Figures for European private equity activity in 2007 are now starting to emerge and it’s clear that in some areas, most notably €1bn-plus deals, activity in the second half of the year and, in the last quarter in particular, tailed off dramatically. But some areas, such as the mid-market, proved remarkably resilient as did some sectors, most notably financial, services and industrials. Sectors perceived as cyclical, notably retail and leisure, fared less well. Surprisingly, European media buyouts fell 57% in 2007 to €11.5bn.
I say surprisingly because media and communications have moved on from the days when they were high risk, cyclical sectors. On the contrary, they now have strong defensive qualities which experienced investors can continue to take advantage of, in spite of the uncertain outlook for the global economy.
It wasn’t so long ago that the Internet meant dial-up, listening to music meant putting on the radio or a CD, and social networking meant going to the pub. For information, you turned on the TV or radio, or picked up a newspaper or magazine. If you wanted to contact a friend in Australia, you picked up the phone or sent them an email. If you wanted to play a video game with your friends, you’d all go round to someone’s house. But the advent of broadband for a mass audience has revolutionised information, entertainment and communications.
Broadband has given a whole new lease of life to the phrase consumer choice. We now take it for granted that TV and radio schedules are only a rough guide to programming: we can simply download a programme and listen to it at our leisure. Likewise, we can download individual tracks rather than having to buy a whole album, or choose a ring tone that reflects our personality. If we want to phone Australia we don’t have to be held to ransom by BT or our mobile operator, we simply
Clearly a lot of these changes are behavioural: we’re not going to revert to any of our previous practices given the convenience of our new, broadband-enhanced ones. And that means consumers no longer regard their expenditure as discretionary. Even in an economic downturn, the momentum behind these changes is largely unstoppable. With an increasingly fragmented, ‘tribal’ media and particularly in an uncertain economic environment, companies have to work harder to attract and retain consumers. That, in turn, means higher revenues for advertisers, broadcasters and increasingly online telecoms and broadband providers, as confirmed by the positive predictions for 2008 made by a raft of advertising companies,
Thanks to broadband convergence, the day is not far off when we’ll be able to satisfy all our information, entertainment and communication needs through one piece of technology. And the pace of change is so fast that the old paradigms are having to be rewritten. People may not want to pay for information when they can access it for free, but clever media operators are appealing to advertisers, rather than users, to generate revenues or are leveraging merchandising opportunities to upweight user spend, viz Second Life or Runescape. And the earnings-generating potential of social networking sites is only just beginning to be exploited.
Companies that provide the infrastructure for, or exploit the potential of new media are a good source of investment, offering the potential for sustainable revenues. To take the example of online gaming, there are companies that design games, websites that host them, advertisers that sell space or sponsorship on the sites, brands that want to merchandise through the sites… the list is long and growing.
Another phenomenon, thanks to broadband, is the globalisation of media and communications companies. A publishing company, for example, is nowadays likely to have a wide range of titles available in various formats, appealing to audiences both national and international. That gives a degree of hedge that was not available even five years ago.
In the B2B space, companies that provide value-added content online, in the form of proprietary or customised data, offer a very attractive business model. Compared with their ‘real world’ competitors, they can attract more customers and generate higher revenues per customer, while delivering their service at a lower cost.
Media and communications companies now span every industry and that trend is set to continue. The key to investing well in these sectors is keeping ahead of developments across the full spectrum of opportunities. That takes both time and experience, but if you think media and telecoms are still high risk sectors, think again.