If one follows, tracks or works in Entertainment and Media (E&M) businesses, one knows that they need to follow the trend for advertisement to know how the sector is doing. Understanding advertisement revenue and forecasting its trend line is the gold standard in managing E&M businesses worldwide. While other forms of revenue do contribute but clearly it’s the advertisement revenue which is, has always been and will be the key for the foreseeable future of this business. This is not the only determinant of health of a successful business, the other key determinants being content as well as distribution. Excellent content and distribution sometimes also cannot save the business in an advertisement downcycle. What is behind this revenue stream and why is this important? Also why this discussion today??
Simply put, E&M businesses have in general two key streams of revenue ie Adverisement or Subscription which also includes your cost for ticketed events like movies or events. A large part of the business is advertisement led and that includes businesses like print-both news as well as magazines, OHH, TV, a large part of events and now a large part of digital streaming too though subscription does contribute on the digital side. Therefore the advertisement trend line for this revenue stream is very important for the media businesses across the world. The world has been lucky except for thr stock market crash in 2008/2009 to have witnessed a steady growth in this revenue trend line across the years. An average growth between 3 to 4% across the world has been the norm with countries like India,China and the Middle East being the new developing markets clocking 10 to 11% growth on an average. Well, then COVID 19 happened, the world and all businesses closed and now it seems the good run is about to terminate! All advertisement related businesses are under a massive threat in the short to medium turn. There has been and there will be a massive turn towards digital but the revenue shortfall may be substantial. There are already reports that suggest that giants like Google, Facebook and Microsoft which are digital have also lost upto 20% in advertisement revenue in the current crisis. Some thoughts as follows on the extent of the problem, when can normal return or whether there is likely to be new normal..
Advertisement in general has a strong correlation with the GDP. The different rates of growth have aligned with the GDP of the countries and are always a couple of points higher than the stated GDP. When India grew at 7 or 8%, the growth in advertisement was between 9 and 10%. This is natural as the key advertisement dollars come from the health of the underlying businesses. Key sectors which largely contribute to the advertisement are Auto, FMCG, Real Estate, Education, and other sectors where brand is key. India was on a brink of a decline in many of these sectors and the COVID 19 lockdown is likely to increase that stress manifold. There are various versions on the recovery after the lockdown, but none of them are optimistic or give a sense that things will be back to normal soon. Some industry insiders feel that the year 2020/21 will see a negative growth in the traditional media while digital media will be at par or with a small uptick of a couple of percentage points if we are lucky. The overall pie will certainly be smaller. Macros presently do not look good!
What lockdown has done is put the focus on the digital capabilities of the business. Our dependence on the Internet and data has gone up manifold whether it is to communicate, entertain ourselves, buy and sell goods or get information. I’m afraid that this dependence will be inculcated as a habit post lockdown and with increased suite of services will start to replace some of the traditional way of doing business. Advertisement also tends to go where the eyeballs shift as it is the nature of the beast. Therefore largely physical businesses like newspapers, magazines or other parts of print will possibly see an accelerated shift of its key revenue stream to digital. Coupled with strained distribution chain their ability to attract new readers will also be under question. TV and broadcast has kept its viewing intact initially though the parts of the broadcast businesses are likely to be impacted with no fresh content and the uncertainty when that will be normalised. News broadcast businesses have seen a new lease of life but it is difficult to judge for how long?
Digital distribution of content will be possibly the new mantra for the E&M businesses, with good content being the only imperative. One assumes though that the large advertisement dollars once the economy recovers will be directed to digital rather than physical mediums. However this assumption is also tenuous as value wise the digital piece is still far less remunerative than the traditional media with virtually very little data as well as impact assessment available for rational decision making. One cannot therefore say that it will only be digital in future as I think there is still sometime both will coexist. However what is certain is that near term assessment for advertisement led businesses is not good and that the shift to digital will accelerate faster than ever.
The earlier we come to terms with the above reality the better as the pie does have a hole!!