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August 24, 2008

Invest in ITV Shares? The Price is Right – I Don't Think So!!!!!

Invest or Advertise on ITV? If the Price is Cheap Enough: But When Will That Be?

I started to look at how ITV was doing elsewhere on this blog (Is ITV Going Down the Tubes?) in the early Spring of this year as Michael Grade tried to pooh-pooh the signs of an economic downturn which is now being considered as more of a recession if some financial commentators are to be believed with worse news to come. At the time of writing the ITV share price was still slipping it is now hovering at the 40 pence level - around a pound a share cheaper than this time last year!

Merryn Webb's article ( Merryn Webb Financial Times 22nd August ) which in the hardcopy version of the Weekend FT is entitled Investors Should Switch on to ITV but Advertisers Should Switch on to ITV in electronic versions shows a supreme over-optimism to my mind. One  thing for certain is my SIPP won't be going for this one and any investment trust my SIPP has an interest in which does will be dumped by me at the earliest opportunity. I did that last year when I noticed that Northern Rock appeared in the top 20 holdings well before the infamous credit crunch. Some investments are obviously bad even to non-professionals.

I  argue that both advertisers and investors should steer clear of ITV at the present moment. Now, there is an argument that the vultures are beginning to circle around ITV with the intention of stripping the carcass. Speculation earlier this week has linked BMG to a possible swap of its Channel 5 holding with the SKY holding in ITV. Sky are currently resisting the forced sale of their shareholding but will need to have some sort of exit strategy. Arguably despite the cost the blocking of NTL now Virgin Media in a planned takeover of ITV has worked to SKY's advantage as they have been able to use the time to establish better non-satellite based srvices.   Of course any deals like that would push the share prices up a bit and for the quick-fire trader rather than investor a small quick profit might emerge but if we are talking about investment, i.e. holding the share on the basis that the performance and prospects of ITV might improve decently then don't hold your breath. Leave it to the recovery funds to judge when the time is right. The shares have further to sink and this one is very difficult to call because of the rapidly changing media environment.

A key problem with Merryn Webb's article is that it relies on anecdotalism as the key element of its analysis rather than serious research. Merryn Webb, like myself, is not of the internet generation and this can make it more difficult to analyse a new cultural phenomenon. Her argument is based upon the fact that she uses the internet a lot and doesn't click on adverts. Instead she prefers the Skoda advert on TV. Merryn needs to make a cultural leap to gain a better insight into what is happening.

Webb ignores the advantages of the internet for advertisers, publishers and also consumers. Increasingly Google - probably the most sophisticated web company who at times seems to be driving the web - has brilliant algorithms which are continuously improving and are delivering and helping to create new markets to new creators - now there is a company to buy shares in! For example one of my AS students last year was earning about £25 per week from his adverts on his web sites. I'm a little envious it earns loads more than this site and neither of us set out to be commercial. He has more experience than me and he is clearly hitting his target market which is his peers. This is how people of that age and younger do things. Rather than analysing the average amount of pocket money that young people are getting getting abetter idea of the incomes of 14-19 year olds is what is needed. Clearly not all of them are working in Tesco, some are developing their own on-line income generators. How will they spend this? Probably on items advertised via the web. The latest iPod / MP3 phone or maybe a faster computer with better screens or ISPs offering better deals for a generation that increasingly turns to the web for a vast range of cultural experiences. People use the web for pleasure and for experiment and this is creating new ways of doing things which is still very young. Merryn I suspect uses the web purely as a working tool and that is the generational difference!

Google matches target audiences and advertisers which is essential in the era of audience fragmentation and on-demand media. Take this blog for example. There are around 500 publicly available pages produced by one person. Google has very successfully matched the page content to relevant advertisers. The better the page content the more closely the adverts seem to relate to potential users and the more popular the page the more the advertiser receives. New media then is intensely competitive. Those who actually make a living out of web publishing for example are amongst the new breed of entrepreneurs for the information age / networked society.

From the perspective of the advertiser once adverts are designed to fit the various Google formats available then they get advertising 24/7 at little or no cost. Only if the advert attracts attention does the advertiser incur costs. Furthermore the adverts can change from country to country so the global reach of the internet can be linked into local audiences. How clever is that? Pretty damned clever I reckon. Furthermore, an individual is attracting advertisers who are huge global companies. BT / Hewlett Packard / Sky for example all have / have had adverts on this blog. This is presumably the case for many thousands of individuals or small groups running small-scale sites. The fact that adverts from high quality companies can be attracted to these sites with no specific effort from the site-owners is truly phenomenal: Unimaginable without Google.

