Feature Stories | Aug 23 2006
By Greg Peel
Foster’s (FGL) will no longer advertise its eponymous, iconic beer on US television. Foster’s has always struggled to reach more than simply curious American beer drinkers in the land of Budweiser and Miller. Its 2005 television advertising budget was US$5 million, considered too small a budget to make an impact.
Will Foster’s just give the US away and come home? No. It will now spend all of its budget on internet advertising.
This was not a decision made in haste. Rather, it was a decision based on the success of a little test the company ran last year. It all has to do with the now famous "Big Ad".
The Big Ad was part of an ongoing campaign from Carlton & United Breweries – Foster’s beer producer – to revitalise its dwindling sales of flagship brand Carlton Draught. The campaign has been centred on satirical humour, and the idea of the Big Ad was to send up the high-budget television advertisements of past years, particularly those of British Airways.
It is a bit hard to simply describe the Big Ad, so if you don’t know what I’m talking about go toYouTube.com and type "big ad" in the search engine.
Apart from being an amusing piece of marketing, the Big Ad provided a test case by being released on the internet some three weeks before it reached television screens. The impact has since become a world-wide talking point.
To begin with, the company only sent the ad out to company employees. They then did the rest. Not because they were told to, but because they liked the ad and so emailed it to some mates. Those mates emailed it to other mates, and before the ad even reached TV, a million people had seen the ad.
It’s now been about a year since the Big Ad was launched, and Foster’s credits the campaign with increasing Carlton Draught’s share of the Australian beer market by 1.44% to 9.2%. Small beer you think? That equates to some 36 million extra stubbies (AC Nielsen).
The new buzzword in advertising circles is viral marketing, and viral marketing is child of the internet. In July last year, Rupert Murdoch’s News Corp (NWS) paid US$580 million for the website MySpace. At the time, many commentators thought Rupert had lost the plot.
MySpace is simply a "place for friends" – a social network website full of internet-age types chatting about this and that and nothing in particular. It sounds innocuous, but AC Nielsen reports the traffic on MySpace is growing by 300% annually. It is now the eighth biggest brand on the whole internet – bigger than Amazon.com.
This month News Corp struck a deal with Google which sees the search engine giant guaranteeing US$900m in revenue sharing over four years just to have its engine on the MySpace website, that’s all. It seems Google cannot afford to miss out on such a high-traffic website when related advertising opportunities lay in the offing. Those commentators have now fallen silent.
Viral marketing works on the simple basis of word of mouth. Word of mouth is probably the greatest marketing tool of all, and the advent of the internet has meant the entire world can now join in one big water-cooler conversation. We all receive jokes, photos and video clips from our mates over email, and if we like them we pass them on to a selection of other mates. This is a geometric growth phenomenon, and it costs nothing.
Put some form of advertising on the net and, on the assumption that the ad is sufficiently entertaining/interesting/provocative, it will be passed on and on. Not only does the advertiser have to do no more, the person downloading the email is actually paying their own money (through their internet subscription) to view the advertising. Compare this to a company placing an ad on television over several weeks, and paying for it every time.
UK rock band The Arctic Monkeys became famous last year when their first single reached number one on debut. All the band did was burn a few CDs of their own and hand them out free at gigs. Fans uploaded the CDs and emailed them to friends. They were posted on MySpace, and the rest is history.
Exploiting viral marketing is not just a case of placing any old thing on the net. Quality is still paramount, and the internet generation is savvy enough to see right through pretenders. Thus Foster’s recognises that it still has to approach its internet advertising the right way, and after all the Big Ad did cost millions to produce.
Foster’s new campaign, commencing with 16 separate ads created by Ogilvy & Mather, opens on the website Heavy.com. This particular site is targeted at young men and features music and videos. The site’s slogan is "Because TV sucks".
And this is the crux of the matter.
The marketing material for Fairfax Digital, online subsidiary of newspaper publisher John Fairfax (FXJ), states that 25% of men aged 18-34 who are connected to the internet now claim to watch less television as a result of their internet connection. As far as advertisers are concerned, this is a very important demographic.
Compared with much of the rest of the world, Australia’s broadband speeds are slow, due to an incompetent government and a ridiculous private/public telco incumbent. Nevertheless, Australians have been quick to at least move off dial-up and on to broadband. This has opened up a whole new world. And it has changed the face of media advertising.
