For most of human history, information was scarce. News and knowledge were distributed in bite-sized pieces, leaving people plenty of time to occupy themselves with other things. Now, the tables have turned. Digital technology means we are awash with intelligence, and can access the most obscure of factoids almost instantaneously. As such, it is human attention – as opposed to the information it absorbs – that has become the valuable resource.
So says James Williams in Stand Out of Our Light, a book that examines how Big Tech has infiltrated individual and collective consciousness. Williams concludes that we now face so many demands on our attention that we have lost control of how we process information, and have been rendered “weak-willed and impulsive”. The liberation of human attention, he declares, “may be the defining moral and political struggle of our time”.
Stand Out of Our Light was published in 2018. Since then, the grip of technology has only got tighter. A survey by price comparison website Uswitch found that adults in the UK now spend an average of five hours a day looking at screens, in addition to any screen-related work. This is up from three hours in 2020 and 90 minutes in 2012. Much of this time is still spent watching television, but social media platforms such as Facebook, Instagram, YouTube, TikTok and Twitter also hold a magnetic appeal.
“With each passing year, more people around the world are spending more of their time, attention and money on the complex and increasingly immersive entertainment and media experiences that are available to them,” PwC concluded in a recent report.
As competition in the entertainment and media sector intensifies, however, and economic conditions worsen, it is getting harder to attract and monetise human attention. Meanwhile, the companies that Williams accuses of feeding our “almost infinite appetite for distractions” are themselves starting to pay the price for our fidgety minds.
Ad-xiety
A key feature of the ‘attention economy’ is advertising – specifically, digital advertising. By serving targeted ads, companies monetise the troves of data they hold on their users. In the case of Google owner Alphabet (US:GOOGL), this now amounts to more than $200bn (£157bn) in revenue every year. As PwC notes, ads are an increasingly dominant source of money for the entertainment and media companies. What's more, internet ads are expected to constitute a third of total sector revenue by 2027.
The past 18 months have been tough, though. In a report that covered everything from newspapers to virtual reality, PwC found revenue growth within the entertainment and media industry “decelerated sharply” in 2022 to 5.4 per cent. “Over the coming five years, a colder reality will continue to bite, with global entertainment and media revenue growth slowing sequentially, year on year. In 2027, industry revenue will rise just 2.8 per cent from 2026.”
The consultancy’s predictions have been echoed by gloomy company updates – even from the biggest players. Google’s advertising revenue dipped by 4 per cent in the final quarter of 2022, in only the second quarterly contraction in its history. Meta (US:META) also reported a 4 per cent decline over the period (read our recent in-depth feature on Meta here).
More traditional media companies such as ITV (ITV), Reach (RCH) and Future (FUTR) have also been struggling, and ad agencies are sounding the alarm over the “challenging trading environment”. Lower down the scale, podcast company Audioboom (BOOM) issued a profit warning last week, saying that the advertising markets “have remained challenging for longer than anticipated”.
In the longer term, however, some companies will be hit harder than others. “Companies that are positioned in areas of growth, for example [connected TV] and digital video, may fare better than those that are more anchored to categories that are forecast to decline,” analysts at KPMG concluded in a report earlier this year. If you are reading a print version of this article, you are currently holding one such category.
For now, tech giants look to be in the strongest position. Alphabet beat Wall Street’s earnings expectations in April after Google returned to revenue growth. Meta also returned to growth that same month, and this coincided with significant cost savings, which put investors in a much better mood. It shares have more than doubled since the start of the year and Mark Zuckerberg’s “year of efficiency” is firmly under way, as we discussed in last week’s cover feature.
Shot in the dark
Something strange is happening on our screens, however. For several years, words, pictures and leisurely video footage dominated social media. More recently, though, eyeballs – particularly young eyeballs – have been drawn to a different type of content: short-form video. Analysts at UBS estimate that these videos, which tend to be less than a minute long, now account for almost 40 per cent of aggregate time spent across social media and YouTube. “We suspect decreasing attention spans help,” the bank said.
TikTok – with its abundance of catchy dance routines and lip-sync videos – proved to be the game-changer, and other sites have been rushing to catch up. Meta has introduced ‘Reels’, Youtube has brought in ‘Shorts’, Snapchat (US:SNAP) has ‘Spotlight’ and even Netflix (US:NFLX) has added ‘Fast Laughs’ to its mobile app.
Despite its prevalence, however, short-form video content only generated a quarter of social media revenue in 2022, according to UBS. This is because it is very difficult to monetise the clips: as they are so short, there is very little time to actually serve ads. Meanwhile, advertisers are less certain than ever that users aren’t simply scrolling past their products.
As we noted last week, while Meta introduced Reels on Facebook and ‘Stories’ on Instagram in 2020 and 2022, respectively, they have been a drag on sales growth ever since, and are only expected to become “revenue neutral” by the end of 2023. Even lossmaking TikTok hasn’t fully figured it out, and makes significantly less money from users than its older rivals do.
