What the Next Recession Could Do to The Media Business
Maybe it’s a blip. Maybe we’ll see the global stock market plunge of the last week as a hysterical overreaction to China’s economic woes. Or maybe, it’s the unwelcome, but real, signal that the economic recovery that the U.S. – and lately Europe – have enjoyed may be compromised.
Certainly, it’s too early to believe that we’ve hit a new turning point. Yet, the overnight stock market correction, and hint of panic, suggests something deeper. Less than a decade after the Great Recession – a time when many couldn’t recall what a normal economy was like – much of American business has been planning like the new, good times would roll on forever. They won’t, of course, but economists have told us the next two to three years look pretty good.
The media business has been banking – literally – on that confidence. Every deal you can think of – the NBC-U investment in Buzzfeed and Vox, venture capitalists’ investment in newspaper properties and the consolidation of regional TV broadcast companies – has been built on the tacit assumption of a good economy. In a slowdown, we’d see impacts in the newer media, in newspapers and in TV, and we can pinpoint the likeliest ones.
While we can hope that stability returns soon, the week’s shock should send a little chill down the spines of many in the business. After all, this is a time of profound transition and transformation in all legacy media, and still a time of proving out the new digital-only news, information and entertainment business.
First published at Politico Media
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So, things will get tougher, that’s assured. The big question: who will feel the pain most? If and when the economic music slows, who may lose at an unplanned game of musical chairs? And who might use a slowing to better position themselves for the next recovery?
First, let’s remember the truism that advertising spending varies directly with economic growth, as measured by GDP. Historically, that’s been largely true. So, our first major point would be that if economic growth slows from the projected 2.3% by a point or so to just over one percent, that could drag down spending almost two billion dollars; projections estimate about $190 billion in total U.S. ad spend.
But, wait, digital disruption may be depressing overall ad spending in general.
At the Vail Roundtable, a newspaper industry event held last week, Ken Harding, senior managing director for the FTI consulting group, laid out that argument.
“Digital is depressing overall ad spend,” he told the conference. Using data from the Economist Intelligence Unit and Wall Street projections, Harding told the group that total ad spend has historically totaled 1.6% of GDP over more than five decades.
That percentage reached an apex of 1.89% around 2001. Then, it began dropping – as digital advertising grew by billions annually – to less than 1.2% this year. It is headed down to 1.15% by 2018, he figures.
Why? Blame all the various digital disruptions, each successive one driven by data-centric efficiency-improving techniques reducing marketers’ perceived needs to spend.
So if overall economic robustness certainly serves as one factor, and digital disruption makes ad selling even harder, how do we place in context the impact of an economic slowdown?
Justin Smith, CEO of Bloomberg Media, said economic downturn could add a fourth pressure point to an already stressed media ecosystem.
“There are three forces at work. Programmatic is commoditizing advertising,” he said, driving ad rates down. Second, the fast audience shift to mobile “reduces opportunity for monetization.” Third, the ascendance of platforms, especially Facebook, makes media-brand site selling even tougher.
If the economy slows, “it could be a perfect storm,” he said.
“A stock market crash, economic downturn or dried-up venture markets would simply aggravate and accelerate the known situation,” said Andy Wiedlin, who left Buzzfeed recently as chief revenue officer and now serves as Executive in Residence at Andreessen Horowitz. “It would sharpen the conflicts and paradoxes, and accelerate winners and losers.”
M & A
Let’s start with NBC-U’s $400 million of investment in Buzzfeed and Vox, finalized (we’d assume) last week (“What are they thinking? NBC-U and the ‘digital dozen’ seek perpetual youth“). Would NBC-U have turned over close to half a billion dollars of its treasury, if it thought the economy might profoundly slow? Maybe, but we’d have to believe the decision would have been harder.
The world of M & A could see lots of changes.
NBC-U (Buzzfeed, Vox), Verizon (AOL), 21st Century Fox (with its Vice investment), Disney (with its Maker buy) and Hearst (which invested in Vice, through A&E Networks) have all made big bets in the last year, as they’ve tried a buy a chunk of the future.
Would a turndown slow down – or speed up – M & A? “It could ignite M & A activity,” said Justin Smith, talking about the market in general and not specifically about Bloomberg’s own intentions.
Certainly, emerging media may feel a greater need for a big brother in troubled times. Just as likely, the price of buying in or buying up could get cheaper. With money a scarcer commodity, start-ups may go for less.
In this week’s Media Notebook, I talked about the emergence of the Big Three in digital news/feature startups. Even in the face of an economic headwind, we’d have to believe that Vice, Buzzfeed and Vox are well funded for now.
But what about Business Insider, which has taken in good money, but hasn’t gotten the capacity Vox and Buzzfeed just obtained? What about Mic, itself having just gotten $17 million in funding, and Ozy, which took in $20 million last fall? These two news start-ups now increasingly find themselves in the shadow of the Big Three. Would their funders place bigger financial bets if the Big Three extend their audience, and then, revenue dominance?
One experienced digital media investor suggests that those sites with “less than 20-30 million uniques could be in a danger zone.” BI has that kind of audience, but neither Mic nor Ozy yet do.
We can tie back this question to the pressures on digital advertising. Most digital startups make digital ads their prime business model. Given those three, and perhaps four, pressure points outlined by Justin Smith, we’d have to wonder about the staying power of the too-small players in the digital ad market.
Much has been made about the outsize $1 billion plus new valuations of Buzzfeed and Vox. These are valuations more of audience growth than of revenue.
As one investor puts it, “This could get ugly. Publishers need to dust off their plans for getting to cash-flow positive fast as necessary to hibernate through any downturn.”