"I believe the next two years, largely due to the take-up of broadband, will be the time when the existing landscape will no longer be relevant and a new landscape will dictate everything from our approaches to our audiences and advertising", said Kim Anderson, CEO of Australia’s largest independent production company, Southern Star Entertainment. (Source: The Australian)
Anderson noted Australian broadband penetration was only 4% in 2002 and is 29% now.
PriceWaterhouseCoopers expects newspapers and free-to-air (FTA) TV to continue to attract the greatest share of advertising during the next five years, but the figure will drop from 70% to 62% by 2010. New media will pick up the difference.
Every single ratings point is gold to an FTA network. One point represents such a substantial difference in advertising share that it can move the valuation of television network stocks by very significant amounts. But if advertisers begin to reduce their overall FTA TV spend, the capacity of networks to finance ongoing production is diminished. And it is not only the internet that is providing a threat.
Australians have been slow to pick up pay TV, due to high costs associated with ludicrous parallel infrastructure rollouts. But the tide is turning. After about 20 years, 2006 will be the first year Foxtel shows a profit.
PriceWaterhouseCoopers predicts the advertising for subscription TV will grow by almost 23% every year for the next four years. By 2010, 31% of Australian homes will subscribe to pay TV. The more subscriptions, the more advertising, the more revenue, the lower the subscription cost, the more subscriptions…
There is still a perception that pay TV simply represents 50 channels of rehashed rubbish, and anyone who subscribes to pay TV will tell you this is true. However, that tide is turning as well, as more advertising means bigger budgets means better quality. The cable-only Australian drama Love My Way scooped the pool at the Logie TV awards last year, despite ratings that barely registered. US cable icon HBO is the poster network for the production of cutting-edge drama that FTA TV won’t touch. Quality wins.
And in this country, it’s all about sport. Pay TV is making quiet inroads into sports broadcasting as FTA TV has frivolously squandered its legal right to first option on broadcast. The government has been forced to respond with a "use it or lose it" policy.
Pay TV has also been quick to exploit the world of digital technology. Once again, due to government incompetence and sycophantic kow-towing to FTA TV moguls, digital television has all but been stymied in Australia by FTA resistance. But that is slowing changing as well.
The most significant aspect of digital television, from an advertiser’s point of view, is "interactivity", or the little red button. By pressing the red button on the remote, pay TV viewers can participate in polls, enter competitions, order brochures, or even buy direct. The beauty lies also in feedback to advertisers, who can immediately correlate information on demographic response depending on just who pushed that button.
Digital television is not the sole domain of pay TV, and pay TV providers are frustrated that the Australian government (other than moving glacially on media reform) is still kow-towing to FTA TV by favouring those networks in the development of digital access and specialised channels.
At the end of the day, however, one of the greatest threats to traditional television, both FTA and pay, lies in the restrictions enforced by programming schedules. The average Australian still arranges weekly activities to include watching a particular favourite program at the time it is broadcast. While watching the program, the average Australian is increasingly frustrated by ad breaks, particularly when they feature in-your-face advertising techniques of intensive repetition (both within a show and within a single break) and sound compression, which has viewers leaping for the volume control.
The 18-35 male demographic might be watching less television, but the next generation of beer drinkers find the thought of sitting down in front of the tele at a time when the program dictates somewhat quaint. It’s almost as silly as watching Dad playing air guitar along with his old Creedence records.
Already, US first-run television programs can be downloaded on the internet shortly after initial screening (pirates can do so even before the screening). They can also be downloaded on to mobile phones and PDAs, and software exists that can remove any advertising from the program.
The next step is internet protocol TV (IPTV), which allows program (or movie, or anything else) download for viewing at a time to suit the viewer, not the network. Such capability requires high speed broadband, and although Australia is slow, it’s getting there. Moreover, there are a growing number of websites that provide alternative entertainment to traditional TV/movie viewing, such as YouTube.com. The penetration of YouTube has been nothing short of phenomenal, and yet most of the videos available on the site are provided voluntarily.
And then, of course, there’s computer games, which represent a burgeoning entertainment alternative, particularly for younger, high-spending punters. It is no surprise that this year Microsoft spent hundreds of millions acquiring the software developed by Australian company Massive that allows ads to be placed within existing games.
How have traditional media companies responded to the new media threat? Well in most cases, very slowly.
"Media buyers have been pushing for it, major advertisers now say they’re ready for it and suddenly the diversified media groups which have TV stations as a core asset say they are serious again about delivering it", said media writer Paul McIntyre in the Sydney Morning Herald. He was referring to the "new media buzzword" of integrated, or cross-platform advertising deals.
