Thursday, July 21st, 2016
Where once our eyes were glued to incandescent TV screens, glossy magazine pages and crowded newspaper sheets, they now spend their gaze transfixed upon computers, mobiles and tablets. Where the eyes have gone, the advertising dollar has followed. Companies like Google and Facebook have built their empires on owning digital realms where media real estate is sold to the highest bidders and entire industries like search engine optimisation (SEO) and programmatic ad buying have been created to service them. As consumers migrate further into new digital frontiers, so too must traditional publishers if they are to survive.
Investors can exploit the dramatic shift in advertising spend share by targeting digital publishers, and avoiding traditional broadcast and print publishers.
Those unable to do this have seen their share of consumers’ attention wane and the attractiveness of advertising through their channels diminish. We saw it first with newspapers, then magazines and now television, all ceding their share of ad spend to the digital world. This a fundamental and permanent structural shift in the market that will continue to reduce the profitability and viability of traditional publisher models. Broadcast media companies like Ten Network (TEN.AX) and Nine Entertainment (NEC.AX) and traditional publishers like Fairfax Media (FXJ.AX) are structurally disadvantaged by legacy businesses tied to declining channels. TV, radio and print media are losing significant market share because consumers both spend more time viewing and are more engaged with digital media. This is symptomatic of the ‘virtuous circle’ driving the digitisation of media whereby as more and more content becomes available online, it is accessed more frequently by consumers, attracting greater advertising spend which in turn incentivises more content. A microcosm of this effect can be found in the likes of Carsales (CAR.AX), REA Group (REA.AX) and Seek (SEK.AX), three digital market places which attract more buyers (consumers) by having more listings (content), and attract more content by having more consumers. Like Google or Facebook, these companies have built digital world where ‘real estate’ has become incredibly valuable to advertisers. In the same way, the self-reinforcing network effect in digitisation is also driving the vicious cycle currently engulfing ‘old world’ publishers.
Figure 1. Share of total Australian ad spend by channel
Source: CEASA, OMA
The siphoning of ad spend away from traditional channels is also being accelerated by their inferiority in harnessing data, which in turn hinders their ability to facilitate more targeted marketing campaigns. Where print and broadcast media can target groups based on who is most likely to access their content, digital media is moving to a point where it can harness data in real time, and present ads tailored to individuals. Once again we highlight Google as the pioneer of this system. It harnesses your past search data and other information gleaned from any linked accounts to present you an ad that is more likely to appeal to you personally. GoogleAdSense offers this service to millions of publishers across the web, viewed by consumers billions of times each year. It is a system that is constantly learning, refining and improving. What is more, it has led to a complete overhaul of the ad purchasing market. Where once, ads were bought and sold by salesmen and marketers through negotiation over days, weeks and months, markets are becoming ‘programmatic’, utilising ad exchanges much in the same way as investors utilise a stock exchange. Given the efficiency gains being generated using programmatic advertising, the consensus in the marketing field is that it is the future of digital ad buying and industry sources estimate that it already accounts for around $724m of ad revenues in Australia and is a world leader in this field. It is an area of advertising primed for sustainable growth as the software underpinning it becomes more sophisticated and powerful. For now, programmatic buying remains a complex, multi-stage process, but the illustration below offers a broad overview of how it works.
Figure 2. How to buy a programmatic ad
Source: Ad Age Group, 2014
There is no doubt that these trends are driving advertising further and further into the digital world. What may surprise you to learn is that one of the biggest beneficiaries of this trend are actually out-of-home (OOH) advertisers. If you look back to figure 1, you will notice that out-of-home, which consists of billboards, retail displays, street furniture, airports, train stations, buses and taxis, is actually taking ad spend share. This appears counterintuitive given what’s happening in the industry and ironically, prior to the digital revolution, outdoor operators were viewed by many as the black sheep of the marketing world. In those times, billboards were static images that required months of prior planning, high capital outlay and offered little optionality to advertisers. Contracts were inconsistent and margins were low. The ability to replace these static boards with digital screens was a revelation which allowed to offer variable, targeted marketing campaigns at much shorter notice. We estimate that replacing a large format static billboard with a digital screen drives a 4x revenue uplift over three years. For smaller format displays such as those found in shopping centres, bus stops and airports, it created an entirely new dynamic whereby consumers can physically interact with the media, and where campaigns can be coordinated with those online or through social media. Essentially, it allowed these firms to link ads in the physical world to the digital realm, a powerful notion that is still yet to be fully explored. In just three years, digital out-of-home (DOOH) has grown from 7.5% of total OOH revenues to 28%. There are several listed players in this space in the Australian market with APN Outdoor (APO.AX) and oOh!Media (OML.AX) the clear market leaders. APO in particular screens attractively, given its superior margins, disciplined management, growing dominance in the billboards space and long pipeline of site digitisations to drive earnings uplift.
Figure 3. Digital out-of-home as a proportion of total out-of-home revenue
With total advertising spend set to grow just 2-4% per annum over the medium term, any material growth is more than likely to be a zero sum game. For every new dollar generated by digital advertising, traditional publishers are likely to see one less. These business continue to adapt and consolidate but ultimately, it is getting to a stage where advertisers and consumers alike feel like their time (and their money) is simply better spent digitally. Investors can exploit this theme by targeting the hosts of digital market places such as CAR, SEK and REA or the out-of-home operators like APO and OML. Software firms involved in the facilitation of programmatic buying are also attractive, but those listed such as Adslot (ADJ.AX) and Tech Mpire (TMP.AX) are yet to be proven businesses, and yet to turn a profit. At the same time, we believe investors would be wise to be wary of publishers bound to print and broadcast media, as their spend share and margins continue to face structural challenges from digital publishers, a trend not likely to reverse. In our view, such stocks are more likely to be value traps than good value.
 Boston Consulting Group, ‘The Programmatic Path to Profit for Publishers’, 2015
 ZenithOptimedia, 2016
Damen Kloeckner is an analyst at Clime Asset Management. Clime Asset Management owns shares in APO.AX and SEK.AX.