Not only is  publishing to  a global market for all possible but  advertising to all interested parties is possible. Just as the concept of mass media is changing so is mass advertising hoping to attract somebody out of a very general audience. Targeted advertising is where it is at and it will become more and more sophisticated. Publishers are free to focus upon creating the content and tuning their search engine optimisation techniques again with the help of Google.

Now from the perspective of the person clicking on an advert they are probably in most cases sufficiently intersted in the product or service to pay strong attention otherwise why bother clicking in the first place? People surfing the internet aren't going to waste time clicking on adverts to see if they find the advert amusing. By comparison the fact that Merryn finds the Skoda advert in Midsomer Murders memorable might relate to the content of the programme - in an inverse ratio?

Advantages of the Internet for Advertisers

I can think of several good reasons for preferring to place adverts on the internet rather than on TV:

  • Extremely low costs for distribution of the adverts
  • Low administration costs
  • Global reach
  • Local target audiences
  • 24 / 7 availability
  • Potential customers who actually cost the advertiser are self-selecting and clearly very interested in the product / service accessed either generically or specifically

Merryn Webb's Arguments for Investing / Advertising Using ITV

Merryn Webb's arguments come down to several key points:

  1. Anecdotal she doesn't click on ads therefore why should other people?
  2. Ads on the internet are irritants (they aren't on TV?)
  3. You can't block ads on TV out (Try using a Skybox!)
  4. 'The average internet user devotes just 24 minutes a day of his home time to the medium'. Evidence please and who is this "average" person anyway? Average and the concept of target markets are mutually incompatible
  5. Last year, 16-24-year-olds watched only 150 minutes (of TV) a day and also said they media multitasked while watching (they sent texts and fiddled on the internet at the same time). Webb writes of young audiences as having no money to spend on TV advertised products anyway: young reduced pocket money /new graduates weak job market / 20 somethings lack credit status. (Anecdotally my A level students have better iPods, mobiles and cars than me...!)
  6. Old people have more money and lots of it locked away in their homes. But which old people? Bring on the equity release schemes... (problem if your property values dive and forget leaving your money to relatives...!)

Media related arguments:

ITV has a few good things going for it, too. It makes the kind of entertainment and music shows both old and young like.

It still has 23.5 per cent of the UK viewing audience. It could even see advertisers return as they scale back online (Really?) spend and seek refuge in a tried and tested medium in a recession.

ITV is also cutting costs, and a possible change in public service broadcasting requirements may help with this. And, although it seems there won’t be a bid from Endemol, ITV is cheap and another bidder may appear in the future. (My emphasis)

Against Webb's arguments:

  1. The appeal to both old and young alike seems to contradict Webb's earlier arguments which wrote off the young as being irrelevant to advertisers anyway. The reality at my level of anecdotalism is that sixth form students barely watch any ITV at all. It is for "old people" (which I suspect is anybody over about 30). C4 is the popular channel.
  2. 25.3% of the UK viewing audience is something of a disaster when compared with what ITV achieved as part of the media duopoly that existed up until the early 1980s. The next thing is which 24.3% of the viewing audience? Possibly those who can't afford Sky and who find the BBC too elitist? If this is the case this means lowest common denominator viewers for most of the time who are less likely to have a big income (with the exception of footballer's wives of course). Obviously this weak demographic is very attractive to the serious advertisers.
  3. There is no evidence that advertising is migrating back from the internet rather the models of marketing and advertising via the internet are becoming increasingly sophisticated. Check out this Media 2.0 workgroup link for example.
  4. ITV is cutting its costs. Well it needs to because it is losing valuable income as ads migrate to the internet and as economic downturn bites. Given that much of its market comes from those designated as  sub-prime when it comes to credit ratings general mass advertising is likely to be wasted.
  5. Don't hold your breath over immediate changes in public service broadcasting requirements. There is no sign of the Governement relinquishing theses at present. If they don't happen for Michael Grade then ITV will really be struggling.

A more convincing argument about the effectiveness of webvertising

I find the argument below more interesting as what happens after a click through is of course extremely important. However this is a matter of how good the company is at delivering its services / products online. Amazon ad links go straight to the relevant book and now their service provides a good second-hand service as well - brilliant. As a  bookbuyer I use Amazon more and more.  In the end  the argument below doesnt negate wbvertising at a generic level it raises issues about competitiveness  and competence in the  delivery institution.  But this is the same issue  however / wherever a consumer  consumes.  The best companies will out!

