With the grim outlook for almost all types of advertising, it seems the once popular cliches 'content is king' and 'ad spend always grows faster than the economy' have been replaced by 'old media is dead.' Barron's magazine is convinced the new paradigm may soon prove to be no more accurate than its predecessors:
The reality is that the best-managed media and advertising stocks are unwarrantedly cheap. If the media economy merely muddles through the next few years, new investors in it will have fatter wallets.
Why are media stocks so cheap? The investing world seems to have bought in to the sentiment that the recent contraction in ad spending is a sign of long-feared structural cracks. Perhaps the 15-year-old recently showcased in a Morgan Stanley research report is right; the coming generation has no intention of paying for its media, and is immune to ad messages. A 'cyclical upturn' is widely doubted by investors. And some cite the alarming cheapness of online ads as proof of the ineffectiveness of all advertising. At a 15% discount to the market, media stocks are pricing in "a rapid and irreversible erosion of profitability."
Barron's thinks investors are way too pessimistic:
While ad-supported media are no longer the briskly growing businesses that they used to be, there is plenty of life left in them over the typical individual's investment time horizon.
Online ads are growing 5-6 times as rapidly as their offline brethren, albeit at a cheaper price. Former DoubleClick CEO Kevin Ryan contends the takeaway from this is not that the internet revealed some historical overvaluation of advertising, but rather that it has widened the pool, almost infinitely. Old-age ad sales were about space and time constraints, and who would pay the most to fill them. Today, with a massively growing inventory of web pages to serve up, it's natural prices will fall. But by the same measure, the value of reaching a targeted audience is growing. Point in case: advertisers are paying more per thousand to reach viewers of some popular network shows on Hulu and TV.com than they're paying for broadcast ads.
Barron's also dismisses the idea that digital media won't accommodate historical levels of ad spending because today's consumers are unreceptive to 'interruptive' brands. Customers, it notes, have never invited ads, but their tolerance for them has forever been underestimated. One media insider notes the ability for TV advertisers to gradually grow hourly commercials from nine minutes in the 1950s to the current 15 minutes without losing their audience. A firm that recently canvassed companies it covers found more hinting at increased ad spend than cuts.
Media stocks Barron's particularly likes include Disney (DIS), Time Warner (TWX) and to a lesser extent its parent News Corp. (NWS) ("which has been hurt by its purchase of print-publication and wire-service-heavy Dow Jones in late 2007.") Ryan says ad agencies like WPP Group (WPPGY) are the least affected by the industry's evolution.
In short, as Wall Street's next media cliche might say: Winning eyeballs still means winning dollars.