As featured at the 2013 M&A Advisor Cross Boarder Summit
It’s a tale of two trends in the greater tech, media and telecom sector. On one hand is a story about innovation and rampant growth as business and everyday activities move to the web and digital platforms. The other is a story of risk and decline as traditional media grows increasingly obsolete in the shadow of the internet’s ascent.
The US Information sector, which includes a mixed bag of 37 tech, media and telecom industries, is worth an estimated $1.26 trillion in 2013. Despite steady decline in the print media and publishing industries, the overall sector is projected to grow at a 3.1% annualized rate in the five years to 2018, with particular help from the US Internet Publishing & Broadcasting industry. IBISWorld estimates that revenue in the Internet Publishing & Broadcasting industry will climb 17.3% per year on average over the next five years, faster than its 13.1% annualized growth over the past five years.
Although 14 industries in the Information sector are actually in the decline stages of their life cycles, only five are expected to experience annualized revenue declines during the next five years. By IBISWorld standards, an industry enters decline as its products or services become obsolete or as its operators fail to stay competitive in a changing marketplace – both characteristics of the aforementioned traditional media industries. US newspaper, magazine, greeting card and directory publishing industries have all experienced declining revenue and operator numbers over the past five years, as have wired telecommunications carriers. The declining print industries also represent three of the five riskiest industries in the Information sector; Book Publishing and Television Broadcasting are the other two. Unfortunately for these industries, their fate is not anticipated to change in the near future.key sector stats
VoIP: a good call
In addition to internet publishing, the five fastest-growing US industries in the Information sector include Search Engines, VoIP, Operating Systems & Productivity Software Publishing and Video Game Software Publishing. These industries have experienced strong demand growth over the past five years and especially strong revenue growth before the recession.
The VoIP industry in particular expanded at breakneck speeds prior to the recession and was barely phased in the years during. In 2008 industry revenue grew 52.3%, and in 2004 through 2007 it increased at yearly rates in the triple digits. Because voice over internet protocol (VoIP) technology uses the internet rather than traditional phone lines, people have increasingly opted to communicate via VoIP and ditched their landlines. As more Americans switched to VoIP, cable TV and internet providers recognized the opportunity and started offering digital voice as part of bundled service packages. For many households, the switch was a no-brainer: the number of residential VoIP subscribers more than doubled between 2007 and 2009.
As demand grew in the first half of the past decade, companies vied for a share of the high-profit industry. The number of enterprises jumped 226.3% in 2004, 87.1% in 2005 and 44.8% in 2006. As the industry has become more saturated, new entrants have slowed. And in more recent years, the number of new VoIP companies has actually declined due in part to the recession and in part to acquisition activity that has been occurring in the $17.95-billion industry. As VoIP has become increasingly competitive with traditional phone services, the industry has been abuzz with investment and M&A activity, with larger companies acquiring or integrating VoIP services into their portfolios.
Major global VoIP player Skype has been involved in significant acquisition activity. In 2005, eBay Inc. acquired Skype, helping the US company rapidly expand its user base to more than 480 million people. Then in 2011, Microsoft acquired Skype, expanding the VoIP provider’s access to engineering talent and allowing it to cross-sell to Microsoft’s extensive network of corporate clients.
Corporate customers are actually expected to drive future growth for the entire industry in the next five years, with VoIP industry revenue anticipated to grow an annualized 6.2% to $24.25 billion. The technology will also be a major driver of growth in the Global Internet Service Providers industry, helping push up that industry’s revenue 7.2% per year on average to $507.1 billion in 2018. Increasing familiarity and comfort with VoIP as a result of this migration will continue to encourage business users to take advantage of the savings offered by VoIP systems; US business spending on VoIP is projected to exceed residential spending on VoIP by 2014. IBISWorld expects significant growth opportunities and lower infrastructure costs to incentivize more entrepreneurs and investors to look to the industry.
Software: expansion, innovation, acquisition
Like the growth anticipated for VoIP, business demand in particular is contributing to steady growth for a handful of US software industries. Enterprise software is a key capital expenditure for a business that helps management make more informed decisions. So as corporate profit improved following the recession, companies have been more willing to spend on enterprise software.
In the Operating Systems & Productivity Software Publishing industry, productivity software sales stayed strong because of the software’s essential nature, even during recessionary business spending cuts. Demand for productivity software will remain stable over the next five years on the back of general demand for operating systems (via computers) and demand from businesses. IBISWorld projects revenue for this industry to grow an annualized 6.8% through 2018.
The story reads the same for the high-profit Business Analytics & Enterprise Software Publishing industry. Businesses’ increased technological sophistication and eagerness to adopt efficiency-enhancing software are benefiting the industry and will help push up revenue an annualized 3.9% to $32.6 billion in the five years to 2018.
