"Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."
Avoiding companies that operate in declining industries is one way to follow Warren Buffett's advice. The media industry, both print and TV, has been in steady decline for years, trying to keep up with disruptive digital technology.
Over the past 12 months, an investment in Nine Entertainment Co Holdings Ltd (ASX: NEC), Seven West Media Ltd (ASX: SWM) and Ten Network Holdings Limited (ASX: TEN) would have returned a loss of -15%, -33% and -40%, respectively. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) returned 10% over that time. That investment is how you break Buffett's No. 1 Rule.
Disruption of traditional technologies by digital media is not new to the industry. The Deloitte Media Consumer Survey 2014 confirmed some well-known trends. 92% of Australians surveyed said they would not pay for online news. The vast amount of free news available online makes it extremely difficult for media companies to attract paying subscribers.
72% of survey participants are binge viewing back-to-back episodes of TV series, whilst 26% of survey participants said they will most likely watch all media content from online digital sources this year. More consumers are turning away from TV and toward online Subscription Video on Demand (SVoD) services and Australian media companies are currently attempting to capture this market.
Trying to compete against the imminent arrival of global giant Netflix, the Australian media companies have formed alliances which could partly shed light on the future of the industry if the cross-media ownership laws are alleviated. Nine and Fairfax have their SVoD service Stan, whilst Seven and Foxtel are offering their Presto service. Other SVoD services available include Fetch TV and Quickflix.
For decades, television advertising revenue has been extremely lucrative but is declining and won't last forever. Some existing companies may be able to create strategic alliances and evolve into successful digital media companies. Others may not.
With a market capitalisation of $25 billion and having the expertise and funding to produce award winning programs in-house, it is likely that Netflix will dominate the local market.
At this stage we can only speculate on what the competitive landscape will look like in the future and which companies will survive. For that reason, the only investment decision I'll be making in the media industry is which SVoD service to subscribe to.
