Some broadcasters have mentioned deteriorating ad revenue growth in March.
Investors are paying attention: shares in free-to-air broadcasters such as
Germany’s ProSieben, France’s TF1, Spain’s Telecinco and the UK’s ITV have
fallen by between 15 and 35 per cent in the past three months.
This is not a canary in Europe’s economic coal mine. Rather, it is a signal
that the advertising market is finally reconnecting with the broader
economy. Last year, ad spending in Europe grew about 5 per cent – more than
double that of gross domestic product – as the market bungeed out of
recession. Investors expected a similar feat in 2011, cheered by the general
sense of market momentum.
The optimism did not make sense. In a normal year, ad spending tends to grow
at a slightly slower rate than GDP. This year the International Monetary
Fund expects Europe’s GDP to grow by 2 per cent. And there are reasons to
think this year will be worse than normal: consumer goods companies and
retailers might well cut ad spending to protect their bottom lines as
commodity prices rise. Meanwhile, television ads are nowhere near as cheap
as they were a year ago.
Free-to-air broadcasters have had a great ride: ProSieben’s share price, for
example, rose from €1 to €25 in a year and a half. But investors are right
to react quickly to murmurs of a changing market, even though the
information is volatile and informal. Thanks to their high operational
gearing, these companies are like the little girl with the curl: when they
are good they are very, very good, and when they are bad they are horrid.
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