Air
date: August 27, 2004
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Media and advertising
GEOFF COLVIN: Were you amazed when Google went public last week and investors valued it at $23 billion? If you thought no search engine is worth that much - you're right. Google's real value is as an advertising medium. Those sponsored links at the top of the page are where the money is. In fact, the Internet is now the fastest growing advertising medium in America. Will its growth turn this medium, your daily newspaper, into so much fish wrapper? Or is Internet advertising so infuriating to Net users, it'll lead to its own demise? In a world where there's now advertising on the supermarket floor, how much more marketing can you take? And which companies stand to win and lose as the business of selling to you is being revolutionized? Ed Atorino is an analyst with Fulcrum Global Partners and has long been one of the best known media analysts on Wall Street. David Hallerman is an analyst with eMarketer, focusing on advertising and technology.
David, I spend a lot of time online, and I feel confident I speak for millions when I say I hate Internet advertising.
DAVID HALLERMAN: Do you hate all advertising?
COLVIN: No, but I hate Internet advertising, which makes me wonder why is it growing so fast?
HALLERMAN: It's effective. It really can be. You mentioned Google, you mentioned paid search. One reason that has been so effective is it gets the consumer at the moment where the consumer in essence has said I'm interested in this topic and I'm interested in it right now. There's no more effective time to put your product in front of someone.
COLVIN: And frankly the way Google does it is quite inoffensive, right? You get your search results, and then over on the side it says sponsored links, and those are there if you want them. But some other is much more intrusive and irritating.
HALLERMAN: Yeah, those sort of, in fact if you're thinking of things like pop-ups, there are less of those, and I think we're seeing more continuation of display ads, which are really akin to what's in a newspaper or a magazine, and seeing what's called rich media.
COLVIN: Well, we want to get into that, because I think most people are not sure yet what rich media is. But this is very effective. Internet advertising is very effective, as you say. Who is most threatened?
HALLERMAN: Well, it's two questions. The pie is growing, and Internet advertising is growing because of that. I mean overall advertising will grow about 7 - 8 percent this year in the United States, but Internet advertising is going to grow by 25 percent, and part of the reason is part of that money is going away from broadcast television and part of it's going away from newspapers. Those are probably the two main ones.
COLVIN: Ed, it is growing very fast, but Internet advertising I take it is still quite a small part of the total?
ED ATORINO: Oh, it is. It's $8 billion, $9 billion...
COLVIN: Out of?
ATORINO: Out of a couple of hundred billion dollar business. Also there's leakage of all other media to the Internet, and advertising budgets are now incorporating Internet advertising into their game plans. But it is still small. If it goes from $8 billion to $9 billion, it's only a $1 billion increase. That's a pretty small amount compared to newspapers or television or radio, who are also trying to recapture the leakage by getting into the Internet business themselves through Newyorktimes.com, Baltimoresun.com, etc.
COLVIN: Do you agree with David that newspapers and television are most threatened?
ATORINO: Sure. They're the two biggest. Whenever a new media comes along, the big will lose to the new. A dozen years ago, cable was pretty tiny. Now cable's getting up there and growing 15, 20 percent a year.
COLVIN: Go ahead, David.
HALLERMAN: I think the important thing is that it's broadcast television that's losing more than cable, cable by all its niche markets, and one, since the Internet is like that, all the sites that might fit a different niche and help the advertiser target their advertising better.
COLVIN: Right. Well, actually this is a great example, because 25 years ago the three commercial broadcast networks had 90 percent of the audience. Today they have less than half. Over a similar period of time, could a similar thing happen to newspapers?
ATORINO: Well, it sort of happened, not quite as dramatically, but the newspaper circulation has been stagnant in the mid 50s, 55 million a day for some time, and yet on a household basis it's been going down pretty steadily. Also 10 years ago there were 60 million a day. So the newspaper audience is changing. Young people read newspapers later in life; older people stop reading earlier in life. They're getting squeezed at both ends.
COLVIN: And this is a generational thing it sounds like, so that in 25 years we could have a broad middle class that is perfectly comfortable getting news and everything else off the Internet and has no particular fondness for newspapers and magazines?
