Is Turnaround In Sight For Indian Media?

The media sector is currently going through a rough patch as companies continue to curtail ad spending due to lower demand and inflationary trends. 

The Nifty Media index is down nearly 10 per cent over the past year, against an 18 per cent rise in the broader Nifty index. While the current state of the media sector can be explained by a fall in pricing and low-fill rates of ad slots, the picture over a longer period is still grim. 

Since the Nifty Media index came into existence in 2011, it has returned a mere 44 per cent, compared to more than 200 per cent for the Nifty.

What Explains Underperformance Of Some Prominent Media Names?

The underperformance is not limited to India but has been a global phenomenon. 

The underperformance has a single-most important factor – that the indices are composed mainly of companies that derive their revenues from traditional media like television, radio, or newspapers. 

Since markets value companies at the discounted value of future cash flows, the valuations these companies get are based on the pessimism surrounding traditional media. While their assets are still incredibly valuable and generate strong cash flows, investors see the longevity of these cash flows as doubtful. 

Within traditional media, newspapers and radio are the first victims of the transition to digital. With cheap smartphones and internet connections in large parts of the globe, both top and bottom-of-the-pyramid users consume content digitally. Several traditional media companies are struggling to keep pace with increased digital adoption and find themselves out of touch with the younger and even some older audiences who consume news through social media, Google News, and other digital intermediaries. In 2012, investor Warren Buffett believed that newspapers were selling at bargain valuations and had snapped up more than 30 local newspapers, believing that their strong hold over the local population would help them maintain their competitive position or "economic moat". However, by 2020, he left the newspaper business completely and said that the industry was 'toast'.

Not only are local newspaper companies competing with platforms like Craigslist that run classifieds, but they are also competing with digital news platforms that have a lower cost base, better user data, and the ability to provide advertisers with targeted ads. 

Further, news has become highly commoditized, making it necessary for news companies to focus on ways to add value to the user. 

One of the leading Indian newspaper companies, during an investor call, lamented about the inability to get readers to pay up for digital subscriptions, along with the company's failure to attain profitability in the digital business with just banner ads.

Players With Differentiated Offerings Still Doing Well

Some players focusing on differentiated content creation and owning popular intellectual properties are printing money and are valued quite richly. Their focus on differentiated content creation has helped them remain relevant despite the changes in the medium. 

Users are ready to pay for subscriptions for such content, and most players find it challenging to sustain digital operations without subscription revenues. 

Companies like Disney and Universal Music Group have thrived in a digital economy due to their command over high-quality and popular intellectual property.

Several Indian legacy media companies are trying to create differentiated content to survive in an ultra-competitive environment. 

For instance, one of the largest Indian radio companies has shifted its focus away from merely being a platform to actively creating content for advertisers uploaded on various social media channels and its proprietary multimedia platform. Currently, the non-radio business makes up a significant portion of its revenues, and analysts expect it to grow faster than the radio business. 

Similarly, an Indian news broadcaster derives more than a quarter of its revenues from its new digital business. It has done well due to its differentiated content offerings in the space. 

Other players are focusing on Legacy vernacular newspapers; however, they are still struggling to find a footing in the digital space as ad revenues barely compensate for costs, and the masses are not ready to buy subscriptions. 

The apps released by large vernacular newspaper companies have a wide reach but have no subscription revenues and hardly generate enough ad revenues to compensate for the business's costs.

New Age Media Companies Still Bleeding Cash

Nevertheless, new-age media companies have it worse. Most new media companies are still bleeding Cash and have been unable to capitalize on their popularity. 

For instance, Vice and Buzzfeed, two storied names in the new media space, are unprofitable and have seen large workforce cuts in recent months. 

Vice News raised money from several large traditional media players at obscene valuations and still failed spectacularly. 

Traditional media companies could now find acquisition opportunities with tons of Cash on their books and strong cash flows to repay debts post-acquisition. 

Some legacy media companies that can quickly adapt to the changing environment can become stronger and larger after the current crisis.