Internet kills the video star?

Transcription

1 Schroders Internet kills the video star? Schroders Internet kills the video star? Television is changing and internet giants like Google and Facebook are poised to prosper as a result. James Gautrey examines the opportunity that this presents. James Gautrey Portfolio Manager Global Sector Specialist Technology Advertising dollars have been consistently shifting towards internet platforms for the last fifteen years or so. Only 2% of global advertising budgets were spent online in 1999; today it is almost 30%. Budgets continue to shift towards social networks, search engines and, to a lesser extent, display adverts as consumers time spent online continues to rise. In the US, 2012 marked the first year the average adult spent more time online than watching television. Advertisers themselves not only follow the consumer s eyeballs as they move from TV to internet; they also enjoy a far greater ability to target and subsequently measure effectiveness of their ads. However, while the shift to internet from traditional sources will almost certainly continue, a significant challenge is beginning to emerge: the need to win in TV. While other areas have yielded huge gains to the internet, TV has remained almost unscathed in terms of market share losses. Source: Magna International, Schroders, February 2015 While radio and out of home shares have both stabilized at around 6-7%, and print will continue to fall from the current 20% - perhaps to just 10% by the end of the decade, it is obvious the biggest opportunity, and indeed necessity, for superior growth is TV. The table below shows that for reasonable assumptions elsewhere, success in TV (defined as winning 20% of the possible 40% market share in the next decade) would increase the internet advertisement market in 2024 from $325 billion to $498 billion. Seen another way, this would add almost 5% to the 10-year compound annual growth rate (CAGR) for internet players.

2 Source: Magna International, Schroders, February 2015 Over $212 billion was spent on TV advertising in 2014 equivalent to three times the combined revenues of Google and Facebook, which clearly highlights a significant opportunity. The two internet giants have a lot to offer in this market because of one simple truth: TV ads are dumb. On 1 July 1941, the world s first TV advert aired in the US - a 10 second spot for Bulova Watches with the strapline America runs on Bulova time and essentially the delivery method has remained unchanged since. All viewers see the same thing, targeting is very broad-brush and measuring success extremely difficult. In short, TV adverts are the diametric opposite of what Google and Facebook serve up every second of every day. Source: Bulova, Company shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. In time, there will be a huge economic pull for tailored, individual TV adverts not just from advertisers wishing to see a greater, not to mention more measurable, return on their dollars, but also from the internet giants as they seek to drive the next big phase of growth. The possibilities are extensive: storyboard adverts running to individual timetables based on ads already watched, interactive models pioneered by the likes of Nike on YouTube etc. Frankly, it begs the question: why has this not happened already? Game of Thrones In short, incumbent TV players benefit from either significant content and / or distribution abilities which act as powerful barriers to entry: Comcast in the US reported invested capital of over $90 billion at the end of 2013 alone. Newspaper and magazine advertising dollars moved to the internet first because the bandwidth required to deliver their content was much lower than video. In the end, the industry accepted the change and now partner closely with both Google and Facebook to serve the most timely and profitable ads. The TV industry faces a similar choice, though it may pain them to admit it. Partnering with the internet companies now would yield several positives. Firstly, the overall advertising dollars should increase as ads become more relevant and targeted. Second, they avoid escalating costs for content as a bidding war

