Key takeaways
- The media industry is undergoing rapid and major changes with the increased demand for digital content
- Lots of media companies rely on advertising spending, which tends to track the performance of the wider economy
- Advertising spending is proving more resilient than originally feared
- Investors should remember that competition in the streaming space is very fierce – just because a company has a good product, it doesn’t guarantee success
What is the media sector?
The media sector covers companies that allow the sharing of information. That means it includes businesses responsible for making, publishing or distributing media – that can be TV (broadcasters), radio, video content or streaming and educational materials. Lots of media companies make their money from advertising.
How has the UK media sector performed?
UK media vs FTSE All-Share total return
Scroll across to see the full chart.
Past performance isn't a guide to the future. Source: Refinitiv Eikon, 03/07/23 (media sector represented by the Refinitiv UK Media & Publishing Index).
The last couple of years have been difficult. Traditional media companies, like broadcasters, depend on advertising revenue. That means other companies and brands need to be willing to spend on TV advertising slots.
Advertising spending tends to track the broader economy. When times are tough, marketing budgets tend to get cut. That makes it more difficult for companies relying on advertising activity.
Despite a partial recovery from the difficult period during the pandemic, returns from media companies still lag the wider UK stock market. That’s partly because there’s a structural (ongoing) decline in broadcast advertising, as well as continued uncertainty about global advertising spending which has knock-on effects for other companies in the sector.
Where are the biggest opportunities?
Gaming and gaming events are a major one. They account for an ever-increasing portion of screen time and have led the way in early metaverse adaptation. This trend is likely to continue and provides a structural growth opportunity as the way content is consumed changes.
Streaming is unsurprisingly another area to watch. Investing in content for streaming, gaming and/or digitising traditional media is very important for the medium term. And only a certain number of companies will be able to afford it, creating opportunity for stronger names.
We like companies that have clear digital strategies. Companies who are on the front foot when it comes to streaming content are in a better position than those whose digital outlooks are unproven or unclear.
There are also some advertising and publishing giants who’ve turned a corner when it comes to their digital product offerings, helping performance and their valuations. These changes have happened faster and more effectively than we thought and have helped underpin our belief in some of the big traditional names in the industry.
Global advertising revenues are holding up better than expected too, despite the ongoing uncertainty in the economy. UK internet advertising spend rose 12% last year, following a huge 41% spike in 2021. Growth is expected to continue at an annual rate of 6% over the next few years, which adds a layer of resilience for media companies competing for advertising pounds in the short term.
What are the risks?
There’s an enormous amount of change happening, accelerated by the pandemic and the recent ramp-up in artificial intelligence (AI) technology. That presents opportunity and risk.
Ad revenues are in structural decline and only those with deep pockets will be able to invest what’s needed to survive on the other side of the content wave. Legacy companies face a very difficult balancing act of creating profit from their traditional business, all while funding digital growth from a limited kitty. These risks are reflected in some very depressed valuations.
For context, streaming video on demand (SVOD) is now bigger in the US than broadcast and cable.
And as most players in the industry move to bolster their digital footprint, including SVOD, competition is heating up in the more dynamic areas of the market too.
Heightened regulation for social media companies means they’re looking for ways to engage users in different ways, including algorithmic content suggestions. All those hours with our eyes trained on specially selected reels and videos is time we’re not watching Netflix, Disney+ or Prime.
So, when we do decide to watch something, we have more options than ever. The fragmented market means inevitably one or two names will come out on top in the long term.
But one way the big names are currently trying to stoke revenue and share price growth is through ad-supported tiers. Early evidence suggests these aren’t guaranteed to be the cash cow they were billed as. This could still change, but is something to keep a close eye on.
Valuations could be knocked if ad growth is harder to come by than previously thought. That’s because profit is also tough to generate for streamers. Content creation is extortionately expensive, as is paying for the wider infrastructure to launch a meaningful platform.
Very few companies can afford a seat at the table, and even fewer will be able to endure the lumpy cash flow long enough to prosper. That means it’s a mistake to assume that streaming is a golden ticket for all companies that try their hand at it.
Our view
The media industry is arguably going through more change than any other sector.
The pandemic accelerated the way we consume content. Demand for streaming, digital and gaming services has increased. Media companies that are able to offer best-in-class products in these areas are in a stronger position.
This has created significant challenges for traditional companies, but also opportunities for investors prepared to take a bit more risk.
Some of the sharp downturns in valuations has been fair and there could be further pain to come. At the same time, some slicker media companies that have seen their valuation increase, aren’t guaranteed success because of heightened competition. Higher valuations also increase the risks of ups and downs.
‘State of flux’ is the most appropriate phrase for this sector, and investors should be prepared for what that entails. With that in mind, we think the short and medium term looks less gloomy because advertising spending looks, for now, to be more robust than we feared.
Enjoy our share sector reviews?
Our last review looked at the real estate sector, the impact of interest rates and inflation on the market, and the sector’s long-term potential.
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