...the rhetoric of departure in hypertext theory.
The other end of the ad's hypertext link is the landing page. Most often, these pages are highly disappointing and cause the user to back out immediately. This is why even click-through is a poor measure of the value of Web ads since it measures the alluring quality of your creative and not the ad's ability to deliver business. (Jakob Nielsen on why Advertising Doesn't Work on the Web)

Nielsen makes another important contribution to developing theories of advertising in relation to websites. Regular returning visitors are likely to be the most valued visitors for the development of websites:

If you build a good site, users may come; but if they only visit once, you lose. This is one of the reasons why raw "hit rates" are discredited as a measure of site success: you can build seemingly impressive traffic volume by spiking your pages with search engine bait or by spending liberally on banner ads on other sites. You gain zero value from people who visit one or two pages and turn away in disgust when they discover that your site is not really about the topic they searched for or that you don't fulfill the promise of your ads. Site tourists crank up your hit count but do nothing for the long-term viability of your site. Repeat users are satisfied customers and the way to build a site. (Ibid)

I absolutely agree and these are the principles behind this blog. Developing long-term content which is of educational value. Google Analytics provides me with visitor loyalty analysis and I can quickly see how much a regular user base is developing. Nevertheless there are opportunities for occasional users. there are some educational service pages on the site such as information about the UCAS points system and  listings of undergraduate courses. Whilst users might return there is still useful advertising to be done for one off users. Hit count isn't totally irrelevant as it helps place the site up the search-engine rankings. Appear after page 2 of Google and your site is commercially dead.  This on the other hand is how  the  web  becomes enormously  competitive and  how in the end the best content for specific target audiences should win out.

ITV Media midget in a Global Mediascape

The simple facts are that ITV do not have the weight financially to compete on the increasingly global media market and provide good quality products. At some point the whole will equal less than the sum of its parts in terms of share price. when that happens this is the time to buy because breaking up ITV and splitting the production facilities from the company will make the overall value clearer. As we move closer to 2012 the ominous presence of companies geared up to deliver mobile moving image products is going to be crucial. How well ITV can adapt to this rapidly changing media environment is a mute point. I'd stick your money in Vodaphone / WPP if I were investing in media companies.  The alternative is to short out ITV: I suspect that once the share price comes down into the 25 pence area then some real value can be potentially released:

Companies naturally dislike investors who bet on their share price to go down. But the activity is legal, and helps keep the market efficient. If the shorts are right, and a company is overvalued, its price will come down in time regardless. By publishing their own analysis, they can stop damaging misvaluations from persisting. (John Authers, Strategic Short-Sellers Not the Root of All Evil, FT 23 / 24 August 2008)

This isn't to argue that TV advertising is redundant, however the argument that because TV didn't kill off Radio, doesn't apply to the internet. The point is that the internet potentially allows for on-demand high quality moving image based media content this will depend on high speeed broadband connections becoming generally available. The other key issue is that 2012 sees the digitisation of the airwaves. There will be increased fragmentation of audiences and content which will be paid for by advertising most probably. Look out for groups of students gathered around the latest handheld devices laughing over 15 minute comedy shows whilst they are on the trains to school or college. Sky seems better placed to provide this content than ITVDraw your own conclusions when it comes to investing in pension funds. My Space will have given the Murdoch camp a lot of experience at the sort of content which younger audiences enjoy. (These aren't recommendation for Sky / My Space please note).

Overall investment in ITV for those not savvy with the rapidly changing media world and who don't have access to a lot of figures and some knowledge of developments in on-line advertising models will be taking an extremely risky punt right now. ITV will need to be significantly reconstructed if it is to survive beyond 2012 but how that is to be achieved and by whom is far from clear and the current downturn in the British economy is working strongly against it.


Merryn Webb Financial Times 22nd August

Merryn Webb's article as displayed by Yahoo

Ofcom August 2008 Research Report

Ofcom PDF on the changing market context including use of communications by older people and the changing advertising market.

FT Technology Blog on web advertising

How-to films get ahead in web advertising. Guardian June 2007

VUNet comment on growth of European Webvertising

Why Advertising Doesn't Work on the Web

Why Site Tourists are Worthless

Warwick University Student Union Site advertising rates.  (Excellent example of  a very tightly defined target audience). The fact that  this site  came high on the search term "web Advertising"  already tells us something about the effectiveness of the site!


Five Bad Webvertising Techniques

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