Can mainstream TV advertising survive?

Millennial trends

Streaming services such as Netflix and Amazon Prime are now ubiquitous in modern day culture, with many investors speculating that the traditional model of television is now dead. For example, some are concerned that Sky and BT could have their stranglehold of Premier League television rights upended in a heartbeat if Amazon decided to bid for it. Their pockets are certainly deep enough.

This change in viewing patterns is highlighted in the data. Subscription video-on-demand (VOD) services such as Netflix and Amazon Prime grew at a rate of 1.5% in Q3 2017, with just over 9.5m households subscribing to at least one of these services. As a result, advertising has leaked away from traditional media. However, the rate of the growth in VOD services is slowing, whilst there is a growing feeling that online advertising is much less targeted and effective than previously claimed.

In contrast, data also shows that television remains one of the most effective forms of advertising, particularly when related to family-viewing or indeed, sport. Programmes that generate particularly high viewing numbers in particular audience segments – highlighted by the recent success of Love Island – also attracts advertisers. Indeed, a recent survey from Ebiquity highlights that every £1 spent on television advertising repays £4.20 in revenue terms, far superior to other mediums.

Returns on every £1 spend

 

Source: Ebiquity Survey, February 2018.

This is because television is essential for building brand awareness, particularly in the aforementioned family and sport spheres. In 2018, a football World Cup year, this will be particularly important for brands seeking to bolster existing awareness, as well as target new customers. In addition, FMCG businesses such as Unilever and Nestle are once more increasing their TV spend, which had previously been on a downtrend.

How are we playing this theme?

The LF Canlife UK Equity Fund has recently taken a position in producer and broadcaster ITV, following a year in which the stock underperformed the broader market by 30%. Carolyn McCall, the ex-Easyjet CEO, has recently joined the business and ITV have a number of prime-time entertainment shows, as well as the half of the UK rights to the 2018 World Cup. This should be an attractive proposition for advertisers, particularly in sectors that continue to favour television – such as supermarkets – where we are also starting to see advertising spends increase.

On a fundamental basis, ITV trades at just 11x this year’s earnings, as well as having an attractive dividend yield of 4.8%. Following a spike in UK merger and acquisition (M&A) activity in 2018 so far, we are also aware that the sector has the potential for some consolidation. This is evidenced by Disney’s recent bid for Fox – and indeed Fox’s bid for Sky – and Liberty Global hold a 10% stake in ITV.

Liberty purchased Virgin Media for £15 billion back in 2013 and could also set its sights on ITV, particularly as the company’s production arm ITV Studios is behind a number of successful shows. This is important as increasing demand for content to distribute internationally is a driving force behind M&A and valuations within the media sector globally.

 

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Currency fluctuations can also affect performance.

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CLI01109 Expiry 15 February 2019

Nigel Kennett

Nigel Kennett

Senior Fund Manager, UK Equities

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