For additional perspective, it was just three years ago (2016) that online advertising, at $72.B, first exceeded TV advertising. Just three years later, the medium now exceeds all traditional media on a combined basis, as we expect total online ad spend to be approximately $130B in 2019 (roughly 85% larger than TV ad spend.

The media sectors that suffered the most from the growth of the internet were print mediums such as Newspapers, Magazines, and Yellow Pages, follow by Radio, and, to a lesser extent, Television and Out- Of-Home. Newspapers declined from roughly 22% of total US advertising in 2009 to roughly 5% in 2019. Magazine’s share declined from 12% to 5% and Radio from 11% to 7%, respectively. And, for the first time, Television, the second largest medium behind the Internet, fell below 30% of total US advertising to 28%.

A Year of Strong Stock Price Returns in the Internet and Digital Media Sectors
All four segments of Noble’s Internet and Digital Media sectors performed well in 2019. Noble’s Ad Tech (+75%), Social Media (+58%), and MarTech (+43%) Indices all significantly outperformed the S&P 500 (+29%) for the year, while Noble’s Digital Media Index (+26%) performed in-line with the broader market.

OUTLOOK – INTERNET AND DIGITAL MEDIA

Expect New Privacy Regulations to Keep M&A Healthy

Despite the strong stock price performances across the board, we don’t expect companies in the Internet and Digital Media sector to rest on their laurels. Change is the only constant in this industry. Whether to stay a step ahead or just to stay alive, M&A in the Internet and Digital Media sectors has remained healthy. While the Big Three (Google, Facebook and Amazon) may account for roughly 75% of the industry’s revenues, in a $130B industry, that still leaves $30B+ marketplace growing at a double-digit rate. We expect continued consolidation in the Ad Tech sector as independent companies seek to build scale and acquire new capabilities in an era of mass personalization driven by access to first party (not just third party) data. The focus on first party data is likely to drive M&A in coming quarters. Consolidation will provide advertisers with an alternatives to the Big Three, while also reducing the number of vendors they are partnered with, thus reducing the ad tech “tax” (numerous middlemen taking a percentage of an ad buy).

Privacy Regulations Have Created Unintended Consequences of Making the Walled Gardens Stronger
As tech giants have gotten bigger, politicians have begun to call for greater regulation on the tech “monopolies”. While there appear to be increasing calls to “break them up”, to date, efforts to ensure consumer protection and privacy by regulating the largest tech companies has resulted, unintentionally, in making them stronger. In May 2018, Europe’s General Data Protection and Regulation (GDPR) went into effect, and on January 1st, 2020, the California Consumer Privacy Act (CCPA) went into effect. Companies such as Google and Facebook used GDPR as a reason to no longer share data with third parties. This provided them with more control over data and limited the effectiveness of the data third parties used to compete in the ad ecosystem.

GDPR and CCPA restrict the use of personally identifiable information (pii) in marketing and already have or will result in a decline in the use of cookies to track consumer behavior. Browsers now block (Apple’s Safari) or limit (Google’s Chrome) cookie use by requiring consumers to opt-in. Online publishers are finding it harder to scale audiences as cookies are either blocked or require consent, making it harder for online publishers to create marketing segments at scale.

In short, legislation that forces the systemic removal of digital profiles and identities (which have been used to prove attribution), is effectively ceding control to the walled gardens of Google, Facebook and Amazon. For example, pre-CCPA, a retailer might generate leads by buying data and audience models from third parties, but post-CCPA, the largest source of leads at scale are those brokered within the black boxes and walled gardens of Google, Facebook and Amazon.

Retailers Make AdTech/MarTech Acquisitions
Perhaps as a response to regain control over their data, 2019 was the first year that brands themselves began to make acquisitions in the ad tech or marketing tech sectors. For example, in March of 2019, McDonald’s bought audience personalization company Dynamic Yield for $300 million; Nike acquired analytics and inventory optimization company Celect in August 2019, and in October 2019, Mastercard acquired the customer data and loyalty marketing company Session M.

