Tim Sprinkle is a Seeking Alpha Editor
It’s no secret that the media industry has undergone a sea change in recent years. One-time major players like NBC Universal and The New York Times (NYT) face uncertain futures, web-based upstarts are assailing media firms’ bottom lines from just about every angle (classified ads, display advertising, production costs), and it seems that a week doesn’t go by without a notable media bankruptcy or all-out shuttering. Even the major Hollywood studios are proving vulnerable to this whole mess.
So what is a media investor to do in this business climate? How are the hills and valleys (let’s be honest, mostly valleys recently) of the industry impacting media stocks - and where does that leave individual shareholders? Is there even a light to hope for at the end of this tunnel? Are there unique opportunities for savvy media sector investors at this time? And will the iPad shake things up?
In an effort to better understand what is going on in the media space, we’ve assembled a panel of media experts for our latest Seeking Alpha virtual panel discussion. This Q&A will be a living thing, growing and expanding over the course of the next week as these and other panelists chime in with their own thoughts and opinions, adding to the discussion. Please participate by adding your thoughts in the comments below.
Kenn Registe: A former equity analyst who has been investing in the media, technology and telecommunications sectors for 15 years. Registe is the founder of TMT Advisors, LLC, a firm that provides advice, analysis and reports on technology, media and telecommunications companies to mutual funds, hedge funds, venture capital firms, consulting firms and company executives.
Dan Rayburn: As Executive Vice President of StreamingMedia.com and a Principal Analyst with Frost & Sullivan’s Digital Media group, Rayburn is broadly recognized as a leading authority on the streaming media and online video industry. In addition to his analysis work with the Gerson Lehrman Group, Dan is a speaker, writer, publisher and consultant who has been featured in a wide variety of print and online media outlets.
Nadav Manham: Manham is President of New York-based investment advisory firm Elera Advisors LLC and has a background in hedge fund investing and advisory work. An advocate of Warren Buffett’s value-based investment approach, Manham has been an outspoken critic of Time Warner’s new media efforts and recent developments in the newspaper space and is a regular contributor to Seeking Alpha with his own blog at The Investors Consigliere.
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Do you expect cable networks to begin charging for access to their streamed video content? As for the broadcast nets … goodbye ad-supported Hulu?
Kenn Registe (KR): I believe the cable networks, Hulu, and others will find that the ad supported model will not be sufficient to cover the cost of the streaming content and they will be forced into charging for content. The longer-term model is a hybrid of ad supported and pay for content.
Dan Rayburn (DR): Hulu will offer a subscription service of some kind this year; that much we know. So yes, more subscription based services are coming along with more options for in-stream video ad insertion.
Cable companies, on the other hand, are taking a defensive strategy with services like TV Everywhere, claiming it will remain free, but at some point, they are going to need to generate revenue from it. When that time comes, they will either charge a monthly fee for the service or raise cable rates to cover the cost, but still call it “free.”
While right now the service has online video advertising as the business model, there is no chance that model alone will cover the costs of operating a TV Everywhere like offering.
Nadav Manham (NM): Cable networks remain very profitable, and their managements will try to maintain that profitability as long as they can. I think if they see evidence that streamed videos are cannibalizing television ratings then yes, they will move to "uncannibalize" by charging fees for streamed videos.
Speaking of web fees, The New York Times is planning to charge for online access to its articles – is it time for a pay wall on news sites?
KR: In order for this to work for newspapers, all of them (by content type that is) will have to do this, else the model will fail.
For instance, if the New York Post charges but the New York Daily News does not, then the model fails for the New York Post since the content is similar (although both may disagree about their respective sports sections). They will have to collude in a sense. I can see the model working for highly specialized newspapers like the Wall Street Journal, but for run of the mill newspapers, it will not work.
NM: In my opinion there are news sites and there are news sites. What will determine whether a pay wall is a good idea is whether not a given news gathering operation enjoys competitive barriers to entry. In a world of infinite web sites the only barrier to entry is a perceived superiority/brand value that the reader will pay for. Only a tiny minority of sites will meet this standard.
Rupert Murdoch has been outspoken in his belief that digital fees can make up for newspapers’ advertising losses, but will that approach actually work in a market where sites like CNN and the BBC are offering free content? How can we expect the revenue shift for newspapers (from print advertising to a new fee mix, whether involving online subscriptions or higher web ad rates) to play out?
NM: The BBC and CNN are interesting comparisons because both of those sites are subsidized by money that comes from television revenues (ads and/or carriage fees). Bloomberg is a third example; its web site is subsidized by very profitable terminal subscriptions. The web sites of the major newspapers used to be subsidized by classified and ROP advertising, but both of those two revenue centers are in secular decline. It will be very difficult for newspaper news rooms to compete with news rooms that are subsidized.
