MEDIA: Luxury Slowdown Clips Phoenix’s Wings
Bottom line: Sputtering demand for luxury goods and cars is likely to hamstring Phoenix Satellite TV’s earnings for at least the next year, as the company increasingly loses ground to new media rivals.
The recent slowdown in China’s luxury goods market is claiming one of its first victims in the media realm, with Phoenix Satellite TV (HKEx: 2008) warning that a sudden chill in luxury ad sales has wiped out its profits in the first half of the year. The news certainly doesn’t bode well for traditional media companies, which are a favored place for luxury goods makers to advertise. Car makers are another major source of ad revenue for these older media companies, and rapidly slowing sales in that sector also means that names like Phoenix and even some new media high-flyers like Baidu (Nasdaq: BIDU) and Sina (Nasdaq: SINA) could be looking at a difficult period ahead.
I was once a big fan of Phoenix, due to its unusual status as a relatively independent voice in China’s tightly controlled media space. The company was one of only a handful of foreign firms to be granted TV broadcasting licenses in China more than a decade ago, alongside other names like Time Warner (NYSE: TWX) and Twenty-First Century Fox (Nasdaq: FOX). Phoenix founder Liu Changle used his government connections to become the only non state-owned broadcaster licensed to offer TV news, gaining a reputation as a relatively independent voice beyond China’s other state-run broadcasters.
But then independent new media like Sina, Sohu (Nasdaq: SOHU) and Chinese-language news websites operated by the likes of Reuters and the Financial Times began to emerge, providing competition for Phoenix. The more recent rapid rise of online video sites like Youku Tudou (NYSE: YOKU) and LeTV (Shenzhen: 300104) has made the competition worse, undermining not only Phoenix’s news channel but also its older general entertainment channel.
Possible Loss
Against that backdrop, this new profit warning from Phoenix doesn’t look all that unexpected, though the company quite specifically attributes the slowdown to falling demand from luxury brands. Phoenix said it expects to report that its profits tumbled in the first half of the year to the break-even level, or that it could even report a loss for the period. (company announcement) That would be a sharp drop from the HK$228 million ($29 million) profit it reported in the first half of last year.
Phoenix attributed the downturn to skidding revenue from luxury goods makers, which are cutting back sharply on their marketing as demand plunges due to an ongoing government austerity drive in China. It also blamed growing costs as it spends heavily to build up its own new media business, the separately listed Phoenix New Media (NYSE: FENG). Phoenix shares have tanked since the beginning of June, losing about a third of their value over the last 2 months amid China’s own big stock market sell-offs.
I really liked the Phoenix story a decade ago, and envisioned big things for the company due to its savvy programming and unique position in China’s lucrative TV market. But the rise of competition, and the company’s own poor management and inability to transform more quickly, have made me rapidly lose interest in Phoenix. Other investors appear to feel the same, with Phoenix shares now trading at around a 3-year low.
Luxury goods and cars were previously 2 categories that still favored traditional media over new media, since buyers of those products tended to be older and were more likely to watch TV and read magazines than surf the Internet. But as these older buyers cut back their spending due to China’s austerity campaign and a slowing economy, the prospects for a turnaround at Phoenix and other traditional media companies certainly don’t look too rosy for the next few years.
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