Media Sector Update

Full Report

Media Sector Update

Media Sector Update
Media Sector Update: Australian Media Reform Implications

Executive Summary

  • In September, 2017 the Australian Government voted in favour of a comprehensive package of media reforms.
  • Key highlights from the historic reforms include increased requirements to show Australian produced content, a public ownership register of media assets, and additional funding for regional and small publishers. (Full details in Venture Insights’ Media Reform Update report in October, 2017)
  • As we reported, while media reform opens the door for consolidation, we do not believe it will or should result in the M&A frenzy many observers predicted. After all, simply putting two challenged businesses together will not provide sustained respite from strengthening industry headwinds or growth in the absence of robust strategic planning that looks beyond the immediate horizon.
  • Specifically, significant inactivity has been witnessed over a period of time attached to whether the media reforms would pass. Whilst, the final form was largely known for some time businesses, nonetheless, were not willing to do deals until reforms were formalised. This has resulted in a backlog not of activity waiting to spill but in subdued willingness or appetite to do deals.
  • However, for the right deals, the media reforms enable a pathway to scale that is essential to achieve four key outcomes we believe are necessary to reinvent the sector for the future:
    • Scale and reach
    • Enhanced platform for adjacencies
    • Step-change in original content creation capability
    • Back-office and shared-service integration
  • This report covers what Venture Insights believes will happen now the reforms are in place

Key Insights

Venture Insights highlights seven key impacts flowing from the media reforms:

  • Industry Consolidation
  • A small amount of additional runway for Australian media companies
  • Creation of genuine omni-channel players
  • Development of content verticals at scale
  • Consolidation of ‘TV’
  • Rebalancing of sports rights
  • Accelerated collaboration

Key insights

We see seven key impacts flowing from the media reforms, seen initially in industry consolidation

Figure 1.

1. Industry Consolidation - Telco Consolidation as an example

Over the last few years, the Telco industry has consolidated down to 5 major players

Figure 2.

SOURCE: FactSet (as at 17 April 2017)

1. Industry Consolidation

Learning from consolidation in adjacent sectors

  • By way of example of the potential in activity likely to be seen in the media industry, consolidation occurred in the telecommunications industry markets some time back.
  • Activity included the emergence of new players; smaller businesses enabled by technology.
  • Consolidation then took hold of the industry.
  • Notably, some of the smaller players were swallowed up, while others moved on to become more significant players i.e. TPG.
  • The telco market is now down to five key players (excluding nbn).
  • The same dynamics are now at play in the media industry, although it has happened in a different way. Largely, media has missed missed the boat on the first round potentially due to reticence while the final outcome on reforms was in abeyance
  • Effectively, media organisations should have started diversifying more than 5 years ago.
  • While we do not expect consolidation will commence in a flurry, we do expect to start seeing a slower merging of audiences prior to the merging/acquisition of companies. These movements will give the scale and cash flow (through cost and revenue synergies), that will facilitate the required diversification to finally happen. This will revive their position and support the overall growth of the market.
  • With regard to the market and potential activity we observe the following:
    • Consolidation will be driven by existing players, particularly broadcasters
    • Pay TV has already begun to consolidate with the merger of Foxtel and Fox Sports
    • Competition for ad spend may see traditional media look to adjacencies such as out-of-home advertising
    • Traditional regional broadcasters are now clear M&A targets
    • The regulation changes put radio and print assets in play which could be leveraged by buyers with their existing content capabilities
  • When the dust settles, like the telco industry, in media there will be a natural state of a few, larger players within the next 5 years. Further pressure from the globalisation of media means success at any scale requires being ‘big’.
  • On this basis, Venture Insights believes there will be consolidation and it will merely be a questions of how and when.

The media reforms will kick-off a 5-year period of media consolidation – any M&A activity must make sense in the context of ongoing consolidation

Figure 3.

