Join our community of smart investors

FTSE 350: US tech continues to batter the might of the media

Last year was a tough one for publishing companies, but a potential regulatory clampdown on US tech giants could offer some respite
January 25, 2018

Few British companies have been disrupted by the might of US tech quite like publishers. Owners of business-to-consumer (B2C) titles are having to compete with the abundance of information that can be found online for free. Meanwhile, business-to-business (B2B) publications have faced a downturn in demand from advertisers. And can you blame them? In an age of 1.2bn Google users it’s hardly surprising that companies have less desire to advertise via printed publications, which might reach a subscriber base of just 40,000 people.

Advertising agencies have also been feeling the heat from changing marketing trends or what WPP’s (WPP) founder and chief executive, Martin Sorrell, calls “simultaneous discombobulating factors”. His company’s shares took a 29 per cent dive in 2017 as lower corporate marketing spend caused like-for-like revenues to switch from a 0.2 per cent rise in the first quarter of the year to a 2 per cent decline in the third quarter. Worryingly, it’s a trend that looks unlikely to let up, as the ease and appeal of advertising on Facebook and Google means businesses become less reliant on traditional agencies.

Meanwhile, price comparison websites are facing a Google-shaped problem of their own. Topping the search engine’s list of money-saving websites is very important for Moneysupermarket.com (MONY), ZPG’s (ZPG) Zoopla and Rightmove (RMV). As such, these companies are spending big on the slots that top Google’s search lists. Every time a customer clicks through a Google ad to a price comparison website, the company has to pay for it, which lowers the potential profit made on that customer. At Moneysupermarket this constrained gross margins by 3 percentage points in the first half of 2017.

But 2018 could provide some respite from the onslaught of big tech. European regulators have already fined Google $2.7bn (£2bn) for promoting its own shopping comparison service at the top of search results, while Australia’s competition authority recently launched an investigation into the market power of Facebook and Google. In the US, the Democrats want to alter antitrust laws to reduce the seemingly unassailable dominance of the tech groups and the Republican government could soon be under pressure to follow suit.

But until regulatory changes kick in, the best publishers can do is minimise their reliance on advertising revenues. It’s a strategy that has worked well for Anglo-Dutch publishing giant Relx (RELX), which now receives just 10 per cent of its revenue from print. Ascential (ASCL) and UBM (UBM) have also refocused in recent years and are now strictly events businesses with the opportunity to keep adding new festivals to their portfolio. The latter has recently entered merger talks with publishing peer Informa (INF) which, after extensive portfolio trimming in recent years, now wants to grow its events business.

Not all publishers have successfully reduced their dependence on print. After many years of strategic overhauls, profit warnings and re-planning, Pearson (PSON) is still trying to turn digital. And it appears to be selling a lot of assets to fund that strategy. Recently, the group disposed of language learning business Wall Street English (including its $150m cash pile) for a measly $300m to a consortium of funds. Management at Euromoney Institutional Investor (ERM) also appears trapped in a disposal spiral. The company described the recent sale of the Institutional Investor journals as, “in line with Euromoney’s strategy… to sell certain businesses which do not align with its strategy”.

By contrast, price comparison websites are trying to bulk up, as scale matters in the fight for customers. Property specialist ZPG recently tried to buy insurance-focused GoCompare (GOCO), while Moneysupermarket continues to diversify away from the energy market. 

 

CompanyPrice (p)Market value (£m)PE ratioYield (%) 1-year change (%)Last IC view
Ascential3791,51888.11.029.0Hold, 382p, 02 Jan 2018
Euromoney Instl.Investor1,1701,27714.12.20.0Hold, 1,148p, 22 Nov 2017
Informa7055,80916.72.83.7Hold, 689p, 17 Jan 2018
Moneysupermarket.com3431,83721.82.913.3Sell, 336p, 20 Jul 2017
Pearson6855,4719.75.7-15.2Sell, 680p, 17 Jan 2018
Relx1,64017,42322.72.313.8Buy, 1,731p, 04 Jan 2018
Rightmove4,5614,16731.91.211.6Hold, 4244p, 31 Jul 2017
UBM8813,4707.42.521.0Hold, 861p, 17 Jan 2018
WPP1,36417,31611.94.4-26.8Sell, 1,295p, 02 Nov 2017
ZPG3441,50827.11.60.2Hold, 320p, 04 Dec 2017