Like in the VoIP industry, M&A activity has been just as rampant as expansion in software publishing. Large software vendors are cash-rich enterprises that can rely on acquisitions to fine-tune their product portfolios. These acquisitions allow them to leverage existing clients by offering software suites to meet all of their needs. Consolidation, combined with limited price competition, has allowed the Business Analytics & Enterprise Software Publishing industry to generate an unusually large profit margin of 35.7% in 2013.
In 2007, SAP acquired French software company BusinessObjects for $6.8 billion. The following year, IBM acquired Cognos, popular business intelligence software publisher, for $4.9 billion. And in 2011, Oracle acquired Taleo, a talent management software publisher, for $1.9 billion. IBISWorld expects the four megavendors of industry products (Microsoft is the fourth) will continue their rapid pace of acquisitions over the next five years, reducing the number of companies an average 1.9% annually to 562 in 2018.
Companies with breakthrough technologies related to data mining and predictive analytics – the current buzzwords driving research and development in this industry – will be the prime investment and takeover targets. In the latter half of the five-year period, companies that focus on delivering similar services entirely over the internet are expected to become major investment recipients and hot acquisition targets.
Print media: a dying breed
Despite being on their way out, a handful of declining industries in the Information sector have experienced a fair share of M&A activity. Gannett Co. Inc., the largest newspaper publisher in the United States, has made a number of strategic acquisitions in recent years, as well as numerous investments in digital technologies. Although the company operated at a $5.1-billion loss in 2008 as a result of large acquisitions, all of its investments have been centered on bolstering the company’s online presence and moving away from print.
This year represents the 10th consecutive year of revenue decline for the US Newspaper Publishing industry. Newspapers and magazines generate the vast majority of revenue from advertising, so as people have increasingly looked to the internet, social networks like Twitter and Facebook and other digital platforms to get their news, advertisers have followed. IBISWorld estimates that total print advertising expenditure has fallen 4.5% per year on average since 2008. Plummeting ad revenue has caused periodicals to shrink their outputs, merge and syndicate, restructure through bankruptcy or exit the industry altogether. Diminishing demand for newspapers has also reduced the price that publishers can charge for issues and subscriptions, further denting revenue. Spending on print advertising is projected to fall at a steady 2.1% rate through 2018, pushing Newspaper Publishing industry revenue down 3.7% per year on average over the period.
The same is occurring on a global scale, with print media industries in most developed countries (including the United States, Japan and most countries in Western Europe) suffering significant declines in their advertising revenue due to weak advertising markets and a loss of market share to other media. These factors are putting the Global Newspaper Publishing industry through a period of restructuring and consolidation and will keep annualized revenue growth relatively flat at 0.6% over the next five years, despite global economic recovery.
Although the domestic and global industries are anticipated to stay in the decline stage, innovation may be the saving grace for some publishers and a potential opportunity for investors in the near future. Publishers are working to adapt to competition’s technology beyond simply developing websites. For instance, in late 2010, The New York Times Company rolled out a platform built to integrate newspaper websites with mobile devices, such as tablets. The increasing number and diversity of mobile technology users during the next five years will bolster the appeal of mobile applications for online newspaper content, such as the NYT platform. Newspaper publishers will also continue to experiment with the pricing of online subscriptions.
To no surprise, print media and publishing industries remain the riskiest in the Information sector. According to IBISWorld’s industry risk rating, risk in the Newspaper Publishing industry is fairly high at 6.03 on a scale of 1 to 9, where 9 represents the highest risk. Growth risk in particular, which evaluates future performance, is especially high at 7.61. With poor future performance anticipated across this entire US subsector, all of its industries have high growth risk scores: Magazine & Periodical Publishing at 7.13, Database & Directory Publishing at 7.23 and Greeting Cards & Other Publishing at 7.50. The Book Publishing industry has the highest growth and overall risk at 7.96 and 6.09, respectively.
Future of tech and media
By 2018 the overall Information sector, which comprises tech, media and telecom industries, is forecast to be worth $1.47 trillion. The 3.1% annualized growth will be a result of the sector’s digital powerhouses driving growth despite traditional media and print industries’ continued decline.
Innovation, expansion and M&As will continue to characterize the sector, particularly the digital and web-based industries, over the next five years and beyond as larger players look to dominate their markets and investors seek out opportunities. Despite the print media and publishing subsector’s high risk score, the overall Information sector has a moderate weighted average risk score of only 4.30. As consolidation occurs, IBISWorld estimates the sector will lose about 13,900 enterprises overall in the next five years.