ALL sorts of mythical qualities have been attributed to the World Cup, which has introduced a curious form of seasonality to some parts of business life. At the beginning of the year it was anticipated that the World Cup would herald a strong year for advertising, and hence consumer media companies. At one point Zenith was predicting healthy improvement in the ad market, but disturbingly, the money has not flowed through at all.
Crucially ITV, the only commercial broadcaster showing games — including two England games in the group stages — is reporting revenues down about 3 per cent at ITV1 in June and by a disastrous 25 per cent in July — which would be the first time the flagship channel’s revenues have been under £100 million for a single month in 12 years. It is an extraordinary outcome because two years ago Euro 2004 was a boon.
It it is tempting to conclude that this represents the beginning of the end for advertising on commercial television. Officially, broadcasters are confused as to what is happening, arguing publicly that it reflects weak economic fundamentals of the type that have afflicted radio and newspapers over the past six to nine months. But the situation is more complex than that.
Weak economic fundamentals are central to the problem; the beleaguered retail sector has been in decline since July of last year — acting as brake on radio advertising — while weak recruitment advertising is hitting the newspapers. But poor fundamentals are not entirely to blame. While display advertising is beginning to show signs of stabilisation, recruitment and other forms of classified are mushrooming on the internet.
And, finally, not everybody is suffering. TalkSPORT, the sports speech station, is enjoying a great run; the success of the station is contributing to a 15 per cent improvement in advertising at UTV’s British stations in the first half of 2006 at a time when the radio market is down by 2 per cent — helped in part by a change of management from the lively, but not necessarily wholly commercial regime of Kelvin MacKenzie.
The short-term investor should reflect on the result of the Paraguay game, rather than wait for the latest bulletin on Wayne Rooney. ITV’s share price factors in dire figures; if England play well, creating a reasonable prospect of the team making the quarter finals, advertisers could start booking late. The World Cup is, after all, one of the few national events, in which a massive 70 per cent of adults are expected to watch the Paraguay match. UTV, by contrast, has the radio upside built in — although such is the unscientific nature of media markets that all advertising-heavy media stocks could get a lift as sentiment improves.
Elsewhere, forecasters are placing much store in the restorative powers of football. FootFall, the retail analysts, point out that shopper numbers actually increased during Euro 2004, especially ahead of games. Retail sales were up 10.8 per cent week-on-week the day before England’s match with France, and down only 1.9 per cent on the day itself. Amid talk of an unspecified £1.25 billion boost to the economy, the onset of a feelgood factor may just help to reverse the past 12 months of media and retail-related gloom.
Yet history shows that past World Cups, and indeed European Championships, are no real guide to future performance. In 1998, the FTSE 350 improved by 2 per cent, but four years later the slide was 8.5 per cent. Even the buoyant Euro 2004 saw shares off 2 per cent, although there was improvement until the loss to Portugal in a penalty shoot-out.
Instead, long-term investors need to reflect on whether to worry about the current advertising crisis. Whatever the media companies tell you, ask advertisers and they will say they are switching money out of broadcasting and into new media, where the advert can be linked into an immediate opportunity to buy. Amid this type of uncertainty, the safe option is to shift investment away from advertising and into subscription, as reflected by the likes of Reed Elsevier, BSkyB (in which News Corporation, parent company of The Times, has a 38 per cent stake) or Pearson.
Yet it is not the way to make real money. As the talkSPORT example demonstrates, good managers who can harness the new opportunities are worth following. Among those to watch are companies investing in internet properties with scale, starting with the likes of Trinity Mirror. As ITV’s World Cup woes show, old media can’t do it on its own. But a mix of old and new could deliver upside.
