Are Social Networks Stepping on Media Conglomerates' Turf?

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News Corp ( NWS ) is a media conglomerate that competes with New York Times ( NYT ), Time Warner ( TWX ), Disney ( DIS ), Viacom ( VIA ) and CBS (CBS) in a variety of businesses ranging from broadcasting and cable networks to filmed entertainment and publishing. Our price estimate for News Corp stands at $20.17 , which is about 15% above market price.

We wrote an article recently discussing Facebook's ability to outpace News Corp's MySpace in the social networking arena (see $1 Billion MySpace Valuation Highlights Facebook's Dominance, But News Corp Stock Still Cheap ). But the competition from social networking sites like Facebook can extend far beyond the social network realm. Below we examine certain aspects of social networking that can threaten the more traditional businesses of media companies.

Social Connect - Increasing Time Share

The time spent by an average U.S. Facebook user is steadily increasing. Facebook has roughly 500 million active users out of which 30% reside in the U.S. That puts U.S. users close to 150 million, almost half the U.S. population. According to June 2009 data from Nielson, U.S. Facebook users were spending on average about 4.5 hours per month on Facebook. This metric has been increasing rapidly and reached more than 7 hours per month per person in January 2010. Still, this number lags well behind the amount of time people spend watching TV, at about 2.8 hours per day according to 2009 data from the Bureau of Labor Statistics.

The key point here is that social networking is fueling the growth of time spent by people on the Internet. As this development gains momentum, we are likely to see more information like news, product launches, videos related to news and entertainment being consumed on social networking websites like Facebook. The social networking environment of close connection and engagement promotes the easy flow of information and opinions.

In the years ahead, it is possible that the amount of time people spend watching TV could decline due to cannibalization from social networks. Many networks that rely on advertisement-based revenue streams, could be threatened by lower viewership, a key metric in determining sales of ad slots.

Profiling Leads to Better Ad Targeting

Take Facebook, for example. The profile that users create for themselves, the information exchange they take part in, the pages they view, the comments they make, the groups they join, the videos they watch and the links they accessall generate heaps of data that can be analyzed to create a detailed individual character profile. This data is valuable for advertisers who can better target individuals and improve sales.

Television still lacks this capability and generic advertisements are thrown at all kind of viewers, meaning a significant portion of them are irrelevant to individual viewers. Thus, there is an incentive for advertisers to increasingly shift their marketing spend to social networking websites, which could hamper ad pricing for media companies.

Drag the trend line in the modifiable chart below to see how reductions in ad pricing on the Fox News channel can affect News Corp's stock value.

On the other hand, one can argue that television offers a more engaging ad experience where individuals focus their attention on the commercial segment - ads on social networking websites are often avoided or ignored by users. Still, the effectiveness of well-targeted advertisements should not be overlooked. User engagement for online ads will likely increase over time alongside increased fluidity of information exchange, bringing more ad dollars to high-traffic sites.

Ultimately, Media Companies May Need to Collaborate with Social Networking Sites

Social networking is a powerful tool beyond social purposes - it creates real business opportunities for large corporations and advertisers alike. Can media companies better collaborate with social networking sites to ride this momentum?

One can imagine a scenario where a media company collaborates with Facebook to combine a user's character profile with his/her location, and aggregates this data across users to identify which areas may be suited for particular types of advertisement. Media companies can then direct relevant ads these geographical areas (with cooperation of cable service providers).

You can see the complete $20.17 Trefis price estimate for News Corp's stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: DIS , NWS , NYT , TWX , VIA

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