Andrew Harrison: Shedding the excess layers

City analysts will tell you that ad spending is often a lead indicator for the real state of the economy, as media budgets flex in line with company results. So, while we may not (yet) be technically in a recession – defined by economists as two consecutive quarters of negative growth – the latest results in the media sector suggest it’s only a matter of time.

A wave of alarm has hit the sector in the last fortnight, causing both ZenithOptimedia and Group M to revise downwards their annual forecasts.

First, newspapers have taken a hammering. Trinity Mirror confirmed sales are down 12% and 14% for May and June respectively, triggering a further collapse in the share price. Indeed, Trinity’s market value has collapsed from £1.5bn only a year ago to just over £200m. Johnston Press was caught further in the regional press crossfire. Next, over at ITV, shares – at less than 50p each – are at an all time low, while agencies report slow bookings for September’s AB deadline and a predicted year-on-year revenue decline of 13% for the month. Finally, the first waves of restructuring and redundancies have begun to hit the sector, at News International, GCap and elsewhere.

So, we’re all battening down the hatches. Now, while a lot of the negative City sentiment towards the media sector may be overdone, it’s clear everything could look very different when we emerge from the other side of this downturn.
For example, no one knows how a recession will impact on online revenues. The dot-com bust of 2000 was part of the cause of the last crash, not a symptom. This is the first time advertisers have had widespread access to online media with which to re-plan media budgets. None of us knows how this will shake out.

So here are five radical possibilities. First, there could be a second dot-com crash. Conventional thinking might suggest that online will continue to steal more ad share in a flight to accountability from display. But, on the other hand, there’s now an excess of online inventory being sold by a plethora of new social networks and other sites, many of which have yet to break even. These fledgling businesses have yet to demonstrate that they can successfully monetise their user base. However, before that happens, for those without current revenue streams, many of the new businesses anticipating IPOs, second-round funding or angel investors could just run out of cash. It wouldn’t be a complete surprise if online businesses, who have not yet proven that they can monetise their own direct user base, fail to attract advertisers to their sites in the indirect hope that space on a social network sells more toothpaste in Boots or more cola in Tesco.

Second, none of us knows what happens to search – the driver of digital growth – in a recession. Google is not old enough to have survived a downturn. But it seems a reasonable hypothesis that search has grown like topsy in the past decade because it’s a bull market product. Whenever consumers want to purchase, Google, Yahoo! et al facilitate the search. But, in a bear market, with much lower consumer spending, there has to be a logical scaling back of search enquiries. If you can’t afford to buy, you don’t need to search. So it seems to me, search will not be immune from a downturn – and if it continues to grow (perhaps at a slower rate) the business model will start to change for advertisers as fewer searches will lead to fewer high value sales.

Third, in television, ITV could be broken up. At the current share price, ITV’s market valuation, as a whole, is less than the sum of its parts. Sooner or later, the price will fall so low that it becomes more attractive to unbundle its archive, production and online sales businesses to extract more value. You could find that Friends Reunited sells for a fraction of its ITV purchase price. Ironically, the withdrawal of CRR may accompany the break up of the dominant market player it was designed to remedy.

Fourth, we might see a national free newspaper. City AM, Metro, London Lite and The London Paper continue to eat into traditional newspaper readership. Sooner or later, the national model will change. Just as The Times’ 20p cover price, two decades ago, changed broadsheet readership, it wouldn’t take many weeks for The Sun to distribute free copies for red tops to enter a new era.

Finally, 20 or 30 local radio stations could close down. There are over 300 commercial radio stations, right now, in a sector worth £600m. At just £2m turnover per station on average, this cottage industry has to rationalise to survive. Given that Ofcom already reckons 40% of local radio is unprofitable, there’s bound to be some fall-out.

Overall, what’s less radical is that the major effect of this recession on the media market will be to rationalise the current unsustainable over-supply of media. Whatever happens won’t be much fun, but it’s probably necessary. Time to hold on to your hats.