Returns on media stocks linked to ads? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Returns on media stocks linked to ads?

Oct 13, 2011

Print media companies get revenues from mainly two sources- subscriptions and advertisements. With competition intensifying, companies have to slash their subscription charges. With that the share of subscriptions goes down as a percentage of sales. For the top companies in the sector, subscription revenue continues to remain significant. The smaller players, however, need to ramp up their presence before they see the subscription revenue picking up. Even for a new entrant to garner market share, the first step is to compromise on subscription rates. This gives them the much needed lead over the more established players. Hence until the subscription rates get more lucrative, it is advertising that is both bread and butter for the print media companies.

If one looks at the financials of the top print media companies, over the past 5-6 years, the share of advertising in the revenue mix has been consistently on the rise. Let us see whether this has actually helped the media companies generate higher returns for shareholders (return on equity, RoE).

As a percentage of sales, advertisements have grown from 74% (year ended 2005) to 77% (year ended 2011). During the same period, industry RoEs have gone up from 14.6% to 25.7%. Of course, aggressive cost cutting measures (taken during the economic crisis) helped the companies generate better margins. But, what has drastically changed the industry dynamics is the growing importance of advertisement in the revenue mix.

Source: Bloomberg, Reuters

Recently, this growing dependence on ads has been criticized and the risks associated with this cannot be simply ignored. Too much reliance on advertisement revenue alone makes the business model risky.

Advertisements are both seasonal and cyclical in nature. A substantial part of advertisements are from the education space which is dependent on the new educational session. The demand for ad space and ad rates tend to be higher during times of economic boom. This is because the companies set aside bigger ad budgets to promote their goods and services. During times of financial stress, however, the advertising budgets are the first to take a hit. Thus, they are quite dependent on the economic cycles.

While temporary hiccups in the economy cannot be ruled out, advertisements will continue to account for a larger share of media companies' revenue pie.

Having said that a more sustainable business model is one having a a healthy mix of subscription and advertisement revenues. Too much reliance on either is not good for the financial stability in the long term.

Equitymaster requests your view! Post a comment on "Returns on media stocks linked to ads?". Click here!


More Views on News

PVR LTD Share Price Down by 9%; BSE 500 Index Down 1.3% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

PVR LTD share price is trading down by 9% and its current market price is Rs 1,015. The BSE 500 is down by 1.3%. The top gainers in the BSE 500 Index are PRESTIGE ESTATES (up 5.7%) and GSK CONSUMER (up 5.1%). The top losers are PVR LTD (down 9.1%) and GALAXY SURFACTANTS LTD (down 7.8%).

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 02:36 PM