PORTFOLIO POINT: The reaction to Seven West Media's recent downgrade belies the fact that the market is yet to accept the obvious – the game is all but over for traditional media.
I read with some interest Seven West Media's abysmal profit downgrade last Friday. While not at all surprised by the news itself, I was very surprised at the extent of the market reaction; the company’s shares plunged 23% on the day. This was particularly baffling given the dreadful results other traditional media companies have been reporting – in particular Ten, just a short while before. So Seven’s downgrade should have been anticipated. These sorts of results have, in my mind, been an accident waiting to happen for some years now. Not just from Seven and Ten, but from virtually every media company in Australia and most traditional media companies around the world. Yet the market has, thus far, not accepted that for traditional media, the game is all but over. Let me explain.
My involvement with the media goes back many moons. In the late 1980s, I had the opportunity to buy from Kerry Packer a substantial holding in Telecasters North Queensland, at the time an ailing regional TV station. While it was always advisable not to buy anything from Kerry with the expectation of making a profit, in this case he was forced to relinquish his holding because of cross-media ownership rules.
I discovered early on the simple secret to television (and indeed newspapers, magazines and other media): In order to be successful, one need only to ensure that the cost of providing the content is less than the revenue received from advertising. If you get this right, you can make a lot of money. However, if you get it wrong you can lose a lot – if not all – as Frank Lowy, Alan Bond, Christopher Skase and others discovered.
Let me explain by way of example: In 1991, Ten was in receivership under Westpac. It had been poorly managed by a series of, shall we say, TV non-professionals (you can look up the history on Wikipedia). Isy Asper, a Canadian who had transformed a local Winnipeg TV station into the international media group Canwest, called on a few people in Australia (me included) to join him in buying control from Westpac, which we did in 1992. The network was losing approximately $1 million a week. Thanks to a very strict focus on lowering costs and on audience demographics (16 to 39-year-old age group only), the turnaround was, to say the least, spectacular. By 2004, its best profit year ever, Ten had consistently been making more money than either of the other two commercial channels and was now neck-and-neck in overtaking Channel 7 for number two spot in the ratings.
Where is this leading? Well, it leads to the dilemma of when to sell. Buying stocks is relatively easy – someone spruiks a company to you, you do your research and if enough boxes are ticked, you buy. Selling is difficult enough when things have gone wrong (you have to come to accept the fact and cut losses, or take smaller profits than you planned for), but a decision to sell is even more daunting when things are going well.
Continuing with the circumstances surrounding my holding in Ten, my thoughts in early 2004 ran along these lines: Ten was the darling of the investment markets and media analysts. The upward trend was confidently predicted to continue. However, I was mulling over two relatively minor, but known, factors and one hidden whopper. Firstly, Isy had retired. Would the strict adherence to cost control continue? Secondly, would the focused pursuit of the lucrative 16-39 age band with funky youth-oriented programming continue? Management, caught up in pursuing Channels 7 and 9, had decided to broaden the demographic to 45-year-olds. This change, while not an immediate problem, was a concern to me as it both diluted our demographic and it raised costs, as new programs were bid for in competition with the other channels.
While mildly concerned with these two changes (after all, we were acknowledged to be the smartest programmers and the most cost-efficient network), the factor which gave me the greatest cause for concern was not, seemingly, related to the business. What had me so concerned was that I had just upgraded my mobile phone for the third time in a year. This was due to the ever-increasing things that 'smart phone' technology was providing, particularly insofar as pushing entertainment, news and information wirelessly to this little device I could take anywhere in the world and still keep in touch via email and, now, video. This threat to static, one-way, 'sitting in one’s lounge room’ entertainment worried me so much that, despite the highly optimistic outlook by almost everyone around me, I sold my entire holding. The price? $2.85 a share.
It took a few years for the internet to become the overwhelming threat that it is now and for free-to-air profits to feel more than just a pinch from the revolution in the way that information and its accompanying advertising is increasingly transmitted. It seems to me that nothing can bring back the wonderful semi-monopoly that free-to-air and, for that matter, the print media has enjoyed for so long. And it seems to me that whatever media companies do to try to regain their lost fortunes, they are on a slippery slope. The analogy in my mind is that of horse-drawn transport competing with the technology brought forth from the internal combustion engine.
So while I am bullish on the stockmarket as a whole, I cannot find an argument which leads me to take a positive long-term view of traditional media, whether in television, movies, magazines or newspapers. The latter, by the way, should be called 'opinion papers', because all the so-called news they print is out of date by the time we read it. The only traditional medium I am neutral to positive on is radio, because it has a few aspects I like, such as digital global transmission via the internet, but its commercial aspects worry me, as it is, by its nature, generally parochial.
In my mind, no matter what media companies attempt to do to return to long-term, high-margin profit growth, they will fail, because their model is increasingly less relevant to the mass social communication that interactive, transportable media has enabled. It is 'new media’ – Apple being the most visible – that need to be examined and invested in.
I have similar feelings about retail businesses. Paradoxically, it was Gerry Harvey – arguably the greatest retailer in Australia since Messrs Jones, Myer and Hordern – who spilled the beans to the general public by making such a fuss about the amount of business his company was losing to internet sales. This has sparked a dramatic lift in 'e sales' in this country, which is now among the fastest-growing adapters of 'e business' in the world.
So I am staying away from retailers as well, although there could be some exceptions. Amazon comes to mind. But I remain untempted to return to either while there are other, long-term, enormous growth opportunities in sectors such as green technology and biotech. These businesses are at the forefront of our environmental and health needs and I look forward to discussing them in the future.
Oh, by the way, the low for Ten – so far – has been 62c, in March 2009. It is currently trading at 80c.
* Laurence Freedman will be a key speaker at Eureka Congress, our inaugural event for Eureka Report members and DIY investors. The Congress, to be held in Melbourne on June 21 and Sydney on June 23, will include panel discussions and small group master classes run by investment experts. For more information, or to book a ticket, click here.
Laurence Freedman has spent his entire career in investment markets, initially with the Gold Fields Group, then BT Australia.
In 1980 he founded the EquitiLink Investment Management Group, which grew to a global company with operations around the world and over $3 billion under management when sold in 2000.
He was a member of the syndicate that bought the Ten Network, of which he became a director, taking it out of receivership and helping to make it the most profitable media network in Australia for some years, before selling it in 2004.
He currently manages his private investment portfolio of international shares, property and fixed income securities and mentors a number of resource, biotech and technology companies.
He is chairman of The Freedman Foundation, a philanthropic foundation that assists and supports young Australians and finances a broad range of medical and scientific programs and organisations.
In 2001 he was awarded the Order of Australia for service to the community, to medical research, the arts, and to business and investment in Australia.
Laurence Freedman will be an occasional contributor to the Eureka Report when, according to him, “I have something to say.” He is also active on Twitter.