Network Seven’s (SEV) CEO David Leckie has noted that surging revenue figures for the six months to June were partly due to the company’s three main elements – the TV network, magazine division and internet joint venture, Yahoo!7 – getting better results from "concocting packages for advertisers" which ran across all three units.
Faced with a serious challenge to its number one position, Nine Network’s (PBL) CEO Eddie McGuire said recently "I know that’s something the media buyers and particularly people from the advertising agencies have been screaming for a long time – for us to get our act together, to get PBL to get integration going". (Sydney Morning Herald)
Publishing & Broadcasting (PBL) ironically was one of the first companies to recognise the future of media, way back in the nineties. Chairman James Packer was instrumental in the joint venture deal with Microsoft – ninemsn – which he saw as the way of the future. Unfortunately James blew it by losing a lot of Daddy’s money on failed telephony company OneTel, and Daddy stepped back in to the frame, bringing all his FTA bias back with him.
The sudden scramble from commercial television networks has been due to ongoing negative growth figures in FTA TV advertising. Last quarters result of minus 1.2% was actually not as bad as many analysts thought it would be, but the numbers have been poor now for a number of quarters.
Most analysts expect a pick up in growth figures for FTA TV advertising in FY07, but only because the industry is "cycling easier comparables". This is analyst-speak for "it was really bad last year, so this year will actually seem positive". The figures may seem positive, but they are only growing from a lower base – the trend is still down.
FTA TV is definitely hurting, but newspapers are hurting more.
Official figures recently released show online advertising grew in Australia by 59.4% in FY06. Within that figure, online classified advertising grew 43.8%. And growth is yet to plateau.
This is a major concern for traditional newspaper publishers, particularly in high-population metropolitan areas. Classifieds are the bread and butter of newspaper revenues, and they are that which finance the actual provision of news. Newspaper circulation numbers are falling, as more people source their news from the internet, or from cable news networks, and more people go online to find a job, house or car.
The difference is that once you’re on the net, access to websites is for the most part free, but the Sydney Morning Herald costs readers $1.20.
Online job search website SEEK (SEK) increased its revenues in FY06 by 50%. Analysts expect similarly strong figures to continue in the short term, and many were forced to upgrade earnings forecasts for the company which is growing at a pace that even outstripped the growth of online classified .advertising.
John Fairfax (FXJ), publisher of two of Australia’s most popular metro newspapers, saw the writing on the wall a few years ago, and introduced its multimedia division, Fairfax Digital. After a disastrous start (FD kicked off in the tech boom, and then wore the tech bust), the division is now going from strength to strength.
The aim of Fairfax Digital is to create a "media-agnostic" business where news and classifieds services can live within all media channels, from interactive TV and digital radio to mobile phones and PDAs. In other words, FD’s brief is to head new technology competitors off at the pass. Analysts at ABN Amro believe FD can lift its share of Fairfax revenue from $7m last year to $100m in 2015.
And speaking of radio, here is another form of traditional media under threat in its traditional form.
It will no longer be sufficient for radio stations to compete with each other by providing endless rotation of "safe" music provided by record companies, or by trundling out more tired right-wing shock jocks. The younger generation are more likely to listen to music on their iPods, sourced from websites such as iTunes and recommended by websites such as MySpace, than they are to listen to what radio station executives dictate before buying the CD.
As far as talk-back is concerned, chat rooms are perfectly sufficient, thanks very much.
Hence advertisers will again look to what radio is actually providing when determining where to spend their money. Radio is not about to die, but radio stations will need to keep up with the technology and expand the range of services across digital and internet media (podcasting is one example of this) in order to remain relevant.
Analyst are predicting the real value of advertising spend across all media to increase by 5-6% in real terms over the next five or so years. It is not that advertisers are trying to spend less (other than on an economic cycle basis), it is simply that they will be rearranging their spending such that new media will continue to receive a bigger slice of the pie compared to old media. If media companies are to survive, they must go with the flow, or perish.
Who is responding, and who isn’t? Let’s look at some relevant Australian media companies, small and large.
For the purpose of the next section, following the company code will appear the rating ratios for each company as derived from the FN Arena database of ten brokers and advisors. They will take the form Buy/Hold/Sell. Not every stock is covered by every broker.
