Madison and Wall: Saturday Summary
For the week ending June 2, 2023
I only wrote one thing during the past week, but if you care about understanding the global advertising agency industry, I think you’ll find the full post to be worth your while. Below is a summary of some of the key data points and ideas contained within it.
Global agency industry narrowly defined = ~$150 billion in annual revenue. Global agency industry broadly defined = >$200 billion.
Media agencies at large holding companies now = 30% of net revenue.
Businesses housing traditional “creative” agencies are similar in size to media at the holding companies, but have evolved significantly in the face of tepid growth.
The overall agency industry outperformed agency holding companies in the United States over the past decade.
Profit margins at the largest agency groups improved on average by ~30bps each year with organic growth averaging 3% globally between 2012 and 2022.
The sector’s capacity to produce cash has improved over the past decade, even as cash outflows have expanded.
The industry has significant capacity to take on much more debt.
Returns on equity remain high, and could go higher.
Beyond that, I thought a couple of news items of interest which relate to Warner Bros. Discovery (WBD) which came out this week were worth highlighting here. First, WBD and Liberty Media, whose dominant shareholder John Malone is also a director of WBD, are reportedly exploring a sale of All3Media, which Discovery and Liberty jointly purchased back in 2014. If a sale occurs, WBD would undoubtedly welcome any cash proceeds it can generate as it seeks to de-lever itself. WBD has $48 billion of debt, including $4.5 billion which needs to be paid back or refinanced before the end of 2024. This is more than the amount of cash WBD generated from its operations during 2022, and while sell side analysts’ consensus anticipates significant improvement in cash generation in the months ahead (with $5.4 billion and $7.3 billion in cash from operations expected during 2023 and 2024 respectively), achieving as much is in part dependent on core high margin businesses holding up, which is a risk considering current trends in television advertising – which I would argue are more secularly driven rather than cyclical – and in affiliate fees, which are facing challenges because of accelerating levels of cord cutting in the United States.
Consequently, it is unsurprising to see such efforts. The attempted sale of various music rights held by the film studio would have done much the same, although it was “scaled back” because of unsatisfactory offers back in March. I would expect that there will be more such transactions to come. Top of mind would inevitably be CNN, whose distinct characteristics from the rest of the company’s general entertainment or sports-related properties make it less of a strategic fit now and into the future. Moreover, as an independent company with meaningful scale, CNN could probably fare better on its own because it would not be competing for scarce capital with the other businesses in WBD’s portfolio.
This is critical for CNN, because the future of a news-focused media company may look very different than the future of a general entertainment company does. If cord-cutting persists as it has, by the end of the decade less than a third of the US population will subscribe to traditional pay TV services. General entertainment may be worse off in the future than it was in the past, but at least its future as a part of streaming entertainment is clear enough. It’s not clear that on-demand streaming works for news, and the shutdown of CNN+ early last year threw away an opportunity to figure something out. So what’s the future for video-based news businesses? TBD, especially so long as CNN is a part of WBD. Incidentally, but not unrelatedly, this leads to the second news item, an extensive and highly detailed piece on the current travails at CNN which was published on in The Atlantic on Friday. It’s well worth the read.