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August 09, 2006

Cheap Is Not A Reason To Own Media Stocks

A new study by McKinsey & Co., highlighted at AdAge.com, does a good job of explaining why television advertising is facing such strong growth headwinds. The key pull quote from the AdAge article is that the study claims that "by 2010, traditional TV advertising will be one-third as effective as it was in 1990."

The article goes on to offer some statistics from the study, noting that it assumes a 15% decrease in buying power driven by cost-per-thousand rate increases; a 23% decline in ads viewed due to switching off; a 9% loss of attention to ads due to increased multitasking and a 37% decrease in message impact due to saturation....

Spending More to Reach Fewer Viewers

While TV is not alone in having its message lost due to saturation, the report does capture the secular challenge faced by TV advertising. The problem is that ad pricing keeps rising while ad viewing keeps falling. This leads to a continual increase in the cost to reach a viewer. The same thing can be said for the cost to reach a radio listener or a newspaper or magazine reader.

Appeal of the Internet Is Ability to Measure

Much of the diverted consumer is going to the Internet, but it is not just lost consumer attention to the Net that is causing advertisers problems. The idea that the Net is more measurable in terms of consumer response also is contributing to the perception that traditional media advertising is losing effectiveness.

Teens Spend 600% More Time Online Than Adults

The study also offers the sobering statistic that teens, the next generation of consumers that advertisers want to reach, spend 600% more time online than adults. In other words, the current trend against traditional media advertising could remain in place for decades.

Traditional Media Stock Valuations Reflect Challenges

Traditional media companies aren't standing still. They are expanding their online operations and changing their selling practices. And their stocks already reflect the challenges to some degree with valuations near or at historical lows for virtually all traditional media sectors.

As Monday's New York Times notes, investors will reward forward-thinking, high-performing media companies, as they have Disney (DIS) and News Corp. (NWS/NWSA) over the past year.

My key takeaway here is that cheap is not a reason to own media. Given the strong secular headwinds, look for multiyear growth acceleration such as we have seen in DIS. Or look beyond the usual suspects to growth in unusual areas like Central European Media Enterprises (CETV).

Posted by Steve Birenberg at August 9, 2006 11:37 AM in DIS