5 year period of consolidation will enable additional runway for consolidated media organisations

…but it will happen in 2 phases

  • Whilst the market has seen some movement in regional markets, and (limited) M&A in outdoor, newsprint has continued to slide and Pay TV has hit its time of reckoning, media organisations showed little appetite for acquisitions until reforms were passed formally. Ironically, we saw more divestment (dollar-wise) from adjacent businesses than we witnessed investment into adjacencies; that is, activity involved selling adjacencies because they were  becoming successful, rather than investing in diversified businesses.
  • Longer term consolidation plays will happen in 2 phases:
    • Initial consolidation of audiences which will deliver audience scale. (That is, merging of audiences rather than businesses). This move will deliver scale and cost/revenue synergies. These moves will likely be cross-platform. This initial additional scale will provide additional runway to start making (better/more significant) bets in digital
    • Merging of medium businesses (a ‘shake-out’) into larger businesses. Undoubtedly, some businesses will disappear either by being broken up or simply ceasing operation. These mergers will deliver greater quality content creation, a stronger position to compete with global operators and delivery across platforms to these new ‘vertical’ audiences.
  • Both phases will include selective acquisition of digital niche businesses, though a fully consolidated state will be cross platform but still require scale for sustainability. As such, we could witness some aggressive takeovers/acquisitions.
  • Strong partnership possibilities will exist regionally, specifically between print and radio however, this will be fraught with challenges given the masthead-driven nature of these offerings.

Moving forward

  • If things continue as they currently are, all legacy players will be squeezed. The majority of decline in this scenario will driven by print, some TV.
  • In order to the address decline, media houses will need to address audiences and verticals and then invest in digital businesses to obtain a share of the growth.
  • Ultimate position is there would be a stronger use of digital users than not, and further, media organisations will know explicit value of user on each platform and digital will grow based on knowing them.
  • Legacy businesses are mostly advertising funded. Revenue models need to be transformed to also include subscription and transactional possibilities.
  • If media organisations do nothing the situation with regard to revenue will only get worse. The additional runaway which can be gained from mergers and partnerships will avoid complete cannibalisation of legacy businesses. Further, seeking out adjacencies should give (new/additional) revenue in the growth parts of the sector.

2. Small amount of additional runway

Cross-media synergies and scale economies will provide consolidated Australian media companies with a small amount of additional runway…

Figure 4. Australian Ad Expenditure (A$bn)

SOURCE: Venture Insights

…Australian firms must take advantage of this runway to drive much more aggressive diversification

Figure 5.

SOURCE: Annual reports

Note: 1. Digital & Adjacent segment split into ventures / commerce and entertainment from 2014

3. Creating genuine omni-channel players

Consolidation of media companies could create genuinely integrated, digital-first businesses

Figure 6.

4. Content verticals at scale

Local players are best placed to create locally-relevant content at scale … and are likely to become ever more focused on specific content genres

Figure 7.

The market has been moving from a horizontal to a vertical content model for some time

  • The market has been moving from horizontal to vertical content models for some time. ABC Comedy and now ABC Education are perfect examples of this.
  • The trigger for content model diversification was expansion in distribution. Both because of the growth in digital but also because of the slicing of broadcast spectrum which encouraged experimenting (with smaller entertainment plays) and gradually moved into more clearly defined verticals (like shopping channels).
  • Naturally digital content is not ‘for’ all audiences. Content verticals enable ‘relevant’ digital content. It connects audience with digital. The key consideration however remains; whether scale can be achieved, for example, in comedy. Naturally this extends beyond scale for individual media organisations to whether this grows the total market, ie, is there room for more than one local player in specific content categories (like comedy). Our assertion, is this would likely be problematic. Further, to be in a vertical, media organisations need to account for global players either by playing with them or competing with them.
  • Building communities will be crucial; linking legacy and digital content and not just servicing a vertical but building engagement on top of reach. Given the current client and dominance of global tech giants, media organisations will need to deliver tools to build engagement to create communities, rather than allowing these global giants (like Facebook) to build communities elsewhere.
  • There will further need to be an additional need to explore different commercial models; advertising funded, paid and everything in between.

