Scale and Growth in Advertising, Media and Technology
Overcoming Perceived Limits to Expansion Opportunities
As most readers of this Substack will be aware, to date I’ve split my career between roles on Wall Street and industry over more than 20 years, but always focused on businesses dependent in whole or in part on advertising. As a result I have a relatively unique perspective around how investors focused on advertising, media and technology think and act, and how companies in these sectors think and act.
Investors are often unimpressed by companies’ growth plans, while company management teams are often frustrated by what they perceive as a damaging short-term orientation from those same investors. The reality is that most investors want companies to pursue growth and scale, but they need to be persuaded that management has as much conviction and focus in their investments as capital markets participants have in theirs. Moreover, consistency in investment strategy is as necessary in a corporate setting as it is in a financial one.
Before assessing why companies don’t always focus on scale or growth, let’s take a step back to assess some basic assumptions about the benefits of both pursuits. I believe the following to be true:
Buyers of multiple products commonly want fewer vendors rather than more of them
Larger enterprises can produce higher profit margins than smaller ones
In many industries, countries across most of the world are similar enough to each other that ideas from one market will commonly work in others
Companies which are growing quickly are better able to attract and retain talent and eco-system partners than companies which are growing slowly
The largest suppliers of capital need ever-larger companies to invest in as asset managers themselves become increasingly large relative to global capital markets themselves. It’s much more efficient to make larger individual investments in absolute terms, but at the same time asset managers usually want to avoid making investments that trigger additional regulatory obligations. Anecdotally I can also affirm that larger companies are much more likely to warrant proportionately more study by sell-side analysts, which means there will be a greater number of individuals who can better explain a company to investors, press and others if a company’s story becomes complicated for any reason.
Despite these benefits, and putting aside the relatively small number of companies which are presently experiencing hyper-growth at the present time, beyond their early stages of development most public and private companies often appear reluctant to chase after scale and growth in a meaningful way, instead focusing on strategies which could be characterized as incrementalist.
In my experience, incrementalism may dominate the strategic choices companies make for reasons such as the following:
Lack of sufficient conviction about the future direction of an industry
Too much focus on short-term-oriented investors
Limited tolerance for risk by a company’s board or its management
Lack of Sufficient Conviction About the Future Direction of an Industry
It’s a reality that industries will change. If things are going well enough for a company, management teams may prefer to sustain whatever trends have supported their businesses for as long as possible, leading to an under-investment in newer opportunities. Where industry-level changes are relatively evident and favor upstarts, there may be willful optimism on the part of incumbents that an industry might return to a more idyllic past where decisions were rooted in “sanity.” In some instances, research underpinning these assumptions may be low-quality or incomplete, over-relying on third-party assessments or syndicated research rather than in-depth original work.
A better approach is to form a clear-eyed view about an industry’s direction through more meaningful investments in industry insights with original thinking and customized work, paired with a high degree of scrutiny around the key assumptions underpinning a sector’s current health or risks associated with attempting to sustain the status quo. The result may be a greater appreciation of the inevitability of certain outcomes, a desire to get ahead of those outcomes through aggressive internal investments or acquisitions and novel strategic approaches.
Consider the many businesses around the world with legacies in television broadcasting who have chosen to limit or reduce their investments in streaming services because those investments are not expected to be as profitable as traditional operations. It would be one thing if entities without traditional businesses now competing in this space – such as Netflix, Amazon and Apple – simply exited and left the industry to its traditional players, but that won’t happen because their business models are durable, and likely to continue growing faster than the rest of the industry. Consequently, the companies who are best positioned will be those who continue to invest against a global opportunity, experience managing the technical aspects of a DTC video service, knowledge of how much content an offering needs to keep churn down, marketing, customer service and content production or licensing, and even if the business features lower profit margins than the traditional model, the scale potential is likely going to be substantially bigger because of global opportunities, leading to the possibility of greater absolute profits for those who pursue them.
Too Much Focus on Short-Term Investors
There is a common view that analysts and investors are only focused on quarterly results or other short-term metrics. Companies may be reluctant to pursue significant investments which could add to growth or scale as a result. In my experience, the underlying premise relies on an incorrect – or at least incomplete – view. While there are many investors whose strategies are focused on “calling the quarter” with a focus on current period metrics which might drive a stock in the near-term, there are many others who would rather spend their time understanding a management team’s longer-term strategy and progress towards related goals.
To the extent that a company credibly pursues those long-term strategies, curates an investor base who wants to see the company focus on those long-term strategies and maintains credibility with investors and analysts by virtue of its consistency, a company can meaningfully reduce short-term pressures and secure access to substantially amounts of capital.
The opposite can also be true. For a stand-out example, early in my career as an analyst I recall one company CEO who was particularly vocal in his distaste for investors’ short-term focus. But in that particular instance the short-termism was warranted because essentially no-one on Wall Street trusted him or his family-controlled firm to make the long-term choices that were centered around the interests of anyone but the controlling family. This was extreme, but illustrative.
Limited Tolerance for Risk by a Company’s Board or its Management
Overlapping both of the above issues and yet distinct from them, I have observed that boards of directors and management teams often have a low tolerance of risk or heightened preferences around avoiding downside outcomes relative to the potential gains. They are rarely willing to “bet the company” on new directions because failure is viewed as undesirable for the individual enterprise and its employees, even if in context of a portfolio of investments, individual failures may not be bad if in aggregate such efforts result in more growth than might otherwise have occurred.
However, as we’ve seen, there are many situations where choosing not to bet the company turned out to be even more of a gamble. Consider the traditional print publishers made in the 2000s who knew that the economics of internet-based content production and distribution would be substantially worse than their legacy business models and yet failed to make sufficient investments as a result. These companies typically chose to avoid making bad decisions and made worse ones instead.
I believe most companies can overcome challenges to find ways that will allow for the pursuit of growth and scale. Solutions can be circular and self-reinforcing. First, it’s critical for management teams to ensure they are clear about the direction of travel for their businesses, with a detailed understanding of the assumptions underpinning current trends and future expectations. Second, management teams and their boards need to appreciate that there are many investors who want to be long-term oriented, so long as they are given good reasons to trust in the companies they are investing in, which requires consistency on the part of the management team and a clear focus on where they expect the industry and company to go into the future. Finally, with superior insights and access to capital, risks can be better understood, managed and invested against, at least by comparison with companies which focus on incrementalism as an alternative.