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.
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, 1941. 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
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
2014. 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 1992-97 to £5.1 billion for 2016-19 – 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, 2015. 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.
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 2015. 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.
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.
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