ATORINO: The business model may change. For example, suppose 10 years from now, instead of getting your news on paper, you got it in some kind of tablet or in a different format, but the content will be delivered by the Baltimore Sun or The Wall Street Journal or The New York Times, and you may want to pay for that and you may be willing to accept advertising along with that in a different format. Content is going to be the key, which is what the Internet is delivering.
HALLERMAN: Right, and in that sense the newspapers still have a lot of potential, but it may be in a different format than the paper we've known, as Ed said.
COLVIN: Well, now that leads to something you mentioned a minute ago that I said we'd get back to, which is rich media. Now this is within the Internet, a type of advertising that is growing very fast. What is it?
HALLERMAN: Well, rich media really are advertising online that has audio, video, sound, motion, what we're used to with television. And that could also be content is delivered more and more like that, too. I know I needed to catch up some speeches from the Democratic Convention, went online and found those. So the fact is rich media advertising enables those advertisers who are looking to do branding, whether it's food manufacturers or automobile manufacturers, want to do that, and they can do the sort of advertising that engages the consumer a bit more with rich media than they can with say a Google ad.
COLVIN: Some people have said, and it's not just people in the industry, that we are nearing some kind of a tipping point. They see a big increase in Internet advertising and they think maybe suddenly advertising is going to shift from mass media into these special particularized media. Do you think that's true?
HALLERMAN: Well, it's happening but, you know, a tipping point, right now Internet advertising is about 3 ½ percent of the total ad spending. Even in a few years, it will be 5 percent, which is about the same as magazines. It's growing at a rate, part of what is the tipping point is the acceptance of it more and more of traditional advertisers who had been resistant to it. In fact one of the more interesting points that we'd seen is that the leading 100 advertisers -- this was an article in Advertising Age -- represent one third of all ad spending in the United States. However, they represent less than one fifth of Internet ad spending. So if those leading advertisers just shift little amounts of their budget onto the Internet, the percentage increases in online advertising will go up tremendously.
ATORINO: I don't like the phrase "tipping point." I think leakage is better. These big advertisers are just now beginning to think of the Internet in their plans, and it's hard to throw a lot of money into the Internet. There's no place to really put it yet. And so it's going to take time for this tipping point to occur, but there is spillage. It is growing very rapidly. It's going to be coming more and more an important part, and as David said, it's a generational thing.
COLVIN: Is there a danger that people are being marketed to so much in general that they just can't stand it? There is this new study from Yankelovich, 69 percent of people said they're interested in products and services that would help them skip or block marketing, 65 percent feel constantly bombarded with too much marketing and advertising, and the one that really struck me, 33 percent -- it's a minority, but a large minority -- 33 percent would be willing to have a slightly lower standard of living to live in a society without marketing and advertising. That is a lot of hostility to advertising in general. Does it threaten ad media in general?
HALLERMAN: It can potentially, and it's why advertisers are now realizing they need to give back as part of their advertising, which in one sense the Internet is best suited for. For example, if you want to go to the salon.com site, which is a content site, you want to read this daily magazine, you can have a choice. You can pay them money and subscribe to it and not see ads, or you can go through a 30-second ad, a rich media ad with all kinds of video and sound, and for that you get a day pass and you can see it.
What advertisers need to do to overcome this hostility is they need to give something of service back, whether that's entertainment, information. It could be community, which can happen online. And the Internet, because it can set things up, go, not go. You know you can get to this if you allow us to advertise to you. You can play this game, they're marketing to teenagers, if you allow us to advertise to you. It's harder to do that with the other media.
COLVIN: Which companies, which media companies understand this whole new environment best?
ATORINO: The Times, New York Times Company, which is not just the Times newspaper, but all their properties, a lion's share of their growth in the first half of 2004 came from their digital properties. It still represents a small segment. So that's one way the newspapers can recapture some of their leakage money, as you've talked about it, is by creating those sites. Media companies, the portals are still a main segment. That's Yahoo, that's MSN, that's AOL. Yahoo is the leader in that. Yahoo's first quarter, first half this year, their ad numbers, revenues were up...
COLVIN: It was over 200 percent I think.
