Here’s a conundrum: why are new digital businesses with unproven business models and no profit history valued higher than traditional UK media businesses with proven revenue and profit streams?
We all know that sometimes City valuations are as much about perception of future potential as they are about acknowledgment of current delivery. And nowhere is this more graphically illustrated than in radio.
Radio broadcasting is a uniquely British media sector – the big six players are all UK companies – GCap, EMAP, Chrysalis, Guardian Media Group Radio, UTV and SMG. Six years ago, the combined market cap of the sector was £6bn. Today, it’s about £3bn – a decline of a whopping 50%. Across the same timeframe, revenues are about flat at £600m. So, it’s true that the sector has not grown in recent times, but nor (contrary to popular belief) has it declined substantially, despite digital revenues, in all their forms, now taking well over 10% of UK media spend. So why has market capitalisation been halved over half a dozen years in a sector where revenues and profits are broadly flat?
It’s all about perceptions for the future.
City sentiment about tangible revenues and audience figures is offset by the industry’s lack of clarity on future revenue streams. Six years ago radio had a “secure” analogue business model (at the bottom of the dot-com bust) and a potential upside in digital migration. At that time, the killer question that exercises the mind of all traditional media companies – “How does a British analogue business make money in a global digital market” – wasn’t being asked and, if it was, everyone could hypothesise about the answer, while writing up the value of the stock. By contrast, dot-com businesses were burning their way through first-round funding, with no revenues, no profits and no future.
Six years on, however, the equation has changed. The traditional analogue broadcast business model is under pressure as listeners (or viewers in TV) are attracted to a digital future full of possibilities. At the same time, new digital companies are again all valued on the upside potentialwith scant disregard for the current realities. It starts with a couple of high-profile deals – such as the one between NewsCorp and MySpace – which sets the sector going nuts again.
Take the sale last week of Last.fm for £140m. (Ironically named, of course, while the first FM radio stations are still very much around – Capital and Smooth in London, and Clyde in Glasgow to name a few). This price is not much short of the possible sale price for Chrysalis Radio, which is rumoured to be in exclusive talks with Irish backers. But, Chrysalis is a real business with real assets (studios, licences, people) years of audience figures, and tangible returns. Compared that with a business that has way fewer listeners than traditional UK radio stations, a very modest revenue stream, no profits, no assets and the £140m pricetag for Last.fm seems ridiculous. It’s all about the fact that the company has a database that “might” be monetised somehow in the future. So something’s odd when Irish racehorse owners gamble on traditional UK media and US media companies gamble on new media!
Let’s hope that CBS can get a return on its money – but the precedents in the media sector are not encouraging. Have you ever wondered what might have happened to real audiences if the ITV investment in the virtual database of Friends Reunited had gone on programming? And ever wondered what would have happened to mobile phone stock prices if the real billions spent on virtual 3G licences had been invested in real assets; or wondered what would have happened if the music industry had kept selling albums only on iTunes rather than forsaking 90% of revenues and selling single tracks for 79p?
Put another way, would you rather your pension fund be invested in GCap, Daily Mail & General Trust, UTV or Losealotofmoneyfast.com?
When this starts happening it’s clear what to do. If you’re lucky enough to have started an internet business, sell and cash in at the top of the market while someone’s daft enough to buy without a proven business model. If you’re the owner of a traditional media business, wise up for the digital future too. Embrace it even where its uncomfortable. Maybe that way you’ll retain the real income and profit streams, while also attracting City favour and more generous stock prices. And, for those of us who are modest investors, buy back into traditional media now – because it’s clear that, in the long run, only real revenues make real returns.
Déjà vu anyone?
Andrew Harrison is chief executive of the RadioCentre. You can contact Andrew at: firstname.lastname@example.org