MEDIA: Phoenix New Media Stumbles on Inability to Adapt
Bottom line: Phoenix Satellite and its new media arm will continue to sputter due to China’s slowing economy and a lackluster move into mobile advertising, and founder Liu Changle should consider selling the company.
Things aren’t looking too good these days for Hong Kong-based Phoenix Satellite (HKEx: 2008), a former rising star in China’s tightly controlled media market that has stumbled badly due to its inability to adapt to a changing industry landscape. Phoenix warned of a major profit decline last month due to a soft TV ad market (previous post), and now its younger Phoenix New Media (NYSE: FENG) unit is also showing signs of distress due to a heavy reliance on portal advertising delivered over traditional desktop computers.
The new quarterly earnings report from Phoenix New Media does contain one bright spot, namely a 124 percent increase in revenue from advertising services offered over smartphones and other mobile devices. (company announcement) But that part of the business is still quite small, with the result that Phoenix New Media reported overall advertising revenue growth of just 7.2 percent, and overall revenue growth of 2.9 percent during the second quarter of this year.
Phoenix in China
Phoenix’s stumbling performance contrasts sharply with leading search engine Baidu (Nasdaq: BIDU), which has been far more aggressive moving into the fast growing mobile advertising business. That move has seen Baidu’s mobile revenue grow quickly to now account for half of its overall figure, allowing the company to report a far stronger online marketing revenue increase of 37 percent in the second quarter. (previous post)
All of this points to the reality that China’s media landscape is a rapidly changing place, where newer business models are regularly making older ones obsolete. In this case the differences between the older Phoenix and younger Baidu is nicely summarized in their chief executives.
Phoenix founder Liu Changle comes from a very traditional media background in print and TV, and seems far less comfortable in the new media realm despite efforts with his separately listed new media arm. By comparison, Baidu founder Robin Li comes from a technology background, and aggressively embraces new trends like the movement to mobile and online-to-offline (O2O) services, even when that means sharply undermining his company’s profits
Revenue to Contract
All that said, let’s briefly review Phoenix New Media’s broader second-quarter results, starting with the anemic top-line growth that saw revenue barely expand to 423 million yuan ($67 million). Even worse, the company’s net profit tanked by more than two-thirds, and it predicted that total revenue would decline by about 10 percent in the current quarter.
Phoenix New Media shares tumbled 5.5 percent in regular trading hours, and then slipped another 6.8 percent in after-hours trade on the day of the report’s release. Shares of Hong Kong-listed Phoenix Satellite have also lost about a third of their value over the last 2 months, indicating that investors don’t have much confidence in either the parent or the separately listed new media company to thrive in the media landscape of the future.
Printing industry
The weak results come just a couple of weeks after the Hong Kong-listed Phoenix said a slowdown in spending by luxury goods advertisers wiped out its profit in the first half of 2015, and could even push the company into the red. (previous post) That certainly doesn’t bode well for either company, since both rely heavily on advertising from makers of expensive products like luxury goods and cars that are both seeing sharp slowdowns.
Phoenix was once a high-flyer when it became China’s only non state-run company to receive permission to broadcast news in the tightly controlled media market more than a decade ago, emerging as one of the few semi-independent voices. Liu Changle has clung stubbornly to that early advantage, and his company is still widely respected among many Chinese. But I might suggest to him that it’s time to let a younger, more web-savvy generation take over his sputtering empire, or even to consider a sale to a better Internet company like Sina (Nasdaq: SINA) or Baidu.
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