Big media versus cyber surfers

Dotcom mania returns

Glynn Davis

Published : Wed 22 Nov, 2006


There’s no doubt about it, the big media companies are in a spin. They are under threat from a growing band of small, fleet-footed upstarts who are creating websites of user-generated content.

The problem with these sites for Big Media is that they are proving such terrific social networking platforms that they are attracting young people in their millions and are quickly becoming their preferred media option above the traditional formats of newspapers and TV.

Needless to say, the likes of News International, Trinity Mirror, Emap, Daily Mail and Pearson, along with the large media agencies such as WPP, are struggling to work out how best to react to this phenomenon. They are facing a market where their audience of the future is drifting away in their droves.

Evidence of the seriousness of the situation was the move by the mighty Rupert Murdoch to purchase social networking site MySpace last year for $580m. At the time this was regarded as a pretty full price but in recent months it has been called the deal-of-the-century by some media industry professionals.

This is because, compared with the recent $1.65bn that Google splashed out for the video sharing website YouTube, it may well be a steal. Whatever the potential of such sites you cannot escape the fact that these are ludicrously high prices to pay for businesses that have yet to generate any meaningful revenues.

Big media versus cyber surfers: Broadband internet taking TV and print audience

It might not be too off-the-mark to suggest that these social networking sites are as insanely valued as any of the dotcom stocks that roamed the virtual planet of the late 1990s. We have entered another period of internet land grab where the biggest pockets initially prevail, but also run the risk of paying a high price for their actions. Witness yesterday’s hot website, old pals get together, Friends Reunited. Bought last year by ITV for £120m, now it is falling fast in consumers’ affections, according to a recent YouGov Brand Index poll.

Murdoch famously missed most of the boat on the dotcom boom-and-bust luckily avoiding pumping too much of his cash into helping further inflate the bubble.
But this time he is pretty gung-ho about investing in internet businesses.

And so he might because it is a sensible countermeasure to put in place as the media industry is undergoing a seismic shift with consumers moving from the print and TV channels and onto online platforms. Research from Credit Suisse found that households with internet access watched four to five hours less TV a week than those without, and for 12-to-24-year-olds the internet is now the dominant entertainment source.

But let’s not forget that a marriage between old and new media can end in tears as we have seen all too clearly before. Remember the Time Warner purchase of AOL – what a disaster that was. And then there were the internet purchases by German-based media giant Bertelsmann by its Chief Executive Thomas Middelhoff who had designs on creating a world leader in new media. This time around the company prefers to cautiously develop its own social networking site rather than splash out on a costly bolt-on acquisition.

What we are really questioning about these moves by Big Media today is that they are paying too high a price for social networking and user-generated-content businesses when there are scant traditional metrics available to calculate their true worth.


Big media versus cyber surfers: Youth market tough to crack

Yes, we admit that they do draw in millions of youngsters who are spending increasing amounts of their time on such sites – sharing stories, videos and music with their new like-minded "friends".

And we also admit that this young demographic has become ever-more important to advertisers in recent times as Big Media doesn’t want to run the risk of entirely losing their links with this audience who are choosing to shun traditional media channels. But in all this frenzied activity there seems to have been a few points missed. For one thing, while these sites attract many millions of young people, there is very little cash spent when they get there. This is because one of the most appealing aspects of these sites is that they effectively represent free entertainment. This makes the prospect of monetising them all the more difficult for their Big Media owners.

They are seeking to engineer revenue from them in a way that avoids rocking the boat and pushing them too much towards being a corporate entity. If this were to happen then we would undoubtedly see a migration of many of their users to the numerous other sites that are springing up and are deemed to be of a more cutting-edge and less corporate bent.

It is therefore a mighty fine line that Big Media treads in trying to extract cash out of these people who are not only difficult to find, but when they are found then they are very reluctant recipients of advertising. They are therefore a particularly expensive group to access.


Big media versus cyber surfers: Affluent 50+ forgotten as ad spend rushes the Net

This makes them a very different beast to the over-50s who are generally a cost-efficient bunch to access because they are easy to find as many remain relatively heavy users of traditional media (although they are also increasingly frequent users of the internet). And they are pretty receptive to advertising as they are used to receiving it through these recognised points of contact.

The only thing is that these people have pretty much been forgotten about as the media companies and brand owners have chosen to flock to the latest online sites in search of the lesser-spotted (or more spotty as the case may be!) 18-to-30 year-olds.

With this desertion is it any wonder that we have seen a fall off in the levels of TV advertising. For example, ITV experienced a fall of around 18% in the third quarter and Channel 4 suffered a 6%-7% decline this year, and predicts the same next year.
Could it be that Channel 4 has suffered less of a fall because it has pandered more to the whims of the 18-to-30 year-old market with its myriad reality TV shows and this has ensured it has retained more of its advertisers?

In contrast, advertising online has continued to grow. IPA Bellwether found that the number of companies spending more than 15% of their marketing budgets on the internet had risen sharply this year to the point that it is now double the level of the peak of the dotcom boom in 2000.

The advertising that has been delivered – via the traditional channels of print and TV – to older consumers has been largely irrelevant, according to US research from Focalyst (involving ad group WPP), which found that almost 25% of people over 42 years old are insulted by the advertising messages that companies are sending them.

The view was that overly-general messages, based on stereotypes, were being delivered – in stark contrast to the heavily segmented approach taken by advertisers when trying to appeal to the 18-to-30 market – because of the belief that many people in this age group were unwilling to change brands.

However, the research found that this was untrue and that as many as 66% of people based their purchasing decisions not on "brands" but on "value", thereby suggesting that this group are not half as stuck-in-their-ways as many media professionals would have us believe.

What also seems to have been forgotten is that this group have plenty of disposable income in their pockets. Unlike many younger people whose live-for-today mentality has played a major part in driving up the personal levels of debt in the UK to unprecedented highs.

For many such individuals the capacity for spending will surely become severely restricted as interest rates gradually move further upwards; unlike their parents who are likely to be far less indebted and have greater freedom to respond with their wallets to well-targeted advertising campaigns.


Big media versus cyber surfers: Fashion victim risk of Big Media make niche plays look good

But until we see such targeted campaigns that appeal to the older consumer then the only people opening their wallets with any great frequency look likely to be the large media companies, as they fight it out for the right to buy the very latest whizz-bang social networking site – yours for only $2bn.

Against this backdrop small media companies look a much more enticing prospect for investors than their larger rivals. With their niche market positions they have proven to be something of a safe haven of late and there looks to be more mileage in this subsector, particularly as consolidation at the bottom end continues to pick up pace.

We believe that business publishers in particular represent an attractive proposition with their relatively secure subscription and advertising bases. While these businesses are also having to react to their audiences moving online this is taking place at a much more manageable speed than with younger consumers who are flocking to the likes of MySpace at an increasing pace.


Regards,

Glynn Davis
for The Daily Reckoning

http://www.dailyreckoning.co.uk/article/221120063.html