Investment bankers softly skewer traditional media companies

Michael Hedges November 1, 2007

The report issued by investment bankers Dresdner Kleinwort opened softly: “Six years of sector underperformance fueled by the disruptive impact of digitization on traditional business models shows no end.” That tone continued throughout.

In its Media Snapshot, released October 19th, the financial analysts at D-K give no quarter to traditional media – newspapers and broadcast – unable to cope with – the minute for ‘understanding’ passed a decade ago – the world moving on; ad revenue, consumers and profits.

The first target for the savage banking beasts was the place traditional media lives – the ad business. They remind one and all that the media business exists because of the ad business that that symbiosis will continue “for the foreseeable future.” But it’s not symbiotic any more; it’s dependency. The ‘winners’ are breaking that dependency.

Getting very ‘macro’ in their flexing D-K brings out the heavy ammunition: the charts. These guys are out to spoil a good sales story with reality. Increases in ad spending follow increases in corporate profits. OK, we kinda knew that.

Using data (ouch) dating from the 1960’s in the UK every peak in percentage increase in corporate profits led to 6, 8, or 10 years of ad spending increases. Until now. The last peak in UK corporate profit increases (2003) was followed by just two years of ad spending increases. “All advertiser funded media will suffer,” they view. “Google,” and presumably all search engine advertising vehicles, “is less vulnerable” because advertisers just love those highly targeted ads only the web can deliver, not to forget performance-based advertising. Yes, advertisers are more than just talking about return on investment.

Investment bankers keep a sharp eye out for free cash flow, the key to share price growth. Digital investment is a requirement that, seemingly, never ends. That, say the D-K analysts, keeps eating the cash flow. And it’s only the beginning: “Our skepticism regarding the sector’s ongoing growth potential lies in the reality that structural challenges are really only just starting to impact.”

Advantage, they say, goes to the “fleet-footed entrepreneurs” who offer innovations like content aggregators and user-generated content. Traditional media keeps trying to protect legacy “cash flows and cultural barriers to change.” Or, “traditional media have struggled to keep pace.”

It’s impossible to not be reminded of the battle between Belgium’s publishers and search engines as D-K describes the new power of content aggregators. Search engines (and the rest of Web 2.0) are the newsstands of the 21st century. “Aggregators dictate the value prescribed to content.” Publishers cannot bypass the aggregators and cannot “squeeze” them.

The D-K analysts bury traditional media saying digital investment should be considered “maintenance capital expenditure,” necessary but not a growth prospect. Ad agencies will profit regardless; money flows where eyeballs go. “Traditional media companies remain culturally unsuited to embrace change.” They also note that ad agencies are fighting to keep that digital edge; note that Nike split off a piece of Wieden & Kennedy’s budget because Wieden, one of the worlds’ most innovative ad agencies, looked to be falling behind the digital times. The only ad company D-K calls a winner is French outdoor giant JC Decaux.

“Technology is really only an enabler.” Push media – the traditional media production model – is dead, dead, dead. The new media consumer ‘pulls’ what they want, when they want it, where they want it.

Perhaps showing their age or age dependent fad rapture, D-K waxes poetic about social networking websites, with the plausible admission that “advertisers are still grappling with how to market effectively on them.” Facebook is due that Time magazine cover story (i.e. it’s over). Google is producing an “over 50’s” social networking site. It’s REALLY over.

D-K’s discovery of ‘prime-time two’ – media consumption during office hours - is about 25 years late. Radio broadcasters figured that out decades ago. But, intuitively, when free broadband is available at the workplace, games will be played. D-K did not address corporate productivity loss.

But D-K salutes several nominally traditional media companies – Der Telegraff, Schibsted, Agora – as big enough and smart enough to keep up the cash flow and still move into new media. Satellite companies – SES, Eutelsat, Immarsat – don’t have to be smart or quick as their revenue doesn’t depend on ads.

Other – smaller – ‘winners’ are web-portals RightMove and Rambler (notably based in Russia) and B2B providers Dealogic and Reuters.

The ‘sinners’ are predictable – traditional publishers and broadcasters, notably those with entrenched cultures and management. Their continued belief that the old business models can be forced on the marketplace will be on their tombstones.

D-K analysts believe merger and acquisition activity will be real in 2008, though nothing on the scale of ProSiebenSat/SBS.

In all the Dresdner-Kleinwort analysts identified correctly, mostly, the malaise of traditional media with the confounding realities of a rapidly changing revenue basis with media consumers trying out everything new. Those are the ‘micro’ factors. Pessimism over ‘macro’ factors – energy costs, for example – is not far from their lips.

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