How old media's rivers of gold dried up
Investors should "steer clear" of traditional media companies and put their money in more innovative alternatives, an investment analyst says.
Latest projections from PwC suggest New Zealand newspaper advertising spending will fall to $483 million in 2016 from $603 million last year.
Craig Investment Partners' Mark Lister told NBR ONLINE it is a particularly hard time to be a traditional media company because they're struggling to adapt their business models to the digital era.
"It's been a dangerous area for investors over the past few years.
"It would be easier for the companies to adapt if they weren't also going through a pretty tough economic period", Mr Lister says.
Traditional media companies such as APN – which owns the New Zealand Herald and half of The Radio Network – were once sharemarket darlings, but have now seen their share prices hit astonishing lows.
On the ASX, APN shares have fallen 90% since 2007, from over $A5.20 to $A0.53.
Things aren't much better at Fairfax – which owns the Sunday Star Times and the Dominion Post – where shares on the ASX sit at $A0.51, down from over $A4 five years ago.
PwC's report says newspapers still have not worked out how they can replace lost advertising revenues while still giving their content away.
Mr Lister says it is almost certain paywalls will become commonplace.
"People will adjust and it will be like Sky TV, but to a smaller extent. They will just be happy to pay for the good quality content."
Recent ventures into paywalls seem to be paying off for major publications such as the New York Times.
The company recently reported its advertising revenue dipped 6.6% to $220 million in Q2, but circulation revenue from newspapers and online paywalls increased 8.3% to $233 million.
That represents a major shift in the newspaper's business model – it is now supported more by readers than advertisers, which surely will be good for the quality of journalism.
PwC predicts similar trends here over the next five years, saying that while advertising dollars will fall the circulation spend will rise to $286 million from $257 million.
Mr Lister says despite recent poor performances there is still a place for traditional media companies on the sharemarket.
"Over five years they may well be a very good buy.
"But for the next two or three years the economic situation is probably going to be subdued and the changes required may take longer than the customer would like."
Shares in companies such as APN could be good value now, but that advice comes with a health warning, Mr Lister says.
"I would be watching and waiting.
"Plenty of people would take a view that all of those risks are factored into the current share price, which look cheap, and on a five-year view they will have made the adjustments they need to."
Mr Lister says new media companies such as SEEK and Trade Me are a far more sensible investment in the current environment.
"They are good examples of the new breed of media companies, and they are firmly entrenched in the minds of investors."
Fairfax was criticised for paying $700 million for TradeMe in 2007 – seen by some as too much – but it turned out to be an astute investment, Mr Lister says.
Shares in TradeMe have increased 28% since its debut on the NZX last December, from $2.90 to $3.70.
Trade Me turned out to be the best-performing part of Fairfax's business, and it recently sold down its holding to 51% to free up cash for its struggling publishing arm.
"It really highlights where the industry is going, and how anyone who doesn't move with it is getting left behind.
"The questions is can those traditional media companies change their business model to leverage off the fact that we all use our smartphones to read the news now, and can they charge for it?"