Digital vs. Tradition Media: Which Screen Makes the Most Cash?

The digital “channel” is growing fast, but still hasn’t eclipsed traditional media.

Last month, iTunes reached five billion songs sold milestone. Apple (AAPL) has extended the reach of the app from the personal computer, to the mobile phone and the iPod. As many of us can attest to, iTunes has been a huge hit thanks to offering a wide array of movies and music in a logical and easy to use interface in conjunction with a stress-free buying process. Traders have made it clear that Apple is onto something (when looking at a two-year stock chart). Its business model of offering choice and convenience to the consumer is where the retailing of media is headed. The consensus is that digital is the way of the future—and if a media company isn’t at the forefront of this movement, its stock price will be depressed accordingly. However, this may not have happened just yet. Real revenue has been achieved; surely, there is traction here. The supply chain has been reduced to near zero and the price per song has clearly gone up. My hat is off to Apple for all of these achievements.

Yet ,when you forgo the hype and emotion generated by iTunes, and view media from a quantitative perspective, a decidedly different picture emerges. PricewaterhouseCoopers reported in its Global Entertainment and Media Outlook that as of 2007, digital and mobile distribution made up only 5% of total spending on entertainment and media. PWC projected that this percentage will increase to 11% by 2012. Yes, this growth is rapid, but the viewing shift that will stem from an estimated 16.1% annual increase in broadband use and the proliferation of high-speed WiFi networks makes it a feasible projection. Even with momentum generated by the aforementioned favorable growth trends, 11% is still a small percentage of the $2.2 trillion annual spending on media and entertainment.

It appears that the “digitalization” of traditional media is occurring slower than we think. Yes, new firms with new ideas are creating real shareholder value and influencing society, but the big bucks are yet to be made. While the MSM discusses the hype on CNBC behind the latest iPhone by market day, we go home and watch television at night. Allot of noise has been made about the aging of the baby boomers, and how this shift in demographics will create profit opportunities in the healthcare, pharma, and retirement sectors.

What do many of the 78.2 million boomers do for entertainment? Most are computer savvy, but the class grew up in the golden age of television. The sheer magnitude of this group should keep traditional television afloat, even as the under-30 crowd shrugs its shoulders for the internet. The PWC study did project that internet advertising will grow at a 19.5% compounded annual clip. Therefore, the growth is there, but on what base figure. Smart investors know the difference between growth and value, and how to invest in both.

News Corp. (NWS) is well positioned to take advantage of the traditional media and entertainment tastes of many aging boomers with its roster of television networks and print newspapers. The company has also embraced the internet as a growth channel. Its Myspace.com division continues to trounce Facebook in monthly unique U.S. visitors by a 100% margin (72 million vs. 36 million) with revenue growing at a rate of 25 to 30% yearly. News Corp. also worked with NBC Universal (NBC) to develop Hulu.com, a competitor to Google’s YouTube (GOOG) that legally streams ad-supported programming with superior picture quality. News Corp. flexes its balance sheet for new media acquisitions opportunistically. Although NWS’s revenue from online properties makes up a small percentage of the $28.655 billion in total revenue booked for fiscal year 2007, it is a company prepared to capitalize on favorable short-term trends while developing—and acquiring - internet assets for the long-term.

Investing in media can be profitable. Investing in rapid growth has its issues and newer firms such as Yahoo (YHOO) which stumbled again this quarter comes with challenges. Size, strength, growth can be competing assets in the media industry. Each can awarded a different price to earnings ratios as evidenced by the firms mentioned in this blog.

Sources:

• MediaPost Research Brief: Net Generation Driving Growth In The Global Entertainment & Media Industry (subscription required)
• http://www.nytimes.com/2008/06/16/business/media/16myspace.html
• http://www.techcrunch.com/2008/06/12/facebook-no-longer-the-second-largest-social-network/

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) by his participation in the portfolio. He owns no shares in the other firms mentioned.

This blog was originally drafted by Clear intern Jimmy Baker.