As we learned in the 1999 bubble, tougher times force valuations to be based more on revenue and profit growth and less on the amassing of audience.
Let’s remember that the biggest, most stable, companies – especially those that already ponied up and the others among the Digital Dozen I identified last week – still have lots of cash. Further, money is still cheap, and may stay that way for longer, given what we’d expect to be greater Fed hesitancy in raising rock-bottom rates.
These biggest companies, then, may be well-positioned to stack up their digital futures, at prices lower than they expected in the first of 2015.
“It’s often during these disruptions that the most astute investors find their gems,” one digital publisher reminds us.
Content marketing and native advertising have burst into the ad market in the last three years, and it’s tough to tell how much this branded content push would be aided, or hurt, by downturn.
“Native advertising is supposed to be the cure-all, but each organization is implementing a different flavor native: some work, others don’t, and [it’s] tough to scale across multiple sites,” said Andy Wiedlin.
Quartz publisher Jay Lauf added:
“The industry is in new territory with content marketing and marketing services because neither was as integral back in 2009 as they are today. I would think complex market shifts would give a number of well-positioned companies a chance to provide valuable insights to customers and therefore stand out.”
What’s clear to everyone with whom I talked, most of whom didn’t wish to be quoted, is that digital display would take a greater hit. The logic: as marketers watch their dollars more carefully, they accelerate movement away from the categories they’ve seen to be the iffiest.
Digital display has been flattening anyway, as marketers seek more proof of would-be customer engagement.
That’s means more provable ad placement, like cost-per-acquisition.
Overall, said experienced marketer David Brown, EVP of Meredith Xcelerated Marketing, “I think it drives investment towards performance-based marketing. Direct marketers always benefit from recession fears.”
The big winners, of course, would be those strongest going into a downdraft: Facebook and Google. While they might take a small hit, their share of dollars (and euro and pounds) is only likely to increase.
Jay Lauf cautions that even with the incredible strength of digital ad growth, a softening would hurt. “I think digital is in a slightly better position because an advertiser can plan in shorter cycles and update content and placements with more alacrity, but it would be foolish to assume a long-term downturn in the economy would have no impact on digital advertising.”
While newspapers’ financial woes now receive decreasing media attention, 2015 has been worse than 2014 – and no year has shown revenue growth since 2007. These are fragile enterprises, unquestionably in downward spiral, by any metric. Newsroom employment is down to 32,900, and will soon be half what it was 25 years ago. They are profitable, but for most, only on the basis of continual cost-cutting.
In truth, newspaper companies lost a huge amount of revenue – one-fifth of their pre-recession totals – in one year and then continued to lose. If recession accelerated newspaper ad revenue loss, so did economic recovery, as advertisers switch to digital further picked up steam. One publisher notes that throughout all the change we’ve seen, newspapers have taken a “disproportionate hit.” Unfortunately, that history would probably repeat.
An argument can be made that preprint advertising – those Sunday inserts crammed into the comics section – could do okay in a down market, as consumers look increasingly for bargains. That’s a thin straw to grasp, though; preprint revenue is already experiencing double-digit losses, I’m told, by numerous publishers, and here noted by the Wall Street Journal.
Yet, it has been New Media Investment Group’s rolling up of newspaper properties that’s been most watchable this year. The Fortress Investment Group-managed company has spent more than $530 million buying newspapers over the last year and a half, and said it has plans to spend as much as $1 billion in total over three years. Already, it owns 87 dailies.
Then, there’s the new split-off-from-the -broadcast/digital mothership, Gannett. It, too, just picked up 10 new dailies in the spring and will soon buy more, I understand, pushing it close to 100 newspapers.
Both chains believe they can make money on new acquisitions, through strategies that include increased centralization and selling digital marketing services to small and medium sized businesses in their markets.
Each will tell you that any acquisition will pencil out in three to five years. That assumption, too, is based on the good economy. A downturn could well play havoc with those consolidators’ arithmetic.
For the industry as a whole, any loss in economic momentum would be tough to bear.
While GDP is one important metric, one successful daily publisher reminds us of regional newspapers’ bread and butter. “The indicator to watch is retail spending. That’s the core of where we play.”
In the good economy, flat (in consumer and ad revenue) is the condition of consumer magazine companies, each and all strategizing their digital transitions. A down economy threatens red ink.
It is those companies in the midst of transition that may be most vulnerable. At the top of the list: Joe Ripp’s spun-off Time Inc. Ripp is moving as fast as he can to change Time’s strategy and culture, but needs time – and money – to effect a real turnaround.
Just as the stock market started to turn down, financial analysts turned with a fury on legacy TV companies. Multiple downgrades of CBS, 21st Century Fox and the Walt Disney Co have already put their ad-based business models into question, as analysts now move to favor the pipes companies,: Comcast, Charter and Time Warner Cable.
Disney is down to $95 from $118 just a month ago. Fox and CBS have seen similar declines, with the overall market drubbing just part of the story.
All of a sudden, these digital transition strategies are being found wanting. If economic turndown were to combine with digital disruption, their need for a new story would be all the more pressing.
Similarly, in the regional broadcasting business, we’ve seen unprecedented consolidation – TEGNA, Tribune Media and Sinclair buying in the last two years. The recognition: It’s a flattish business, starting to absorb the same kind of digital disruption that forever damaged regional newspapers. Yes, these companies can point to their retrains fees as a buffer, but if auto advertising – 25-33% of their ad revenues – were to take a hit, flat might seem good. For 2016, there’s the power of political advertising to counteract immediate losses of revenues, but beyond the election year, the serious challenge that local broadcast faces will only be worsened by economic woes.