What do you think of AOL’s long-term prospects as a stand-alone? How should investors view the company now that it is back on its own, and what should we expect from the now-AOL-less Time Warner?
KR: I think the end game for AOL (AOL) is, ironically, an acquisition by another company, maybe Google (GOOG), Liberty Media (LINTA), or IAC/InterActiveCorp (IACI). I do not think that their business model will sustain declining traffic and loss of support from the declining access business. I believe the same for Yahoo! (YHOO). So AOL is not alone. Maybe the two merge.
What about media measurement? Will it be able to keep up with changing viewership technologies (like web and mobile streaming), and is this something that network execs are worried about?
DR: Media measurement is talked about in general terms, but rarely does anyone actually break down the different kinds of measurement needed in the market, which are sorely lacking today.
Nielsen does some end-user measurement, but does not measure consumer use on many platforms and devices outside of the PC and TV. In addition, the biggest problem I see in the video industry is that in order to monetize content, you need accurate measurement of the engagement created from advertising. Companies are working to solve this problem, but right now, many problems exist with online video advertising when it comes to targeting and measuring the performance of advertising campaigns.
Do you expect the Comcast-NBC deal to go through in 2010? Why, or why not, and will the Conan O'Brien buyout (rumored to be around $40 million) have an impact on the deal?
KR: I think the government approves the merger in 2010 because the media industry is still relatively fragmented.
The Conan buyout is a non-issue, although I do believe that Comcast (CMCSA) loses the edge in negotiations with other parties so as to avoid public spats while trying to close the deal.
How is the revenue mix changing for the home video market? Will the rise of RedBox, Netflix and other rental services continue to eat away at profits, and how will the studios respond to this?
DR: I think we already know the answer to this.
The studios want to combat anything that gives the customers more control. Studios want to tell us how we view content, when we view it, what we view it on and how much we should pay for the “convenience” of digital, as they put it.
That said, Redbox (a subsidiary of Coinstar (CSTR)) and digital distribution are not having a big impact on the cable VOD market, which saw revenues grow almost 20% overall for last year. So DVD sales are down, but other aspects of their business are up. As for Redbox and digital, at some point, the studios will have no choice but to adapt to the new business models. I find it sad that the studios still haven’t learned that the customer is the one who decides how and when something is bought, not the studio.
Should we expect newspaper and print publishers’ cost cutting actions to contribute to real savings in 2010?
KR: I do expect publishing profits to improve in 2010 as a result of the cost cutting efforts in 2009.
NM: I think so. The question is whether the cost structure is declining as fast as the revenue structure. I'm not so sure it is.
What about classified ads? Have we seen a permanent shift away from print classifieds, and, if so, how will the publishers make up for the loss?
KR: Newspaper classifieds are doomed and I believe revenues there will approach zero asymptotically over time due to the shift of classifieds to the Internet.
NM: I think the shift is permanent. I don't see how publishers will make up for the loss. There were few better businesses on Earth than the classified section of a big-city monopoly newspaper during the golden age of print newspapers. It's not easy to replace that.
How long will media companies like News Corp be willing to sustain losses from their print businesses? Will they at some point be forced to make a change (whether it is charging for online access, raising print copy prices, or another solution)?
KR: Companies like News Corp (NWS) can sustain losses in the print business for some time until they figure out the right model for print because their business model is diversified. News Corp will ultimately charge for online access but only for the Wall Street Journal and not for the New York Post for reasons I stated previously. Raising print prices is not a likely option.
NM: I don't think the current situation is sustainable. The print business is basically in run-off mode, both demographically (old newspaper readers are not being replaced by young newspaper readers) and in terms of declining economics. It's difficult to predict, but I think the most likely solution is some kind of Bloombergization of news, in which a separate business that is very profitable (i.e. selling terminals) acquires a brand-name news gathering operation and uses it to cement the profitability of that existing business. Think of Microsoft (MSFT), which built Internet Explorer not to make money from Explorer, but to preserve the economics of the Windows operating system.
Will we see improving ad returns along with the recovering economy and, if so, what segments should we expect to bounce back? Will automotive ads ever be the major revenue “driver” that they once were?
KR: Advertising growth has proven to be cyclical and has proven to be correlated to the economy and GDP growth. So to the extent the economy improves, advertising should improve along with it. And, to the extent the underlying verticals improve then advertising improves there as well.
Are we close to a bottom in newspaper revenue losses or does the industry have further to fall?
KR: The newspaper industry continues to feel the pain of the secular shift of advertising dollars to the Internet. So, yes, the industry has further to fall.