Media fails to make assets perform

A PricewaterhouseCoopers study into the financial performance of the world’s top 30 entertainment and media (“E&M”) companies between 1995 and 1997, has revealed a dramatic erosion in shareholder value. In Capital Value: sustained value creation in the entertainment and media industry, Brett Savill and John Studley address the key issues currently facing companies in this sector.

According to the paper, the E&M sector has failed to make its “assets sweat”. Between 1995 and 1997, when capital expenditure on acquisitions and organic investment rose by 30 percent, the return on invested capital declined from 10.2 percent to 8.3 percent despite a 6 percent increase in margin.

Capital productivity, which measures sales generated from capital employed and accounts for a large part of this decline, fell by 25 percent with $1 of capital generating sales of only 69 cents in 1997 compared with 91 cents two years before.

Whereas a few years ago industry experts were predicting that content providers would out-perform distributors, content providers are now under increasing margin pressure.

In their search for value, many E&M companies continue to rely on outdated financial measurement tools, namely profit and loss measures and cash conversion ratios, that encourage cost reduction at the expense of sales growth. Economic or shareholder value measures give a far clearer picture of a company’s true worth.

Finally, PwC identifies a need for the industry to adopt a more systematic and rigorous approach to enhancing shareholder value. E&M firms need to understand where and how value is being created, develop appropriate management tools, incentivise management and ensure they communicate effectively with their investors. Above all, they need to understand better the value of their capital.

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