ATORINO: 200 percent, right. And that kind of thing. You also need the specialized companies in terms of the ad agencies and the companies that coordinate all the technology. DoubleClick and aQuantive are two of the bigger media companies in that area.
COLVIN: Right. David mentioned the New York Times Company. You have a buy recommendation on their stock I believe.
ATORINO: I did. I downgraded it recently.
COLVIN: Oh, you did?
ATORINO: Well, the July advertising numbers haven't been coming along all that well, so we just stepped away from the plate a little bit temporarily.
COLVIN: From an investor's point of view, which media companies would you put money into today?
ATORINO: Right now I'm recommending a company called Scripps Networks. Scripps has a company, it's a broadcasting newspaper company, but also Scripps Networks, which is Food Network, Home and Garden TV, Do it Yourself network and Shop at Home and Fine Living, networks that are growing faster than most other cable networks, because they're delivering content that people are interested in, food, decorating, how to fix your house, how to fix your deck, and that is growing far faster than most other newspaper companies right now. The other newspaper companies have sort of neutral ratings on, but a company like Gannett has been delivering their numbers very solidly. They're showing one of the best ad gains so far, and while I have a neutral rating, I do like the company.
COLVIN: One part of the media world we haven't touched on, we should briefly, is the magazine business, because it has largely survived through a proliferation of niche titles. But is that the future for them, or are they going to be suffering the leakage you described to the Internet?
ATORINO: I think they will suffer the leakage as well, but you're right, they have targeted content. Just look at Vogue this week, 850 something pages.
COLVIN: The September Vogue, always the thickest magazine.
ATORINO: Exactly, and the targeted magazines that are out there delivering valuable content, backpackers, running. Right now the fashion, the home, the shelter magazines, the fitness magazines are booming because that's what consumers are interested in, but some magazines are struggling because they don't have that niche position that are driving readership.
HALLERMAN: Niche positions are working in all media. We're talking magazines, we're talking cable, we're talking the Internet. At the same time, it's like I'm remembering the late '40s, the early '50s when people said radio is going to go away, TV is going to kill radio. It didn't. It transformed it, and I think that same possibility for print, especially because so much content with the Internet, those print companies that find a way of combining the two and crossing media, because consumers don't necessarily care as much. They just want the information or the entertainment.
COLVIN: It's a very good point. As far as we can tell, no new medium has ever completely wiped out an old medium. They all just survive and adapt.
ATORINO: No, the pie grows, the slices change.
COLVIN: That's right. Ed Atorino, David Hallerman, thank you very much.
Market roundtable
KAREN GIBBS: Well, the pie has been a little tastier for investors recently. While it's still too early to call it a trend, the Dow is up for the third week in a row, closing at 10,195 for a weekly gain of nearly 85 points, while the S&P picked up over 9 points. The Nasdaq rose for the second consecutive week, gaining 24 points to close at 1,862.
But it's still a tough environment for investors. The markets are all underwater for the year. But two money managers are racking up big gains using different methods. Since his last appearance almost two years ago, John Buckingham's Al Frank Fund is up a blistering 77 percent. He loads up on undervalued and unloved stocks and sees current price action as an excellent buying opportunity. Over the same time period, Dan Steininger's Catholic Fund is better by 33 percent. Dan prefers to invest in companies based on their corporate governance track record, and uses stock ownership as a way to bring activism into the boardroom.
Well, John, how do you view the market right now?
JOHN BUCKINGHAM: Well, I'm very optimistic, given the fact that interest rates are low, inflation rates are low, corporate profits have been strong. We've gone through a pretty sizable correction. I really am optimistic. I know there's a lot of fear that's priced into the market. We always have to worry about terrorism, oil prices. Happily they've come down considerably. But I do think that going forward things are going to be pretty favorable. And we are getting closer to the seasonably favorable time of year. November through April has always been a very good time for us.
GIBBS: Dan, are you as optimistic about the market?