Publishers under pressure
The hypnotic appeal of videos over words and pictures is having repercussions across the industry. In May, the newspaper group Reach – whose titles include the Daily Mirror, Manchester Evening News and the Daily Express – blamed Facebook for a slowdown in page views and the subsequent fall in digital advertising sales.
Reach was referring to the fact that Facebook had recently turned off ‘Instant Articles’, a tool that allowed users to open news links in a mobile-friendly format within the Facebook app, rather than on an external website. Reach claimed this had caused a “reduction in referred traffic across the sector”.
It is hard to ignore the suspicion that Reach was looking for someone to blame. The group is firmly at the traditional end of the media spectrum (print newspapers still account for about three-quarters of its revenue) and its business model has been under scrutiny for some time.
However, younger media outlets are also being impacted by Big Tech’s change of direction. LBG Media (LBG), best known for LADBible, describes itself as a “digital youth publisher”. It distributes articles and videos aimed at Gen Z and millennials, and about a third of its content is generated by users themselves.
The group has a mind-bogglingly large fanbase, which is growing rapidly. In 2022, users increased by 102mn to 366mn, and the publisher generated 98bn content views – up 68 per cent year on year (for context, this is equivalent to every person in the world looking at about 12 articles or videos per year).
One of the key ways the group makes money is via social media. Its videos are fed into Facebook, for example, and ads appear amid the footage. When a video is watched for 60 seconds, an ad payment is triggered, which LBG splits (roughly 50/50) with the social media platform.
With the help of its young management team, LBG has skilfully adapted to the world of short-form video, and is the number one news publisher on TikTok, with 29mn followers. There’s a problem, though – it’s not making much money from it.
“People are scrolling and scrolling, so it’s a question of how you get an ad in there which people don't just scroll past, and finding the trigger for the payment,” says Zeus Capital analyst Rachel Birkett.
Birkett is confident that TikTok will eventually be monetised and that LBG’s enormous audience represents a “significant revenue opportunity”. In the meantime, though, LBG is left with staggering viewing figures but limited means of making money.
Regulatory reckoning
There’s also the threat of regulation to contend with. TikTok’s chief executive, Shou Zi Chew, has been grilled by US legislators over fears that the platform – which is owned by Beijing-based ByteDance – is sharing data with the Chinese government. In May, Montana became the first state to try to ban the app.
This is good news for rival platforms, but they have their own problems to deal with. The Irish Data Protection Commission, for example, concluded last month that Meta’s transfers of personal data from the EU to the US should be suspended because it breached GDPR data protection laws. The order forces Meta to suspend all transfers within five months and pay a record fine of €1.2bn.
The US Federal Trade Commission has also been going after Meta for monetising children’s data, and the EU’s Digital Service Act regulation is also set to affect the group.
It’s easy to drift off when reading about knotty regulation, but analysts at HSBC studied 236 resolved and ongoing cases globally, and pointed to “high regulatory risk across Meta’s geographical footprint”. Change is coming, though whether this materially affects top or bottom lines is a different question.
Television drama
Enough about small screens, though. What about slightly bigger ones? Streamers were the darlings of lockdown, trampling over traditional TV broadcasters. Shares in Netflix, Disney (US:DIS), Paramount (US:PARA) and Comcast (US: CMCSA) all surged in 2020 and into 2021. Since then, however, only Netflix has shown any signs of sustaining investor interest – and even then its shares are still down more than a third from lockdown highs.
The problem here is not advertising or regulation, but competition. There is only so much television people can watch, and so much they are willing to spend. A 2022 KPMG survey reinforced the idea that entertainment isn’t recession-proof: a fifth of consumers indicated they had already cancelled at least one streaming service due to inflation, and another 37 per cent said they would cancel if the cost of other goods kept rising.
Swedish streamer Viaplay (SE:VPLAY) is the latest group to get into difficulty, after a "sharp and rapid deterioration in the TV and radio advertising markets". The issue is more widespread, however. Disney’s streaming arm is still lossmaking, for example, and shed 4mn subscribers in early 2023.
Nervousness in the sector is reflected in high levels of boardroom churn. Bob Iger is back at the helm of Disney after his replacement was ousted; Reed Hastings is stepping down as chief executive of Netflix; and, most recently, Viaplay’s chief executive, Anders Jensen, has been sent packing.
Content budgets – which ran to eye-watering sums when borrowing was cheap – have also been slashed. In February, Disney announced plans to cut $3bn in content costs, as well as $2.5bn in other costs. It expects its content spending to remain “in the low $30bn range” in 2023. Netflix, which has managed to keep growing its subscriber base, has also been keeping a lid on its budget: for 2024, it expects its cash content spend to plateau at roughly $17bn.
Industrial action among screenwriters is unlikely to help matters, however. Hollywood faced its first strike in 15 years last month after contract talks between screenwriters and movie studios broke down, with workers picketing outside Netflix’s office on Sunset Boulevard.
