Switching channels
Matthew Vincent says advertising revenues hold the key to picking shares in the media sector ‘Have you had an accident at work that’s led to a loss of income?’ ‘Would you like to consolidate your debt?’ ‘Do you want to release equity from your property?’ If you’ve ever had the misfortune to find yourself watching ITV1 during the daytime (according to the British Market Research Bureau, not a single Spectator reader admits to doing so, so take my word for this), you’ll recognise those questions from the relentlessly downmarket ads that the channel now carries.
But — in an irony apparent to industry watchers, if not to daytime couch potatoes — those same questions can just as easily be asked of the company itself. That’s because, in the first half of this year, a series of accidents in ITV’s scheduling (how else would you describe a second series of Celebrity Love Island?) led to an 8 per cent fall in advertising income. In the same period, ITV’s net debt increased by 45 per cent to £647 million, and £108 million worth of its ‘noncore’ assets were sold off.
So it is perhaps surprising that shares in ITV are currently rated a ‘buy’ by three City brokers, and by my colleagues at Investors Chronicle. I shall explain why in a moment. Suffice to say at this stage that for all media companies, advertising patterns and revenues are crucial. F. Scott Fitzgerald, who once worked in advertising, observed, ‘Advertising is a racket, like the movies and the brokerage business ... you cannot be honest without admitting that its constructive contribution to humanity is exactly minus zero.’ In fact, advertising’s contribution to television was plus £3.5 billion last year; but across the media sector as a whole, its contribution is falling fast in some parts and rising fast in others.
Traditional, mass-media companies are seeing the fastest falls in their advertising revenues, their audiences and their share prices — in particular, broadcasters and former broadsheet newspaper publishers. ITV1 is now expected to see its advertising decline worsen, causing Numis Securities to cut its revenue forecast from minus 10 per cent to minus 12 per cent for the full year. ITV’s plummeting audience share is to blame — from a high point in the 1960s, it has kept on falling (see chart) and it fell by another 17 per cent in July alone. All of those lost viewers mean that the channel will lose about £90 million in advertising revenue next year, even if the overall television advertising market is flat. So, despite promising to cut £100 million worth of costs and to return up to £600 million to shareholders, its shares have fallen 20 per cent since March.
GCap Media, the UK’s largest commercial radio group, has suffered similar problems, with revenues for the six months to 30 September down 9 per cent; its shares have fallen nearly 30 per cent in the year to date. One analyst at broker Teather & Greenwood suggested that these broadcasters may have suffered during the World Cup because advertisers ‘were sceptical about how well England was going to do’. But the excuse is undermined by the fact that revenues were already falling steadily months before the football tournament. And even the shares of SMG — Scottish Media Group — have dropped 16 per cent this year.
Newspaper group Trinity Mirror reported even worse advertising numbers for the first half, with total revenues down more than 10 per cent, and revenues from its national papers — which include the Daily Mirror down 12 per cent. Trinity’s management recently admitted that the advertising environment is weak and said it would ‘run the business on the assumption this will continue for the remainder of the year’. Daily Mail and General Trust (DMGT) told a similar story in its recent trading update, with advertising revenues down 6 per cent in its national division, Associated Newspapers, and 8 per cent in its regional division, Northcliffe Newspapers. Northcliffe’s performance was particularly disappointing, because it meant that the division could not be sold off at a decent price. It is now being restructured, having apparently disproved its noble founder’s dictum: ‘News is what somebody somewhere wants to suppress; all the rest is advertising.’ The glossier end of the print-media market hasn’t fared any better. In July Emap’s shares fell more than 15 per cent after it warned of declining circulation at its car and men’s titles, which include FHM and Zoo — a trend that it confirmed last week. And a month earlier Future — which publishes 150 consumer magazine titles — issued its third profit warning of the year, blaming the poor advertising market and weak news-stand sales.
For investors, the message may seem as black and white as a Daily Mail headline: media shares are suffering because of an advertising recession. However, as in most Daily Mail headlines these days, the real issue is ‘migration’. Or, as Morgan Stanley analyst Edward Hill-Wood put it, when explaining the Daily Mail’s predicament, ‘Migration of print advertising to the internet is still in its infancy.’ New, specialist-media companies — in particular digital ‘narrowcasters’ and narrowly focused business publishers — are seeing the greatest benefits of this migration of advertising revenues, audience and investment. Digital multichannel television is achieving rapid growth. Analysis by the regulator Ofcom shows that multichannel services increased their ‘reach’ between mid–2003 and the end of 2005 by 5.6 percentage points; as a result, the multichannel share of advertising revenues increased strongly last year. Even ITV is profiting from this, having achieved a 46 per cent increase in advertising sales from its digital channels in the first half. It’s these digital revenues that explain recent bid speculation, and all those ‘buy’ recommendations.
Ultimately, the internet will become the preferred medium for viewers and advertisers. Nearly a third of teenage respondents to a MindShare online research study said they now watch television on the internet. Their choice of viewing is getting ‘narrower’ too, as websites promoting user-generated content such as MySpace, YouTube and Bebo — become the fastest-growing online brands in Britain. Perhaps it’s no surprise that Al Gore, the man who once claimed to have invented the internet, is now bringing his own user-generated content channel over here through BSkyB, the digital broadcaster and broadband provider.
Even some established print media groups are profiting from a migration of advertising to digital channels, and to narrower business-tobusiness (B2B) products. Business and professional publisher Reed Elsevier reported a 15 per cent increase in digital B2B revenues in the first half of this year. DMGT now derives 40 per cent of its total revenues from subscription information products and exhibitions and forecasts high growth in its B2B arm, DMGT Information. And the conferences and events division of Centaur Media, another business publisher, achieved 10 per cent growth last year — and emphasised its new profile by using the Rolling Stones’ tour plane to fly delegates to its events!
To be a successful investor in media, therefore, you no longer have to watch the mass market — or, thankfully, its increasingly tedious television channels. You need to look at the bigger picture — which these days is a lot narrower, and downloadable from a website near you. Current stocks to watch are ITV, BSkyB, Centaur Media and one more business publisher, Wilmington.
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