DANIEL STEININGER: We're optimistic, but for different reasons. Our U.S. economy has gone through shocks and corporate scandals. We feel that the reforms that Congress and the SEC have enacted have improved the confidence in the market. It's brought greater integrity and transparency. So I think all shareholders are going to benefit because it's restored the credibility of our markets in a way we've never seen before. And I think it was all based on, this is the week of the Olympics, and here we're all happy that the Greeks are giving us a world class Olympic event, but their greatest contribution the Greeks had was democracy. That's where we got our notions of democracy. Well, behind all the regulatory reform has been the notion of shareholder democracy, and we have the Greeks to thank for that, and that's why we're very optimistic in the long run because the confidence of the markets have been restored. We feel that it's a good place for shareholders to be in the coming years.
GIBBS: So in the short run you ignore, say, rising oil prices and the fear of higher interest rates, Dan?
STEININGER: We're primarily an index fund, so we're in it for the long term. We don't actively trade or sell stocks. We're an index, our focus on corporate governance. That's our expertise, and bringing our values to the boardrooms of America, and CEOs all over America are having to listen to us, whether they like it or not.
GIBBS: Okay. Well, we're also coming up, Dan, on the anniversary of the mutual fund scandal. Have things changed at all for investors?
STEININGER: It is a different world now. I think the markets are more transparent. I think investors can have more confidence in everything from the financial statements to the independence of the board. So we applaud this, and that's what the Catholic Fund's been doing, advocating for those kind of values in the corporate boardrooms of America.
GIBBS: John, what's your take on the situation with mutual funds now?
BUCKINGHAM: Well, I would agree that there's been a lot of things cleaned up. Unfortunately, there's a lot of regulation that goes on. In our particular shop we've had to hire a compliance officer full time, and that obviously adds to expenses. Now we're not going to stick it to our shareholders. We're going to eat it as the management company. But I do think in the long run things will be better for investors, but there is a cost associated with that.
GIBBS: What is that cost?
BUCKINGHAM: Well, that's hard to say. Is it 10 basis points, 15 basis points? I just don't know. But I do believe that eventually the fund shareholder will have to endure that cost.
GIBBS: Dan, do we see any clear good guys and bad guys now in corporate America?
STEININGER: Well, I think, one example I'll give you is Intel Corporation. Andy Grove has really gotten religion when it comes to - and of course I'm in the Catholic Fund - but corporate governance. He has restructured, brought independent directors to his board. I think he's going to take over the chairmanship because he's dropped his CEO title. He's educating his board. He spends hundreds of hours a year of education to understand what it means to be an independent director for that corporation. And I think in the long run, a corporation like Intel will do very well because it's taking corporate governance so seriously.
GIBBS: John, does corporate governance come into play when you look at stocks?
BUCKINGHAM: Well, I'd like to say that it does, but it's very hard to quantify the quality of management or of corporate governance. So what we try to do is look at companies from a valuation perspective, buy undervalued stocks, but broadly diversify so that if you get hit with a WorldCom or something like that, and there will always be those companies unfortunately in the future, you have to diversify. You can't put all your eggs in one basket. So valuation is really the key for us.
GIBBS: Well, talk about valuation, Intel and technology, Intel's kind of the bellwether for technology. A lot of people say tech is overvalued. What do you think?
BUCKINGHAM: Well, we're one of the only managers out there who sees value it seems in technology. We like to look at companies from a balance sheet perspective. And there are a lot of tech stocks, and I'll give you a couple of examples, that have lots of cash on their balance sheet. They raised money in opportune times or they've made a lot of money over the last few years and they've kept it, and I think those are companies that you can invest in as a value investor. Take a company like Integrated Device, a communications, semiconductor manufacturer. It has about $6.00 a share in cash on its balance sheet and the stock's trading around 10 and change, and it's profitable. So you don't have to pay that much for a growth stock. It's a value company trading at a very inexpensive valuation. So I think there are a lot of opportunities with companies with great balance sheets.
GIBBS: Going back to balance sheets and corporate governance, give us some more examples of the white knights in corporate America right now.
STEININGER: Well, one of the arguments we always get when we appear at shareholder meetings and talk about executive pay, and that is that you really can't hire good help without paying the exorbitant salaries and stock options you see in corporate America. Well, let's look at Toyota Corporation. It's going to make more money than GM. It may take more market share than Ford. And yet they seem to be hiring people who are doing a very good job. I know it's not an American corporation. Americans are buying their cars. They produce quality. And their senior management team and their CEO, they aren't making anywhere near the kind of dollars that American leadership's making. So I say, okay, you can't fight Americans. Try hiring your competition. They apparently can get the job done for a lot less money.
