Media/Entertainment Fleeting vs. enduring changes Overweight (Maintain) COVID-19 is accelerating changes in media consumption At its core, the media/entertainment industry hinges on how long and to what extent Industry Report its content can capture user interest ( quantitative exposure and engagement vs. willingness to pay). The costs paid by users can take a variety of forms (ad views, pay- March 23, 2020 per-view, subscription fees, product/ticket purchases, fan club membership fees, etc.), with the total outlay ultimately determ ined by the benefits or value provided by the content in question. COVID-19 has driven drastic lifestyle changes, leading people to avoid public places Mirae Asset Daewoo Co., Ltd. and large gatherings and spend more time at home. Media consumption is increasing, and barriers to new kinds of media experiences are decreasing. New media are no [Media ] longer the exclusive domain of early adopters. Against this backdrop , the value of content/specific formats has undergone rapid changes that would have otherwise Jeong -yeob Park taken place over a significant period of time. Against this backdrop, we believe it is +822 -3774 -1652 important to differentiate which of the unfolding changes in media consumption are [email protected] fleeting and which will endure after the outbreak is over. Bottom line: Amid the accelerating rise of new media, the business environment for entertainment stocks with high valuations should improve further even after the outbreak subsides. We think stocks that have become more expensive t han peers during the current market dip—i.e., Studio Dragon (253450 KQ/Buy/TP: W112,000/CP: W75,800) and YG Entertainment (122870 KQ/Buy/TP: W40,000/CP: W21,350)—continue to merit attention. We expect dramas/webtoons to recover first, followed by performances and then ads/films. Transition from old to new media: Bad for broadcasting, good for OTTs LINE was launched in the immediate aftermath of Japan’s 2011 earthquake and quickly became the most popular messaging app in the country. In a similar way, we believe the global rise in new media consumption sparked by COVID-19 could serve as an inflection point for the media industry, especially broadcasting and OTTs. Nielsen Media Research forecasts TV viewing and OTT streaming to grow roughly 60% due to the COVID-19 outbreak. We view this as a reasonable projection, given the rise in TV viewership in the US during the country’s 2017 hurricane season (+56%; four-week average) and 2016 blizzard (+45%; one-week average). That said, broadcasting and OTTs are unlikely to benefit equally, as the groups have different income models and different consumption expansion prospects. For broadcasting program providers (PPs), the main source of income is ads. During normal times, businesses tend to expand their ad spending when ad exposure increases, as this typically improves advertising effects. But this time, the COVID-19 outbreak is having a dampening effect on consumption. With lower advertising efficiency, businesses are reluctant to increase their ad budgets. As such, higher ratings will likely fail to translate into higher ad pricing. For CJ ENM (035760 KQ/Trading Buy/TP: W195,000/CP: W90,700) and SBS (034120 KS/CP: W15,200), which depend on domestic ads as their primary source of income, we believe that even as ratings go up, any benefits in terms of earnings or long-term competitiveness will come only when the economy begins to recover. Premium OTTs, meanwhile, mainly generate their income from subscription fees. Their income model fundamental ly relies on a positive feedback loop, where better content leads to more subscribers/consumption , in turn enabling bigger budgets and more investments. OTTs tend to be less sensitive to economic conditions, and can achieve bigger economies of scale more q uickly because of their global reach. Given that OTTs in the long run align their budget allocation to their user bases, content production targeting countries outside of the US should increase. Furthermore, traditional media players are also entering the market, resulting in fiercer competition to attract subscribers. Overall, we think the environment for OTTs will be more favorable after the outbreak than before the outbreak. For domestic production companies with global capabilities, we believe such cha nges will lead to bigger content deals and also hasten the timing of such deals. Both Studio Dragon and J Contentree (036420 KS/Buy/TP: W52,000/CP: W23,500) inked deals with Netflix (NFLX US/CP: US$332.83) in November 2019 that guarantee a certain production/supply minimum (20 titles for a three-year period each). As platform competition intensifies, there is also a good chance that new partners will emerge. Season two of Kingdom (produced by AStory ), which recently premiered on Netflix, has received more positive reviews than season one of the series, highlighting the ability of K-dramas to adapt and venture into new genres. Looking ahead, we think expectations for major upcoming titles (such as Studio Dragon’s Sweet Home , a Netflix original based on a popular webtoon series coming out in 2H20) and additional deals (on top of quarterly tentpoles) could increase going forward. March 23, 2020 Media/Entertainment Figure 1. TV viewership (including streaming) increased Figure 2. Natural disasters appear to have led to US Netflix during previous natural disasters subscriber growth in the past (%) (mn persons) Winter Storm Jonas 70 Average increase in US TV viewership 2.5 Netflix net subscriber increase 60 Hurricane Harvey 2.0 50 40 1.5 30 1.0 20 0.5 10 0.0 0 Winter Storm Jonas (Jan. Hurricane Harvey (Aug. COVID-19 (projected) 2016, US Midwest/East 2017, Houston) -0.5 Coast) 2Q15 1Q16 4Q16 3Q17 2Q18 1Q19 4Q19 Notes: One-week average for Winter Storm Jonas, four-week average for Hurricane Harvey Source: Nielsen Media Research, Mirae Asset Daewoo Research Source: Nielsen Media Research , Mirae Asset Daewoo Research Figure 4. Content producers to be less affected by economic Figure 3. Higher ratings are unlikely to translate into higher conditions: Short-term VOD revenue growth, long-term ad spending global order expansion (%) (Wbn) 2 Quarterly GDP growth consensus 300 Studio Dragon → Ex-Netflix sales Studio Dragon → Sales to Netflix (originals) 250 Studio Dragon → Sales to Netflix (simultaneous) 1 200 150 0 100 50 -1 0 1/18 7/18 1/19 7/19 1/20 2017 2018 2019 2020F Source: Mirae Asset Daewoo Research, Quantiwise Source: Company data, Mirae Asset Daewoo Research Figure 5. Kingdom season 2 has gotten a positive response; Figure 6. Sweet Home , a Netflix original drama, to be released Content production targeting global viewers to increase in 2H20 (p) 9.5 Kingdom season 1 Kingdom season 2 9 8.5 8 7.5 7 Ep. 1 Ep. 2 Ep. 3 Ep. 4 Ep. 5 Ep. 6 Source: IMDb, Mirae Asset Daewoo Research Source: NAVER Webtoon, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 March 23, 2020 Media/Entertainment Theaters: Negative outlook due to declines in attendance and releases Theater attendance has dropped sharply amid the COVID-19 outbreak, as people are avoiding public places and large gatherings and spending more time at home. YTD, box- office revenue is down 46% YoY in Korea, down 85% YoY in China, up 18% YoY in Turkey, and down 5% YoY in the US . Theaters in China have been closed since February, and theaters in many other regions find it nearly impossible to operate. Despite improvements in cost efficiency, most theater businesses are bound to incur massive losses due to their high exposure to fixed costs (e.g., lease and labor expenses). Amid the proliferation of large-screen TVs and high-quality OTT content, video streaming services are emerging as an alternative to movie theater attendance. This trend threatens to hurt theaters’ earnings in the short term and slow down content supply in the long term. Due to the contraction of the box-office market, Disney (DIS US/CP: US$85.98) has decided to postpone the releases and production of some of its films, and is now considering going straight to streaming using its OTT platform (Disney Plus). We note that Korea’s box-office market relies heavily on Disney; Disney films captured around 15% of moviegoers annually over the past three years. Reduced supply from a major distributor like Disney would deal a major blow to the theater business, as margins are not particularly high even during good times (e.g., single-digit margins in 2019, a favorable year for the theater business). Table 1. Box-office revenue by country (YTD) Box-office revenue Attendance (mn people) Avg. ticket price (ATP)_ Korea China Turkey Vietnam China Turkey US (US$mn) Korea China Turkey Korea (W) (Wbn) (RMBmn) (TLmn) (US$’000) (RMB ) (TL) 2018 370 18,630 274 2,165 3,000 45.9 514.5 22.2 8,068 36.2 12.4 2019 425 17,664 235 1,732 8,891 50.0 449.0 16.3 8,489 39.3 14.4 2020 228 2,655 278 1,654 14,206 26.2 95.1 16.2 8,687 27.9 17.2 2018-19 YoY (%) 14.7 -5.2 -14.1 -20.0 196.4 9.0 -12.7 -26.5 5.2 8.6 16.9 2019-20 YoY (%) -46.4 -85.0 17.9 -4.5 59.8 -47.6 -78.8 -0.7 2.3 -29.0 18.7 Note: Based on first 11 weeks of the year Source: KOFIC, Mirae Asset Daewoo Research Table 2. Movies increasingly opting for OTT releases, raising content supply concerns Premiere Title Distributor (Platform) Director Genre 1/8/20 Underwater 20th Century Studios William Eubank Action/drama 1/25/20 Timmy Failure: Mistakes Were Made Disney Plus Thomas Joseph Drama/fantasy 2/21/20 The Call of the Wild 20th Century Studios Chris Sanders Adventure/family 3/6/20 Onward Walt Disney