Media Puzzle

Media Puzzle

30 September 2017

Mint Asset Management – Greg Fraser

After innumerable attempts to change Australia’s outdated media laws, the government has cobbled together a deal to remove some barriers that were meant to protect the industry, but have instead become a hindrance.

The changes come probably a decade too late.

It has to be said that most of the procrastination was on the part of the media moguls themselves. They had become entrenched in their own over-protected industry (anti-siphoning rules, no fourth commercial free-to-air TV licence et al) so that when changes were necessary to combat the internet players, they bristled with self-interest (removal of broadcast licence fees) so that no common ground could be found.    

Back in October 2006, the stars did align for the media groups. The Minister for Communications, Helen Coonan, tweaked the infamous Keating media cross-ownership rules and unleashed a frenzy of takeover activity.

Alas, several of the rules remained in place, among them the two-out-of-three rule and the 75% coverage rule. The former prevented companies from owning all three major media forms in one market and the latter prevented any TV group from distributing its content across the entire country without the help of a junior partner.

Somewhat bizarrely, Australia’s media laws had been imbued with a geographic skew, intended to preserve a local voice in remote regions, but which invited inefficiency and duplication.

Amongst the deals manufactured from those changes was the multi-billion dollar exit strategy of James Packer from his father’s beloved television empire and the copycat sell-down of the Seven Network business by Kerry Stokes.

The Fairfax Group re-engaged with its cousin Rural Press in a $9 billion merger after Rupert Murdoch initially popped up on its register with a 7.5% stake.

As the dust settled and the so-called media barons began refashioning their asset bases, little attention had been paid to the real predators already inside the chicken coop.

The market was busy marvelling at the rapid growth of online advertising that by 2007 had risen to $1.2 billion of the $11.1 billion advertising pie in Australia.

Most of that online slice was heading straight into the coffers of Google and Facebook.

In addition, the new kids on the block – Seek, Carsales and (REA) – were also helping themselves to enormous gulps of the rivers of gold that had lined the pockets of the incumbent media proprietors for most of the century.

Much worse was to come for the traditional media groups.

Not only did the advertising volumes disappear in a hurry but also the price of what they were selling collapsed as the online competitors decimated the cosy CPM (cost per thousand) regime. They had unlimited inventory and sold it accordingly.

Slowly but surely, audience numbers and engagement began to fall away as the younger generation eschewed newspapers (particularly) and eventually television and magazines. They preferred to hang out in their bedrooms surfing the internet, self-imaging their lives on Facebook and Snapchat.

Advertisers obligingly followed.

The private equity companies that thought they had snared Australia’s iconic media businesses not only overpaid for them but the earnings and valuations quickly evaporated.

The ensuing decade has seen the emaciation of shareholder value in the traditional media companies as earnings plummeted and balance sheet values of goodwill were massively impaired.

Hailing the new media laws as a salvation misses the point that there is precious little to salvage.

The Ten Network has, not for the first time in its history, fallen into administrators hands and been offloaded to its largest creditor, CBS Corporation.

Private equity groups have circled Fairfax Media with TPG offering $2.76 billion but subsequently pulling out. Fairfax plans to separate its Domain real estate listings business but what remains is a gaunt shadow of its prior glory days.

The Fairfax saga has extended to New Zealand where the NZ Commerce Commission rejected a well-publicised merger with rival NZME group. The appeal decision is imminent but even if the merger process reignites, the proposed new group will be far from safety, exposed as it is to the same rapacious online trends as in Australia.

The media mogul with arguably the most to lose is WIN Corporation owner, Bruce Gordon. His privately owned business was the regional broadcaster for the Nine Network until 2016 when Nine swapped dance partners to Southern Cross and left WIN with little choice than to partner with the wallflower Ten Network. We now know how well that turned out. Mr Gordon owned 15% of TEN when it handed the keys over.

The subscription television market is enduring its own dose of karma from the intrusion of streaming video services. Foxtel has struggled to hang on to its large subscriber base in the face of the onslaught from Netflix and Stan (half-owned each by Nine and Fairfax) who are piggybacking cheap broadband services as a means of snatching customers.

Foxtel’s owners, Telstra and News Corp, are seeking to combine Fox Sports with Foxtel, and then list the larger entity on the stock market. Telstra intends to sell its stake down further.

Sky Network Television has faced the same competition from streamers and has struggled to match them with its own version, Neon. The NZCC stymied the proposed merger with Vodafone leaving Sky to ponder what plan B looks like. The real danger for Sky is the potential for a larger fish to swallow its hegemony over rugby and cricket broadcasting rights.

If any segment of the media industry is in the spotlight it is radio and outdoor. Both were hitherto the poor cousins of the media world, each occupying a niche but subordinate to the powerful television and newspaper groups in the pecking order for advertising dollars.

How the fortunes have changed.

Radio has soldiered on to become the steady Eddy of the media formats producing reliable profits on relatively shoestring budgets compared to the profligate TV networks.

The outdoor media businesses, APN Outdoor and oOh!Media, have emerged as serious alternatives rather than also-rans for advertising executives. The transition to fully digital billboards combined with a genuine audience measurement tool has propelled revenue and earnings to the extent that the market is now placing higher valuation multiples to this segment than TV or print.

The Australian Competition and Consumer Commission disallowed a merger of these two companies earlier this year because it would dominate the segment and hence reduce competition in outdoor advertising.

The narrow market definition was clearly not a practical application. Now that the ownership rules are changing, it may be possible to revisit such combinations if the ACCC takes a sensible view of the broader advertising market.

Keating’s ‘Queens of the screen’ and ‘Princes of print’ are an anachronism, much like the media laws that have finally been consigned to history. The industry is not yet fully rid of its special treatment but is getting closer to mainstream company regulation and that is a good thing.