3 would doubtless ensue between TV and internet players. Finally, it would prevent wasted capital expenditure at a broader level since telecom networks are natural monopolies. Despite these attractions, it is difficult to see TV companies simply rolling over and taking the deal. No doubt they will think that if Google wants a slice of their ad/subscription revenues then they will have to buy their own content and build the infrastructure to support it! Interestingly enough, that may be exactly what is already happening. I m the one who knocks. I am the danger - Walter White, Breaking Bad Google has launched Google Fibre, offering one gigabyte per second speeds to three cities in the US to date, and identified another 12 for short-term builds and 34 for longer term. While the company s rhetoric over the last few years has been that this is simply to alleviate an unnecessary bottleneck in technology (low bandwidth), it is entirely plausible the true motive is breaking down one of the key barriers to entry in TV. At the very least, it may be enough to bring TV executives to the deal table. On the content side, Google s YouTube has a huge amount driving over 1 billion people to watch around 300 million hours of video on the site every day. The most popular channel (a Swedish man playing video games) garners over 34 million subscribers over twice the weekly viewership for CBS s The Big Bang Theory, according to Nielsen data from late In the UK, make-up vlogger (video blogger) Zoella, a 24- year-old living in Brighton, has the same weekly viewership as EastEnders (7 million). If YouTube or any other internet player really wants to crack the TV market however, they will need to acquire or create more professional, high-quality content. This would entail drama, movies and perhaps most importantly, live sport. Increasingly, the value of live sport seems to be outgrowing all other categories significantly. Broadcast rights for the English Premier League have risen from 191 million for to 5.1 billion for an increase of almost 27 times and this implies a price of over 10 million per game. Britain s next top model? An interesting thought exercise below considers how much more effective a YouTube advert would have to be in order for them to disrupt the current subscription models offered by the likes of Sky and replace with a free to consumer, advertising-paid model. Assuming around 10% of the monthly subscription fee for Sky Sports is attributable to a single game of football, YouTube would need to achieve a cost per impression (advertising lingo for the price paid to show an advert to a single viewer) around thirteen times higher than that enjoyed by Sky s current adverts in order to generate the same revenue. Source: Schroders, Companies shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. While many advertisers have reported viewing and click-through rates multiples higher than traditional display adverts, an average of thirteen times seems something of a stretch. It would also imply a cost of 17p per advert per viewer something not palatable for a consumer staples company making 60p of profit selling a bottle of shampoo.

4 Hence the solution seems to be either a partnership model with existing TV players, or some combination of lower subscription pricing subsidized by more effective, targeted ads. Season Finale There is considerable impetus for change in the way TV is delivered, viewed and paid for. Consumers want more a la carte pricing, not bundles; internet companies need to break in to fuel the next leg of growth which, coupled with new distribution infrastructure means the traditional incumbent s lock on the market is under threat. TV is critical for Google given its overall market share of the online advertising market has stalled. Fortunately, it is probably the best placed company globally in this space with YouTube. The difference in Google s growth over the next ten years could be as much as double depending on its success in TV. At 15 times 2016 price-to-earnings excluding cash, success in this area is effectively given a zero probability by the market and that feels very wrong. Source: Schroders, February Companies shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Facebook has strong growth prospects ahead simply from increasing its market share in the overall online space. In video, however, the company is lagging considerably. The acquisition of LiveRail will help their expertise in placing adverts and targeting but this is not a consumer- facing business. The current user-feed is unlikely to cut it, so Facebook needs to act quickly and more decisively in this area. The opportunity for both companies and potentially others, too (Apple, Amazon) is not only significant but necessary for growth. The TV players should consider a partnership model although that feels unlikely. The internet companies will likely have to force the issue through either distribution, content or both. A surprise bid in a key area like leading sports rights should not be discounted. The topic is nascent but deserves front of mind consideration when debating with players involved. After eighty years the model is finally about to change.

5 Important Information: The views and opinions contained herein are those James Gautrey, Portfolio Manager, Global Sector Specialist Technology, and do not necessarily represent Schroder Investment Management North America Inc. s house views. These views are subject to change. This newsletter is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder Investment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. Past performance is no guarantee of future results. Sectors/regions/companies mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties. Schroders has expressed its own views and opinions in this document and these may change. The opinions stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. Schroder Investment Management North America Inc. ( SIMNA Inc. ) is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the Schroder Funds ). Shares of the Schroder Funds are distributed by Schroder Fund Advisors LLC, a member of the FINRA. SIMNA Inc. and Schroder Fund Advisors LLC. are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Further information about Schroders can be found at Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc and is a SEC registered investment adviser and registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and Saskatchewan providing asset management products and services to clients in Canada. This document does not purport to provide investment advice and the information contained in this newsletter is for informational purposes and not to engage in a trading activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution. Further information on FINRA can be found at Further information on SIPC can be found at Schroder Fund Advisors LLC, Member FINRA, SIPC. 875 Third Avenue, New York, NY