GIBBS: That's a good point. But looking at the automobile sector, they're very sensitive to interest rates and certainly to rising oil prices, as consumers may stop buying gas guzzlers. What's your take on the automobile sector?
BUCKINGHAM: Well, we like it. We like it just for precisely those reasons, that the stocks have performed miserably. So you have a company like General Motors that's trading at a single digit P/E ratio and yielding almost 5 percent. I think that GM's going to be around despite the troubles they're going through. It's going to be around for the long term. So I would be a buyer of a company like General Motors. We like Ford, and we even like some of the auto parts makers, precisely because they haven't performed. That's our MO. We like to buy companies that other people despise and buy them at inexpensive valuations, have the patience to stay with them, and then reap the rewards down the road.
GIBBS: How about the dividend play involved with General Motors?
BUCKINGHAM: Well, dividends are a theme that I think is really coming back into vogue. You can't fake dividends, whereas in the past we saw that companies were faking earnings and things like that. Historically, again we are students of market history, if you look back, dividends have accounted for anywhere from two to four percent of that 10 to 12 percent return that equities have generated over the last 80 years. So dividends are extremely important. But you can combine dividends with undervaluation, and I think you can have excellent returns with a modest amount of risk by investing in those kinds of companies. In addition to General Motors, I like DuPont in the large-cap area. DuPont has a 3.5 percent yield and is trading at a below market multiple. And I even like some technology stocks. Believe it or not, technology stocks pay dividends. Several companies like Traffix in the online dating business, online marketing business. TRFX is the symbol. It yields 5 percent, profitable, $3.00 a share in cash on its balance sheet. American Software, same kind of story, 5 percent yield, profitable, $3.00 a share in cash on its balance sheet. So there's tremendous value out there if you can get off the beaten track and you're willing to do what the conventional wisdom suggests you shouldn't be doing.
GIBBS: Dan, can you use or do you use dividends as a gauge on companies that are returning shareholder value or paying their CEOs and management exorbitant fees?
STEININGER: Well, if you're paying your CEO $29 or $30 million a year, you're probably not paying as many, the kind of dividends your stockholders could be getting. And again, we don't have any problem with high pay. Our problem is with the ratio between what the top CEO or his top lieutenants are making. Ask an average investor who builds quality into the products, who delivers service to your customers? It's so often the average employee. So for the investors in our fund and for all investors, I think we need to pay attention to those things. What is the ratio between what the average person makes at that corporation and the CEO? We say to our investors, look, you need to look at the corporate governance, the ethics, the compensation packages. In the long run, corporations that are not perceived as fair and trusted by their employees are not going to succeed. They may have a short-term gain. Who could beat Enron in its heyday? Who could beat WorldCom? Global Crossing? These things catch up with companies, so we want our investors not just to look at earnings per share or dividends, but look at how the company's managed, its governance, its ethics, its culture. Catholic Knights has been around for 120 years. It's because we've had a culture of honesty and integrity. So we want investors to do well in the market, but we also say to do that you better look at the overall culture, and governance is something you should factor into it.
GIBBS: Any companies that stand out that just don't get it even after this year of scandal?
STEININGER: We picked on Cendant Corporation. The CEO there, Silverman, took out $234 million in three years roughly, approximately. $234 million is more than the gross domestic product of many countries. There's something wrong with a company that has that kind of pay disparity. I appeared at J.P. Morgan Chase in New York a couple of months ago. Again, we simply asked the board of directors to look at that pay disparity between the top lieutenants and the average worker, and they wouldn't do it. But I reminded them that J.P. Morgan himself once said that the CEO should not be earning more than 20 to 1 the average employee. How ironic that J.P. Morgan Chase is probably in the 3-400 to 1 range at this point. So look at those things for the average investors, because it's going to catch up to a corporation when they're doing those sorts of things.
GIBBS: Dan Steininger, John Buckingham, thanks so much for joining us.
STEININGER: Thank you.
BUCKINGHAM: Thank you, Karen. Much appreciate it.
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