Edison clients mentioned in this report
4imprint Group
Centaur Media
Ebiquity
MGI – Media & Games Invest
The Pebble Group
Portobello SpA
Earlier hopes for an improvement in sentiment over Q223 look to have been misplaced, with consumer spend continuing to be suppressed by cost-of-living pressures across the three regions covered here of the UK, the US and continental Europe. Spending by the big tech brands remains curtailed and there are limited product launches scheduled for the rest of the year, which is reflected in results from the large global agencies. Big tech share prices, though, have bounced from their oversold positions. There are patches of sunlight, with high-quality content finding receptive audiences and rapid technological advances, including in AI, bringing true personalisation at scale from the wish-list into real world applications. Some price increases are also sticking, with less impact on volumes than might have been expected. There has been little overall movement in the quarter on corporate revenue or EBITDA forecasts, with US share prices up 13% and UK and Europe retreating by 6% and 7% respectively. Valuations are still well below their long-term averages.
MediaWatch: An introduction
We are now on our third edition of MediaWatch, and as we build the data, we hope that its value will grow. The premise remains the same: we look at performance and changes to consensus forecasts for companies in the media sector across the UK, European and US markets. We highlight the direction of travel of revenue and EBITDA (as a proxy for earnings) estimate changes across the seven constituent subsectors, as defined by the MSCI’s Global Industry Classification Standard (GICS), for FY23 and FY24. We then look at the individual stock level to see where current valuations are compared to their long-term averages, using values back to 2006 to smooth out the cycle. On the basis of our screens, a large majority of stocks continue to trade at a substantial discount to their long-term average ratios, which indicates that pricing remains too low or that market earnings estimates are still too high, or both.
KEY THEMES
Last crumbs from the cookies
With the end of the road now in sight for third-party cookies, set to be withdrawn on Chrome in Q324, Google has recently (July 2023) clarified its timelines. The key change now is the enabling of further Privacy Sandbox APIs. The most important from a consumer (and therefore advertiser) perspective is Topics. Here the general principle is that the browser will loosely categorise the website and individual visits into one of (currently) 469 topics, such as sport, beauty or cookery (but not sensitive factors, such as race, sexuality or religion) and look for the most frequently visited. These relevant topics are then shared back to the websites at a rate of one per week to facilitate the serving of relevant ads without any disclosure of an individual’s specific traffic data.
The full introduction has been delayed twice and there are doubtless many advertisers globally who would welcome it being pushed back again, but this strikes us now as being unlikely. The first 1% of third-party cookies on Chrome are to be deprecated in Q124 with a roll-out thereafter.
It is likely that this will all take some time to settle. Nobody yet knows how it will affect pricing, although, logically, we would expect less close personalised targeting to come in at lower price points, at least initially.
Open market ad pricing still weak
Even without the cookie deprecation, open market digital ad pricing has been under pressure through 2022 and 2023 to date – a good illustration is on page 19 of Reach’s recent interim results presentation. This means that publishers, of all online content including games, need to sell more inventory to generate the same levels of revenue. While the proportion of total advertising spend allocated to digital continues to rise globally, the overwhelming majority of this is directed at Alphabet and Meta Platforms.
Until macroeconomic conditions start to strengthen more convincingly, we are unlikely to see any significant improvement in yields (see Exhibit 1 below for the correlation). The flipside is, of course, that purchasers of advertising can get their desired exposure more cheaply.
Subscription prices rising
At time of writing, Spotify has just put through a price rise of $1/month in the US and £1/month in the UK, with its premium duo service set to go up by $2 to $14.99. It is worth noting that the basic US price had been at $9.99 since launch in 2011. Apple Music prices went up in Q422, Amazon in Q123 and YouTube more recently. This is on the back of Spotify’s Q223 figures showing total monthly active users (MAUs) up by 27% y-o-y and by 7% over Q123 and 4% ahead of earlier guidance. Average revenue per premium user was down 3% at constant currency, year-on-year. Management is guiding to flat total revenue for Q3, with a 3.8% uplift in total MAUs, so it will be very interesting to see what gives.
At Netflix, the crackdown on password sharing seems to have had the intended result of swelling the number of paying subscribers, up 8% y-o-y in Q223. Netflix management points out in its accompanying statement that it has not put through a price increase in its major markets since H122. The two models are very different though, in that Spotify is far less in control of its financial outcomes, having no internally generated content with structurally high content costs. Netflix has much greater flexibility and now has the added element of its ad-supported offering, although its advertising revenues are not yet material in the group context.
Everyone still wants to talk AI, but now so do the regulators
AI has been in use in a high proportion of companies across the sector for some time, for some as side projects but for many as a core strand of business development. This is to be expected given that so many of the business models are predicated on the harnessing and exploitation of data. Investor focus on the issue was investigative at the year-end results meetings, but has already shifted to the practical: How much will it save? How soon? What will it cost to get there?
Amid the enthusiasm, there are also now more discussions about transparency, integrity, intellectual property and wider societal impacts arising from rapid adoption. Although the imposition of regulatory checks and balances will come at unaccustomed pace, it is still likely to happen much more slowly than is perhaps needed. Preliminary framework discussions are now in progress between governments and the largest market participants in efforts to impose some controls, such as the electronic watermarking of AI-generated content.
This AI-generated content is already proliferating, though, often trained on content that should have had intellectual property protection such as copyright and sometimes filling in the gaps in its own knowledge and understanding by making stuff up. Trying to reverse this content off the web would likely be impossible, so it may be that the point of control that regulators adopt is placing the responsibility squarely on the shoulders of the platforms that host it, which they would doubtless resist. The rogue content generators would be much greater in number and much harder to chase down.
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