Media – disruptions and opportunities
Media is a diverse sector in the stock market. We all consume a great deal of media and by a growing variety of means from fixed to mobile devices. US companies have dominated much of the internet space and we think of them as setting the trends both in the new digital media and traditional media like TV. Several of these companies have expanded into new areas with a disruptive challenger mentality. With this backdrop it is easy to assume what happens in the US today will find itself in Europe tomorrow.
So, recently when various US companies, led by some cable TV operators, pronounced viewing habits had emphatically changed with a younger generation rejecting fixed schedules in favour of different more self-selected TV viewing, with negative implications for advertising many US stocks took fright and Europe companies followed. As usual although there is much truth in this perspective the reality and the investment opportunity is more complex.
The common perception is that European media companies are highly regulated, nationally constrained groups with ever rising content costs competing against new providers of both content and delivery mechanisms often supported by deep pockets where the pressure is to grow revenue rather than be answerable to deliver profit - think over the top TV. Several European companies fit this framework: broadly the nationally limited broadcasters.
So the fear is that any trend seen first in the US will arrive in Europe often to the detriment of European stocks. The reality is more complex even if it means we have to look for selective niches in Europe. In Europe there is a heritage of free TV funded by the state so for quoted broadcasters the role of cable competition has always been different. Pay TV, prevalent in the US has often been noticeably low in Europe - Germany, Italy and Spain are shining examples. Perhaps a simple read across from the US is too simplistic. European media has many differences from the US. Europe hosts world leaders in professional publishing, music and advertising agencies.
To give one example there is a family business with a leading world position in outdoor advertising. They started in France with billboards and have grown into street furniture (the best example is bus shelters), and transport (airports and metros). They have a history that demonstrates a few characteristics: the family ownership supports a long term view, the business has a big network effect - once scale is reached margins improve by offering a presence to a well-defined audience. This is attractive to advertisers but they have also proven innovative in enhancing civic space. This secures them strong locations but also creates barriers to entry and broadly makes civic life easier - smart bus shelters, bike hire schemes, self-service flushing toilets were all pioneered by them. Over 20% of their business is in China. Until recently this exposure that was growing fast was seen as a positive but with recent turmoil in the Chinese market it has been interpreted as a negative. This volatility has not stopped the group innovating or investing for the future.
All these bus shelters are in prime city centre locations around the world just where mobile networks are straining to deliver the quality network everyone now demands for all these new services we consume. They have discovered an incremental source of revenue. They have just completed a trial to offer small cells on their real estate. This will benefit the telecom network provider by improving quality and reducing capex and it will also benefit the cash strapped local government with a new source of revenue. For the company it offers a source of new high margin incremental revenue. This again demonstrates innovation and is a useful source of revenue and profit while we weather any pause in the expansion of footfall, and advertising revenue that comes with Urbanisation and increased travel by public transport in China and elsewhere.
So although the European company is not a US leader in their own space that they have innovated they are world leaders who are passionate about their business and are getting on with growing it regardless of what ever headwind or tailwind prevails for the wider economic or media community.
Stan Pearson, Head of European Equities, Standard Life Investments
First published in Hong Kong Economic Journal - 7th October 2015