Alternative lens
Simon Edelsten manages the Artemis Global Select Fund (GB00B568S201). One of the fund’s 10 themes is called “screen time”, which constitutes 5.5 per cent of total holdings. Writing in the Financial Times last June, however, Edelsten was sceptical of “glamorous” streamers.
“Disruptive sectors can be volatile and may yield disappointing profits despite their rapid growth. Strong competition compresses margins,” he concluded. His view hasn’t fundamentally changed over the past year, despite Netflix’s impressive share price rebound.
Instead, Edelsten argues in favour of “cockroach stocks”, so named because they could seemingly survive an apocalypse. The examples he gives are international telecoms companies such as Singapore Telecom (SG:Z74), KPN (NL:KPN) and Nippon TT (JP:9432), which media companies rely on to operate.
UK investors will know that life isn't so simple for all telecoms companies. But pursuing this train of thought further leads to some other sectors, too. Midwich (MIDW) distributes products such as speakers, projectors, lights and microphones to AV integrators. After a tough lockdown, profit and revenue growth is encouraging and the group looks set to benefit from our growing desire for immersive, technologically-enabled entertainment.
“There’s a general societal shift towards experiences,” says Midwich’s chief financial officer Stephen Lamb. “In places like the Middle East, there has been huge investment in creating digital galleries. You have an immersive Van Gogh experience… a room with enormous versions of the original paintings.”
Midwich shares trade on a forward price/earnings ratio of around 12, compared with a five-year average of 18.6. Neil Hermon, director of UK equities at Janus Henderson, says the stock “is probably cheaper than it has ever been” due to nervousness about its top line and a lack of investor interest in small and mid-caps. There is certainly a sizable discrepancy between Midwich’s valuation and that of bigger, higher-margin distributors, which could start to close as the company expands.
Not all companies up the supply chain are as appealing, however. FTSE 250 group Videndum (VID) is a video hardware manufacturer, making equipment for broadcasters, film studios and vloggers. Its shares soared during lockdown, and management set an ambitious set of post-pandemic targets.
That growth has not materialised, though, and shares tumbled further in May after Videndum revealed that the writers' strike in the US was hitting demand. This was just a small part of the problem, however. Management added that it was “not yet seeing a recovery in the consumer environment, improvement in the independent content creator segment, nor any significant retail restocking”.
Shore Capital analyst Tom Fraine says there had been a loss of trust among some investors. “They were led to believe that [Videndum] was a resilient business because of cyclicality being quite low. Consumer spend was used as a proxy for cyclicality. But that hasn’t proved right.”
Videndum’s valuation has crashed in recent months, and it now trades on a forward price/earnings ratio of 8.1, compared with a five-year average of 15. For investors with a long-term view, this could be an attractive entry point. However, the lack of earnings visibility is a serious cause for concern.
"There was a bit of a boom after Covid, with people wanting to be bloggers and influencers on platforms like TikTok," says Fraine. "It’s quite difficult to understand how the [sector] is developing. But the market is quite clearly of the view that we may be in a bit of a bubble in terms of content creation.”
A novel approach
The term ‘content creation’ has only gained traction in the past decade or so. Simple words like writing, editing, filming and photographing are less fashionable nowadays. It’s important to remember, however, that the entertainment market hasn’t been entirely taken over by ‘content’, or intellectual fast food.
With the odd bump here and there, Bloomsbury Publishing (BMY) has been quietly growing its sales and profits for the past 10 years, helped by the resilience of its fiction offering. “People have had too much reality, they’re turning to books as an enjoyable form of escape from quotidian worries,” chief executive Nigel Newton told the FT this year.
For decades, television and reading have been pitted against one another, but Bloomsbury has kept expanding, helped by the enduring appeal of a certain boy wizard. Indeed, the huge success of Bloomsbury’s children’s division owes much to the Harry Potter films.
Now there’s another opportunity in the pipeline: a television series of Harry Potter is being produced by Max, which Bloomsbury said will “generate the most incredible publicity and bring new fans into the works – entirely new generations and world-wide audiences’.
“What has been great is that technology – which some people thought threatened the future of the book – has in fact enabled books most marvellously,” Newton told the IC. “The current example of that is audiobooks – they now comprise 2 per cent of our turnover. And e-books are enabling people to read a lot more on holiday.”
Bloomsbury offers a decent mixture of value and growth: its price/earnings ratio has come down a little over the past 12 months, and is only slightly higher than Pearson's (PSON), which has a far patchier track record. Meanwhile, its resilient fiction division exists alongside a fast-growing digital offering aimed at universities and professionals.
The continued success of the publishing house – and paperbacks more generally – complicates the idea that our attention is slowly being fried by Big Tech. It is also a useful anchor in the rapidly changing world of entertainment and media, where it is increasingly hard to predict what will grab our collective attention next. With escapism perhaps soon to enter a new realm with the arrival of virtual and augmented reality headsets, one thing is clear: the competition for our commodified consciousness is far from over.
