Consumer confidence the key to media growth
After a recovery in ad spending during 2013, many media companies are preparing for further growth this year.
A much-needed lift in the advertising market during the 2013 calendar year has led some media companies to gear up for growth in calendar 2014, according to insights from the latest Commonwealth Bank Future Business Index. (Read the full report for a wide-ranging snapshot of Australia’s midsized businesses.)
The sector has been helped by a return to advertising growth after declines in the 2011 and 2012 calendar years. There is growing optimism about the prospects of a broad based recovery in economic activity — especially in retail, which has historically sparked fresh rounds of advertising spend.
The March quarter Index shows that a growing number of midmarket companies from the broader Services sector — which includes media and telecommunication companies — are preparing to switch their focus from cost management to growth. Meanwhile, almost half of Services firms predict that revenues will grow over the next six months.
But while there are reasons for optimism, it is not all plain sailing. For media companies in particular, a sustained lift in consumer confidence and spending will be essential to support future growth.
Seeking yield-enhancing opportunities
The March 2014 Future Business Index found that 45% of Services businesses say growth is now their main priority, up from just 34% six months ago.
Given the improved conditions going into 2014, this renewed focus on growth is not surprising. We’ve seen many media companies developing new strategies to increase yields, whether by expanding their domestic activities or seeking offshore growth opportunities, either from existing assets or potential acquisitions.
In some cases, this is a response to the ongoing structural changes across the industry. Free-to-air broadcasters are actively investing in new products, due to the proliferation of connected devices and the evolution of online platforms facilitating video content, while publishers have been implementing paywalls to charge for online news content.
Although cost-out initiatives have been a focus for the last 18–24 months, the March Index also found that 68% of Services organisations say their costs are under control. While there’s no doubt that businesses will continue to monitor expenses carefully, many have either already been reduced or are subject to existing programs, allowing management to shift their focus to growth.
Consumer confidence is the key
Given the close link between advertising spending and consumer sentiment, media companies will be hoping that the recent post-budget decline in confidence is only a short-term phenomenon. Fortunately, the prospects for higher economic growth remain positive, with the 1.1% lift in GDP during the March quarter outpacing most expectations — although not those of the Commonwealth Bank economics team.1 Overall, our economics team is forecasting economic growth to outperform the budget forecasts over the next few years as growth returns to long-term trend levels.
An interesting wildcard is the potential for merger and acquisition activity as a result of proposed changes to the current Commonwealth legislation covering cross media ownership (the 75% reach rule and the 2-out-of-3 rule). In the event that the legislation is passed, it is likely to spur a new round of investment across the sector, with a number of merger and acquisition transactions likely to take place.
1 Commonwealth Bank, GDP Preview, 3 June 2014.
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