Feature Stories | May 02 2006
By Greg Peel
Merrill Lynch notes July 2006 will see the launch of Australia’s first true IPTV network – Reeltime Media (RMA). Reeltime will offer broadband accessed pay-per-view (as opposed to monthly subscription) TV and movies. This will further fragment the market. It may take a while yet before first-run quality will be accessible to Reeltime, but FTA and pay TV have to see the writing on the wall.
Thus existing media can squabble and bitch all they like, all the way to 2010, but chances are the problems will be solved behind their backs through newer technology. One interesting twist is that Telstra (TLS) is doing its best to catch up on broadband rollout, in order to remain competitive as a telco, but this will only provide new media with greater penetration opportunity. And don’t forget Telstra is the "tel" in Foxtel, so to some extent it will rob Peter to pay Paul.
Who will suffer the most?
The government will keep FTA on life support by preventing new licences and extending the opportunity for specialist digital channels, as well as extending anti-siphoning laws, albeit with a "use it or lose it" covenant. Pay TV will suffer, but one mustn’t forget that pay TV takes in subscription income while FTA relies solely on advertising dollars. Pay TV should have the opportunity to grow as FTA fails to find the money to spend.
Of the three commercial networks, Merrill Lynch notes Nine (PBL) has been the hardest hit by the decline in viewer numbers, losing 12% over 2001-05. Seven (SEV) and Ten (TEN) have lost 7% each. Nine has not only lost out in absolute terms, it has loss ratings to Seven given Seven’s re-emergence as a TV force. Ten, on the other hand, has always survived by targeting 16-39s, and has succeeded with its popular franchises of Big Brother and Idol.
Looking ahead, Merrills has downgraded TV industry growth assumptions out to FY08 from 3.5% to 3.0% with definite risk to the downside. This may not seem like much, but there is an extraordinary correlation between ratings points and advertising spend, meaning the smallest of falls can have a significant impact.
Merrills calculates the impact to Publishing & Broadcasting’s (PBL) valuation to be down 1% on this measure, but PBL is saved by not only its interests in the internet (ninemsn) and pay TV (Fox Sports) but by all its other interests, particularly in gambling. (The end result is actually an upgrade of 8% for the company. But should Jamie now be looking for a new generation Alan Bond?)
Valuations fall 3.5% for Seven and 2% for Ten. While Seven’s re-emergence has probably come a bit late in the scheme of things, the network has looked forward through its deal with Yahoo!. Ten has no such deal as yet to bring it into the internet world, but rather it is relying on its old stable, as well as AFL and content from Fox.
Merrills notes that if its long term growth assumption was reduced to 1%, valuation for PBL would fall only 4% but Seven would lose 26% and Ten would lose 20%.
(In late breaking news, Ten has won a ratings week, albeit in equal first place with Seven, for the first time since 1994. Big Brother is back. Channel "Still the One" Nine came in third, for the first time since 1991. Poor Eddie.)
So that’s the situation for the television industry. Now we turn to the other old media warhorse – newspapers.
Back in the tech boom of the late 90s, pundits were predicting that the internet would replace just about everything. You would no longer go out to the movies, leave the house to go grocery shopping, browse the boutiques or bookshops. And you would no longer "buy" the newspaper. While the internet has definitely changed the way we live, it hasn’t done so to quite the anticipated extent, and may yet not.
At the end of the day, human beings do quite like to get out of the house. And how can the internet replace, say, an afternoon of solid shopping with the girls? Consider also, that people still like to read a hardcopy newspaper – at the breakfast table, on the train, in bed on a Saturday morning. It’s actually a pleasure in itself that sitting in front of a computer does not replicate.
Thus it is understandable that rumours of the humble newspaper’s demise were exaggerated. However, while newspapers do provide news and commentary, pictures and puzzles, they survive on classified advertising. And it is the dominance of newspaper classifieds that has been under threat from new media, and particularly from the internet.
On-line advertising in Australia grew 65.3% year-on-year in the March quarter of 2006. Total spend was $195 million, but the tip is that if the growth rate continues, on-line spend for 2006 could reach $1 billion.
Those numbers look very impressive, but the reality is that online still only accounts for 6% of the total ad market (across all media) in Australia, and the same in the US, according to Merrill Lynch. It might be growing fast, but it is not looking like the be all and end all just yet.
In Australia, savvy companies such as Seek (SEK) burst on to the scene with its online job market and caught everyone by surprise, particularly rising from the ashes of the tech crash in the US. Although very slow to react, the likes of newspaper publishers Fairfax (FXJ) and News Corp (NWS) have since thrown their efforts behind producing and acquiring their own online services. Merrill Lynch suggests, for example, that by FY08 online will account for some 19% of Fairfax’s earnings.
Hence there is a buffer for traditional publishers in terms of heading off loss of market share to online upstarts. However, publishers may provide choices for advertising sellers, but they still very much rely on the public actually buying newspapers.
The newspaper as a provider of news and entertainment has long been under threat from other forms of media. For example, there is not much information one cannot now access via one’s mobile phone. And the younger generation are less likely to become newspaper fans when they are used to other forms of technology.
Merrill Lynch notes the decline in circulation of metro newspapers has been 2% over 2001-05. Compared to falls in FTA TV viewing, this dinosaur of old media has faired reasonably well.
It is also noteworthy that some specialist online classified sites, such as those for classic cars, have actually supplemented their websites with hardcopy publications, despite the obvious cost of printing. The hardcopy does not look like dying out for a while yet.
Merrill Lynch is forecasting traditional media to grow by 2.9% in the period 2005-2010. The level of the past 15 years has been 4.6%, with the last five years at 3.1%. Total media growth (including new media) is expected to be 4.9% in 2005-2010 compared to 5.1% in the past 15 years.
During the same period, Merrill Lynch expects total ad spend to grow at the same rates. However, there will be a "continued reallocation" away from old media and into new media. Of the two giants of old media – newspapers and TV – newspapers will not suffer any immediate sharp declines but FTA TV is quite clearly on the way out.
It may well be that by the time decisions are to be reached in regards to television in 2010-12, there won’t be a lot to argue about.