norm and has been for some time. Doing more with less is the new standard. Anyone who doesn’t realize this has not been watching what’s been going on in the market for at least the last 18 months. We’ve seen companies talk about how they’re reducing the highest tiers in their encoding ladders and consolidating compute and storage costs. Every piece of the streaming ecosystem, from glass to glass, companies are looking to do more with less. Listen to my podcast from last month, Episode 70, where I talk about this in more detail.
Even on the content side, we’re seeing companies remove titles from their catalog and be more selective in what they produce and license. So if you haven’t already adjusted to this reality, you better do it fast, because this new way of doing business is not going away anytime soon. I think it’s important for everyone to understand the outside factors that influence the economic conditions of business in general, no matter what industry you’re in.
On Wednesday, September 20th, the Fed left the interest rates unchanged but didn’t rule out a rate hike in November. Due to the 11 other raises the Fed has already done, the cost of capital required to do business, to expand, has gone higher. The Fed said they don’t expect to cut rates next year by as much as they thought they would. They now see the federal funds rate at 5.1% by the end of next year, which is up from 4.6%. So the key takeaway is higher rates for longer periods.
Why is that important to our industry and every other industry? If rates were lowered, those lower interest rates would be a boost to many businesses’ profits as they can obtain capital with cheaper financing and make investments in their operations for a much lower cost. And that’s a really big deal when it comes to growing a business, expanding into new markets, offering more products and services, and not having to do layoffs to cut costs quickly. One company I know that just raised over $100 million, I’m not going to say who they are, but they have a 15% coupon.
If you don’t know what that means, a 15% coupon rate is the fixed annual rate at which guaranteed income security, which is typically a bond, pays its holder or owner. That is a very high rate, at least double, compared to just a few years ago. All individuals, no matter who they work for, have to understand what is driving the industry from an economic standpoint. If you’re back from IBC and you’re shocked that sales cycles are taking longer and budgets are tighter, you need to do a better job of reading what’s going on in the space and what’s going on in the overall economic business climate. That climate has a direct impact on all of our jobs. Who’s hiring, who has to lay people off, who can afford to pay bonuses, do matching 401Ks, etc. is all impacted by economic conditions.
Everyone has seen the layoffs that Disney has done over the past 12 months and with all the money they have lost in their DTC business, no one would be surprised. But even Netflix, who has projected they will have at least $5 billion in free cash flow this year, did two rounds of layoffs. Even a company as profitable as Netflix has to cut costs. At the end of Q2, Netflix had $8.6 billion in cash and short term investments. Their gross debt stood at $14.5 billion and they paid $174.8 million in interest during the the quarter, which annualizes to about $700 million. Netflix has plenty of cash to pay their interest but still needs to save money where it could.
Doing more with less is the new standard and that is not going to change in 2024. If you haven’t adjusted to the new reality in the market, you need to. The current economic conditions tied to lending money, market caps, stock prices, and profit and loss are the new metrics being used by companies to make decisions on how they stabilize, grow, or in some cases simply try and survive the current economic climate.
