Alphabet’s Larry Page. Photo: Getty Images

Morgan Stanley has laid out a grim forecast for the future of Australian domestic media industry, in which global technology giants – especially Google and Facebook – scoop up the overwhelming majority of advertising dollars with dire consequences for the profitability of local companies.

The investment bank believes that out of the total pool of advertising spend in Australia last year, global ad players will take up to 40% of total revenue this year as part of a snowballing trend that will only increase over the coming years.

In terms of specific stocks, Morgan Stanley believes broadcasters are the most overpriced, although they do not see significant revenue declines arriving for TV companies for several years yet.

The pressure on media companies from digital disruption is nothing new, of course, but Morgan Stanley Australia analysts Andrew McLeod, Mark Goodridge, and Elise Lansky, along with their international colleagues Brian Nowak and Kevin Liu, argue that the market is underestimating the scale of the threat to income of Australian media companies posed by global tech giants.

“We believe the implications are significantly negative for revenue (and therefore EPS) of the domestic media companies in our universe… in a nutshell we see a ‘crowding out’ of domestic media,” the analysts wrote.

They further explain:

Let’s say total ad spend stays approximately the same as a percentage of the total Australian economy (which we believe it will, at say ~0.8% of GDP) … then the more ad spend moves to the Internet/online … the more ad dollars will be leaking to global media/ad tech players, such as Google and Facebook, which dominate that space. This is great for them, but not so great for the domestic Australian media companies. Why? Because the pool of ad dollars left over, which becomes the addressable market for which the domestic media companies, has by our estimate stopped growing and started to shrink.

In brass tacks terms the bank estimates that this year, global tech companies playing in the media space will take out between 35% and 40% of the $13.9 billion advertising pool. “It’s a big number and critically, it’s growing fast – we estimate the leakage to global players increased 24% or ~A$1bn in C2015… if the total Australian ad market only grew ~A$300m and global players collected an extra ~A$1bn, that means the revenue pool left for domestic media to compete for actually shrank by ~A$700m.”

This is all driven by changing media consumption habits and while the pain is not likely to hit television companies for some years yet, Morgan Stanley is forecasting declines of 7-8% annually for the coming five years in newspapers, and of 8-9% for magazines.

They share this astonishing chart of forecasts for spend across various media platforms recently and over the coming years.

Morgan Stanley

While this explosive forecast for growth in online ad spend may look like an opportunity, the problem is global giants are poised to take an ever-increasing share of that growing online spend, slowly starving local media businesses of revenues.

The key players here are Google and Facebook, which Morgan Stanley estimates as having earned $A2.5-3 billion and $A500-600 million respectively last year in the Australian market. The dominance of Google’s Android platform and Facebook’s media growth trajectory, helped by Instagram which opened to advertising last year, put the two companies in a position of enormous strength in the media market.

So what happens next?

Looking forward… what is worrying for domestic media companies is the severity of global leakage, or crowding out, which will likely increase as Australian corporates shift their ad spend online, where global media/ad tech players dominate. Looking out to C2020E we estimate global players could account for A$8bn-A$10bn or 50-60% of total A$16.1bn advertising in Australia. That is a big number, although it represents a 5-year of CAGR of only +18% on the A$4bn-A$5bn global leakage number we estimate for C2015. Not unfathomable in light of current +59% revenue growth.

In terms of the impact on specific companies, Morgan Stanley says that “TV, Newspaper and Radio companies are mature and in the declining phase of their life-cycle … on a 3-5 year horizon we forecast declining revenue, declining margins and falling ROEs.”

They put an underweight rating on broadcasters including Seven West Media, Nine Entertainment Company, Southern Cross Media, and the Prime Media Group, while being equal weight on News Corp. They say there are “only a handful of positive exceptions”, including Fairfax Media “for the rising and still undervalued growth in its Internet asset Domain”, on the Ten Network “as a contrarian view for an as yet unappreciated TV market share turnaround, and on APN Outdoor, “where we view digital panel billboards as a unique window for revenue growth.”



Disclosure: Allure Media, which publishes Business Insider in Australia, is 100% owned by Fairfax Media.

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