The global advertising industry is undergoing a rapid transition, with print media losing significant market share to digital, i.e. the internet and mobile. According to Euromonitor, global advertising revenue is set to grow by 6% in 2016, with television and digital advertising projected to account for close to 60% of that total revenue1. While TV continues to hold the greatest piece of the pie, internet and mobile advertising are increasing share year-on-year.
Nikko AM’s Global Equities team has been analysing the global advertising industry to identify the long-term trends and how they affect the companies in that sector. In our view, advertisers are currently under-allocating to mobile advertising relative to the amount of time that consumers spend on their phones and there are some companies that are well placed to take advantage of this trend.
Fundamental shift from traditional to digital media
The internet has been the major market share gainer at the expense of print, with newspaper and magazine circulation plummeting, while TV, radio, outdoor have all held market share. Chart 1 shows that in terms of global advertising spending, the internet and (new entrant) mobile have had a devastating effect on print advertising budgets over the past eight years.
Chart 1: Global advertising spending by category (in US dollars)
Source: Bloomberg, Magna Global as of February 2016.
What is driving this shift in advertising dollars from traditional to digital media? One of the primary reasons is that consumers are spending more time on internet-enabled devices such as smartphones, tablets and PCs (see chart 2).
Time spent on print, radio, TV and even the internet are decreasing, with mobile the only form of media increasing. TV is a little over-indexed in terms of ad spend, but the US still spends significantly more on print than is justified by the consumption figures. As a result, there are significant market share opportunities for emerging media such as mobile and the internet. Compare mobile advertising, which currently represents only 8% of US advertising budgets, with the 24% of time spent by consumers on mobile.
Given these figures, budgets are likely to increasingly move towards online ads, where engagement levels are higher. In the last couple of years, mobile advertising has taken an increasing share of the market, leading to rapid growth for the companies that dominate in that sector. In our view, this trend has some way to run. According to eMarketer2, nearly one in 10 US internet users (11.7%) will go online exclusively through a mobile device in 2016, with that number expected to continue rising. Increasing mobile ad spending is not just a US phenomenon—a similar trend is seen globally.
Chart 2: Time spent by US consumers vs. advertising spend, 2014
Source: Kleiner Perkins Caufield Byers ‘2015 Internet Trends’. Advertising spend based on IAB data for full year 2014. Print includes newspaper and magazine. ~$25B+ opportunity calculated assuming Mobile ad spend share equal to its respective time spent share. Time spent share data based on eMarketer 4/14 (adjusted to exclude outdoors / classified media spend). Arrows denote Y/Y shift in percent share.
There has been much discussion, particularly in the US, about ‘cord-cutting’, which refers to consumers reducing or exiting their monthly cable TV subscriptions. This is largely being driven by the rapidly growing wealth of digital content and video streaming available via the internet, tablets or smartphones and the trend towards using multiple devices to consume content. However, for now, cord-cutting remains largely an intention as opposed to a reality. According to chart 3, despite the relatively high percentage of householders saying they intend to ‘cut the cord’, only a small number are actually doing so. Monthly subscribers to US cable TV and pay TV networks have been falling, but at a steady pace of around 0.1% per quarter for most of 2015. They say want to cut, but they’re not actually cutting at any great rate.
Chart 3: Consumer inertia fairly high – actual cord-cutting very modest compared to consumer intent
Source: UBS Evidence Lab.
Source: Company reports, UBS.
This has implications for TV ad spending. If intention were to start to translate into reality, then we would expect to see TV advertising budgets move with the consumer, with increasing re-allocation towards digital.
Equity markets: new media starting to outperform traditional
In terms of share price performance, the internet sector and the traditional media industry had actually been performing fairly similarly since 2009 (see chart 4). However, in late 2015, performance began to diverge. Mobile advertising had already been building momentum but during 2015, it accelerated and this began to be recognised more widely. Investors seem to have become slightly fearful about the market-share implications for some of the traditional media.
In our view, this market fear is valid. The attraction for advertisers has always been where large audiences are, and where they’re willing to engage and identify with brands. Mobile is where consumers are increasingly spending time, particularly accessing the internet via smartphones. Currently this isn’t being fully recognised in terms of advertising spend, but the trend is definitely in favour of mobile ad spending growth.
Chart 4: Internet and traditional media stocks had been following similar trajectory up to late 2015
Source: Bloomberg, as of 23 March 2016
Looking at the audience size in mobile for one of the largest social media platforms, Facebook had 934 million daily mobile users on average for December 2015, an increase of 25% year-over-year (YoY), with monthly mobile users at 1.44 billion, an increase of 21% YoY3. Mobile advertising revenue represented approximately 80% of Facebook’s total advertising revenue for Q4 2015, up from 69% of advertising revenue in Q4 2014. Instagram also continues to be strong in mobile, with 34.1% of mobile phone users in the US expected to log on to Instagram at least once a month in 2016, which is driving mobile ad revenues for the platform4. In addition, the leading Asian messaging services WeChat and LINE have very large audiences generating meaningful amounts of revenue.
Although the internet sector has begun to outperform traditional media stocks, we believe that there is significant growth still to come. This is clearly becoming well understood amongst investors since valuations for the market-leading mobile franchises are now fairly high.
Conclusion: Mobile advertising potential still to be fully realised
While the Global Equity team are stock pickers and do not just follow broader economic trends, it is important to recognise the overall backdrop of each sector in order to identify the ‘future quality’ companies (high quality franchise, balance sheet, management and future valuation) that will be able to grow their business, and hence their value, in that environment.
In our view, mobile advertising has enormous growth potential. We also believe that global franchises likely have the greatest growth potential since mobile advertising tends to benefit stronger franchise positions. That means that as advertisers start to migrate their budgets to where their customers are spending more of their time, these companies should be poised for further growth in revenues, despite valuations being already quite high.
1Key Trends for Advertising Industry in 2016, Euromonitor International, 3 January 2016.
2eMarketer, ‘US Internet Users Rely on Mobile Devices for Digital Access’, 2 March 2016.
3Facebook Q4 2015 financial results.
4eMarketer, ‘Instagram Continues Double-Digit Growth’, 22 February 2016.