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The biggest risk for media stocks...I

Oct 4, 2013

Media sector has always been dependent on advertisers for its growth. In fact, media is an industry which is run by and large on advertising revenues. But can advertisement be the major revenue driver for media sector forever? What if this main source of revenues begins to dwindle? In this event, media companies and regulators can look for ways to perk up ad rates or explore an alternate revenue stream. Let us discuss if falling advertisement rates have led to such developments in the media sector recently.

It is well known that a weakening economy is the key reason for a slump in advertising. Few years back, when the economy was in full bloom, broadcasters had an upper hand with the advertisers. They were able to realize higher advertisement rates. The rates were well justified by increasing subscriber's rate as well. However, off late, the economic slowdown has had a significant impact on advertising. Advertising spend across media in 2012 grew at a single digit of just 9% (according to FICCI-KPMG report on the media and entertainment sector). This is a significant decline from the growth rates of 13% in 2011 and 17% in 2010. Even popular events like the Indian Premier League (IPL) cricket tournament have failed to lift the advertisement spends in recent times. Consequently, there has been a fall of around 15-20% in the advertisement rates.

We believe a sudden slump in advertising revenues can compel broadcasters to explore ways to perk up advertisement rates. One such initiative was to discontinue Television Audience Measurement (TAM) services. In June 2013, many of the prominent channels (Star India, Viacom18, Network18, and Zee) proposed to stop using services of TAM. TAM, a JV between Kantar Media & A.C. Nielsen, is a ratings agency which provides audience measurement. It helps the broadcasters and advertisers to gauge target audience's response to the aired content. It also helps them find out which kind of audience their rivals are trying to reach out.

TAM has always been considered a single reference point by media planners and advertisers to allocate their budgets amongst broadcasters. However, broadcasters have never been content with TAM's rating methodology. The broadcasters or channels are of the view that TAM's approach has become outdated as their sample size and areas covered is very small. Also, TAM has time and again been accused by channels for manipulating TV ratings through their 'faulty methodology'. Most of the channels are of the view that viewership for TV is growing but TAM under reports the numbers. Thus, any misinterpreted rating can affect a channel's advertising revenues and program planning. This is a double whammy especially when the advertising sector itself is going through a low phase.

However, there is a lot of money riding on these weekly ratings as they are the single reference point used by advertisers and media planners. Therefore, there has been a temporary settlement that broadcasters, ad agencies and advertisers will continue to use TAM services under the guidance of BARC (Broadcast Audience Research Council), in which Indian Broadcasting Foundation (IBF) ministry has a 60% stake, till an alternative system is in place.

What is our view?

TAM's methodology has always been questioned by the broadcasters. But since it was the sole rating agency, they had to abide by it while negotiating with advertisers. However, discontinuation of TAM services show eagerness of broadcasters to develop an inherent rating system particularly in the wake of poor advertising revenues. Otherwise, nothing else can rightly justify a sudden outburst against a rating system of two decades. In fact, TAM's management has accused broadcasters of exerting pressure on it just because their advertisement revenues decline.

Nevertheless, the discontent with its ratings may compel TAM to fine tune its methodology. This can ensure more transparency and accuracy; which may eventually gain broadcasters a better bargaining power with advertisers. This in turn, may give a boost to advertising revenues. On the other hand, in absence of any rating system, there may be a risk of overpaying or underpaying of advertising time. In that case, advertisers may be hesitant to spend their money. This may hamper industry growth. Therefore, there is a dire need for better systems and indicators to assess a channel's reach and popularity so as to ensure appropriate advertisement rates. This can be achieved only if broadcasters, advertisers and TAM work hand in hand to develop a foolproof system which can meet expectations of all the parties involved.

In our ensuing article; we shall discuss more such developments which may even alter media stocks' revenue pie. We will also tell investors if it is worthwhile to invest in media sector which faces some structural challenges.

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