Dotty about dot.com
Recent months have seen soaring indeces across Europe, and one of the mosttraded sectors has been the media sector. Mergers have been one of the driving forces, but the dot.com phenomena has also played an important part in the re-rating of some companies.
ING Barings’ Richard Madden says the sector has been the most successful of all over the past 12 months. “Although the last few month’s performance has been phenomenal, one can look back over the past year and see the major listing centres of London, Amsterdam and Paris outperforming,” he said. “The German sector is smaller, but a number of TV and film distribution stocks came to the Neuer Markt in a blaze of glory, and have performed very well.”
Michael Picken is Media Analyst at CSFB in London, and he identifies the internet as a significant feature driving activity in media stock. “Many investors in Europe see existing media companies as a proxy for the internet, far more so than in North America. Across the Atlantic we see a lot of garage start-ups which are then floated, but it is more difficult to invest in net start-ups on the continent. In contrast to the US, however, many media companies have their own investment in internet companies, and have developed their own dot.com arms.”
Madden agrees, saying “Across Europe companies are developing their internet strategy, and although this is something of a global trend, interest as Europe is heightened in the light of a relative underperformance in previous years.” He believes that in an increasingly fragmented market, the importance of a mass audience is crucial. “The markets have realised that many of the media companies are capable of driving its audience to their websites, making their internet properties valuable,” he added.
“The other major factor driving the sector is the buoyant advertising market,” says Picken. With GDP growth rates increasing on the continent, traditional consumer advertising is increasing.
But Picken also points to other events on the continent not linked to GDP: “Deregulation in the financial services in Europe means that there are some new companies advertising more than they did previously. Banks and insurance companies, for example, which have traditionally had low marketing budgets are now spending much more in a newly competitive environment. It is a trend which we have witnessed in the UK and now the continent is playing catch-up.”
The internet also plays a part in the increase in advertising spending. “In the States dot.com companies account for around 25% of advertise spending increase, and we expect them to have a similar impact in Europe shortly”, he says: “The US has seen a massive advertising spend by internet companies, promoting themselves, and this will be reflected in Europe,” agrees Madden, and adding; “But significantly there has been little evidence that the internet companies are stealing revenue from traditional members of the sector.”
Mark Beilby at Deutsche in London agrees that European companies are ‘absorbing’ the internet, but says: “It is a far more complicated story than that at the moment, but the media sector certainly looks set to continue to overperform.” He confirms that advertising revenue is looking extremely positive across the region, in both print and visual media.
Other predictions for European advertise spending growth are also bullish, encouraged by figures from southern Europe. Spain, Italy and Portugal all experienced double digit growth in spending over the past year, with domestic TV spending leading the way.
“Although we have predicted 6-7% growth across Europe, we are now revising that upwards,” says Picken. “France and Germany will probably follow the pattern we have seen further south. Certainly we anticipate the European market outperforming the US market, as the dynamics of European media companies, particularly with respect to the internet, place them in a better position.
The situation in France is confirmed by Jean-Michel Bamamy at Credit Commercial de France in Paris. “In this sector advertising is, and in my opinion should, remain the major influence. The internet is another outlet, but advertising revenue is the main driving force. The possible exception here is cable and satellite TV, where companies may be looking to increase their subscription income, and the influence of the internet should not be underestimated. Witness the announcement by BSkyB last month.”
James Barty at Dresdner Kleinwort Benson in London believes that the performance of the sector has been sparked by the AOL-Warner merger. The sector is up 40% this year alone and the merger has meant the stocks are viewed differently. “Content is king,” says Barty “The new view is that all the new internet companies will need to have content. We expect these stocks will still be strongly underpinned, and suggest that if there is any weakening investors should go back in.”