It is important to note at this point that there is a prevailing positive air surrounding many Australian media companies at the moment, given a change of laws on cross-media ownership will likely usher in a period of consolidation, rendering many companies as takeover targets. This has to be considered when contemplating the fortunes of such companies going forward.
We’ll start with television. Of the three FTA television networks, Network Seven (SEV) (6/3/1) has been the star performer of late, with surging ratings representing increased advertising revenues. Yet two brokers in particular – Merrill Lynch and Deutsche Bank – will not rate above Hold due to their simple belief in the decline of FTA TV. Nevertheless, Seven is looking to the future via its associations with the likes of Yahoo!, and more recently IPTV movie provider Reeltime Media (RMA).
The Nine Network suffers a similar fate with regard to FTA demise, but as a division of Publishing & Broadcasting (PBL) (5/5/0) its fortunes need to be considered alongside PBL’s gaming interests. As mentioned, however, Nine is at least trying to catch up to the new world. PBL also has a share in pay TV provider Foxtel.
The Ten Network (TEN) (1/7/2) has performed well over recent years as the youth network, but will disappear of the face of the planet if it doesn’t look to embrace new technology soon.
Regional network Prime Television (PRT) (4/5/0) rides on the coat tails of its association with Network Seven.
Stand-alone pay TV provider Austar (AUN) (1/5/1) has seen its fortunes improve of late as pay TV subscription numbers have grown. Analysts presently consider the stock well valued.
Southern Cross Broadcasting (SBC) (3/4/2) crosses both FTA TV and radio, and analyst views tend to the glum side with regards to a weakening advertising share. Seen as a good candidate for takeover.
On pure radio we have Austereo (AEO) (1/5/4), which, as a collection of look-alike stations in a dwindling market, does not excite analysts other than for its takeover potential.
Moving to publishing, John Fairfax (FXJ) (4/6/0) is Australia’s oldest newspaper publisher and considered somewhat of a jewel in the crown of any media conglomerate. Analyst views reflect this, which detracts from the reality that the company faces an uphill battle between declining newspaper sales and the growth of Fairfax Digital.
West Australian Newspapers (WAN) (1/9/0) has been booming along with WA’s economy. Although this is considered by most analysts to continue for a while yet, it won’t continue forever. WAN also has a share in Hoyts cinemas, which is another area of spurious growth given the impact of home theatre systems as well as the net.
Regional publisher APN News & Media (APN) (0/9/1) has a large exposure to New Zealand and as such has performed poorly of late. Nevertheless, still a traditional media company.
Rural Press (RUP) (0/9/0) is also seen as a takeover target, but otherwise is beholden to the fortunes of regional and rural Australia. In its favour, in the medium term, is that rural people still preferred newspapers over the new-fangled (and often expensive) internet thingy.
The perfect cross-over from old to new media is the king of them all – News Corp (NWS) (8/1/0) – but this is now really an American company. After being a little tardy, News now crosses all boundaries. The only problem is the company prefers to keep spending money rather than provide genuine shareholder reward.
Moving into new media, SEEK (SEK) (2/5/0) is a perfect example of strong short term growth, but analysts largely see the stock as fairly valued at present.
Online marketing services provider Photon (PGA) (3/1/1) is the perfect example of the other side of the media equation. Photon has risen steadily in value through acquisition, and nothing suggests that will change in the near term.
As Australia’s only integrated media-telecommunication company, SP Telecom (SOT) (0/1/1) is not highly regarded at present by the only two brokers covering the stock, given its interests in both telephony and regional FTA television (through WIN).
There we leave those relevant media stocks covered by the FN Arena database. The following stocks attract little coverage, but as new media companies deserve the attention of those investors for looking for exposure to this growing market. Do not rush in before talking to your broker.
Emitch (EMI) is an online advertiser that has experienced stellar growth and there is no sign of that abating in the short term. FN Arena has reported on Emitch now on several occasions.
Reporting wise, we haven’t heard much about the following:
Hyro (HYO) provides business solutions across new media. Realestate.com (REA) is looking to do to real estate classifieds what SEEK did to jobs. Reeltime Media (RMA) is at the forefront of IPTV movie viewing. TwoWay TV (TTV) is the Australasian subsidiary of the UK parent, specialising in interactive television (little red button), mobile for TV, games and so forth. Swish (SWG), now known as Ignite.au, provides new media services and website design incorporating emerging internet technology.
The world of media is changing. Hopefully this has provided investors with food for thought.