Media Organisation and Industry Mix

  • There will be a range of verticals which will be created or amplified.
  • There will likely only be room for 1-2 general ‘horizontal’ entertainment businesses.
  • Within verticals, some will be dominated by global organisations (such as movies) and then whether there will be room for a local or more than one player is questionable.
  • Undoubtedly, there will be a number of key, highly competitive genres; including news and sport.
  • As the room for general linear TV services reduces at least one FTA will need to reinvent itself or get squeezed out. The question will be whether they jump early and merge or fight to be last man standing
  • Some frenemies will be created driven by a move to content verticals. As such we will witness a further blurring of FTA and PayTV. As verticals that exist with scale start to get prosecuted it will make sense for PayTV to play in this space especially with broadcasters and other media organisations with local scale. For example, if a combined Fairfax and Nine Network pursued a vertical where Foxtel already had dominance (eg the Discovery Channel) it would make sense for all three to partner to grow total audience rather than compete.

5. Consolidation of TV

The local television market will consolidate further and the lines between free and paid will begin to blur

Figure 8.

Genre based verticals will also impact sports rights

  • Content and marketing largely sustained media organisations through distribution disruption and technology advances. Despite some largely experimental (rather than transformation) technology implementation masked the more significant need to reinventing themselves. Largely technology improvements rather than business model and commercial models adaptions were mistaken for ‘reinvention’.
  • Reach, as a result, been impacted. Value for advertisers is in high reach. If (or as) the reach of legacy media reach declines, the value per head does.
  • The dynamics of this ‘value’ will have a material impact on the sports rights market. Sports rights has witnessed a series of conflicting pressures; sporting organisations increasingly want to own/control themselves, the entry of digital players at scale (in some instances these were telcos), reaching the peak of sports rights value for TV, and the prospect of more value being derived from digital (which has a dual impact of eating into TV rights).
  • Increasingly new entrants will continue to arrive, largely with no production capability but with new funding concepts, i.e. linked benefits (like selling more phones).
  • To maintain value and because it makes sense, co-operation will become more prevalent and necessary in viable verticals as will changes to business models.
  • Subsets of sports or what were niche sports like eSports have presented opportunities not only in a growth category but also for broadcasters to shift rights budgets across a more diversified portfolio but also develop tiers within their sports rights commitments  which rely on mixed business models and therefore allow movement between tiers as the value for specific sports scale up or down.

Impact on sports rights

As sports rights packaging and monetisation evolve, sports will rebalance their rights partners to maintain overall growth. Sports rights will be impacted because:

  • Audience is more targeted and more valuable
  • Production costs are shared across platforms
  • Value of legacy TV rights is lower, but value of overall cross-platform rights likely to see steady growth

6. Sports rights

As sports rights packaging and monetisation evolve, sports will rebalance their rights partners to maintain overall growth

Figure 9.

7. Accelerated collaboration

Cross-platform M&A will produce a new mix of ownership and platforms; co-opetition among local players can help defend against new global entrants by re-setting the local industry cost base

Figure 10.

Summary

Collaboration is key

  • Cross-platform M&A will produce a new mix of ownership and platforms. ‘Co-opetition’ among local players can help defend against new global entrants by re-setting the local industry cost base.
  • To date collaboration opportunities have been restricted to costs, and the biggest wins in broadcast in the short term will continue to be in cost collaboration. Legacy media must continue to drive costs down to match the cost base of new entrants.
  • New ownership structures will facilitate a greater level of co-operation among legacy media players to reduce their cost base.
  • Existing industry structure and relationships will become blurred and packaging and distribution will be more blended than today’s existing silos
  • Local media organisations have not had a right to collaborate on revenue but this will present the greatest mid-longer term opportunities.

In summary, the industry will witness a 5-7 year period of merging activity; content verticals will be further developed and the aggregation of audiences around those verticals will be reflected in M&A and partnerships to defend the value of local media vs global media. In some areas there will be room for more than one player and both local and global; in some, one will dominate.

A media company in Australia in 5 years time will need to be sourcing a significant portion of revenue from other means, including platforms, diversified products, and through new or varied revenue models.