Connected TV M&A to Remain Healthy
M&A in the connected TV sector ramped up considerably in 2019, and in the fourth quarter in particular. When programmatic buying first began to take hold in the early 2010s, many industry execs opined that the lessons learned in online advertising would serve them well as programmatic or automated buying shifted to the biggest pot of gold: television. Of course, this was when TV advertising was 3x larger than online ad spend. But lessons learned in online advertising did not translate easily to TV, and in the years it took trying to figure out how to bring targeting and addressability to TV, online advertising surpassed TV advertising in size ($130B vs. $70B). Nevertheless, it is clear that M&A action has moved into the OTT or connected TV space, given the promise of marrying mass audiences with addressability. For example, in the month of October alone:

• Roku announced it would acquire DSP Dataxu for $150M to bring “data-driven modeling focused on business outcomes for brands” to connected TV;
• AT&T’s Xandr acquired Clypd, a sell side platform (SSP) providing marketers the ability to buy both digital and linear ads with improved targeting; and
• LiveRamp acquired Data Plus Math for $150 million providing marketers the flexibility to marry “TV and digital to any real-world outcome online or offline“ and more accurately measure ad effectiveness.
Over-the-top (OTT) TV platforms were also in demand in 2019: in January, Viacom acquired Pluto TV for $340 million, and in April, Altice USA acquired Cheddar TV for $200 million.

Summary of 2019 Internet and Digital Media M&A
2019 was an active year for mergers and acquisitions in North America in the internet and digital media sectors. Noble breaks down our universe into 9 categories and we tracked 362 deals in 2019. The most active sector was the Marketing Technology sector, with 102 deals. This was followed by deals in the Digital Content sector (87 deals), the Agency & Analytics sector (58) and the Ad Tech sector (47).

While M&A was most active in the marketing technology sector, deals in the information services category represented the largest deals by transaction value, with just 26 deals representing $45.3 billion in transaction value, followed by eCommerce deals valued at $17.0 billion. MarTech and Ad Tech followed next, with total M&A transaction values of $8.4 billion and $7.7 billion, respectively.

OUTLOOK - TRADITIONAL MEDIA

Overview
The Internet Takes Over The World

As we noted at the top of this newsletter, according to several advertising prognosticators, online advertising accounted for slightly more than 50% of total US advertising spend in 2019, more than triple from 15% just 10 years earlier. Despite losing share over the last decade, not all traditional media sectors performed poorly in the public markets. While it is difficult to determine with complete accuracy the performance of the sectors over the past 10 years, given mergers, spin-offs, and bankruptcies, the Television sector was the only traditional media sector to outperform the general market over the past decade. The TV stocks were up 736% from 2009 to 2019 versus 189% gain for the general market as measured by the S&P 500 Index over the comparable period. The TV companies benefited from a brand new and highly profitable revenue stream, Retransmission revenues, and significant industry consolidation. Many of the largest TV consolidators, including Nexstar (+2,783%), Sinclair (+723%), and Gray Television (+1,338%), outperformed the rest of the group. In contrast, there were very few Digital Media companies public 10 years ago and, as such, we do not have an Index to compare.

The significance of the stock performance for the past 10 years, as it was in 2019 for all media companies, including Digital Media, is that the stock valuations were influenced by M&A activity. This is true for the Publishing stocks in 2019 (discussed later in this report), which had one of its best performances in years. But, the momentum of the Internet and Digital Media appear to be hard to stop. In 2019, Noble’s Ad Tech (+75%), Social Media (+58%), and MarTech (+43%) Indices all significantly outperformed the S&P 500 (+29%) for the year, while Noble’s Digital Media Index (+26%) performed in-line with the broader market.

As we look into our crystal ball, there will be some favorable fundamental tailwinds in 2020, given the expected influx of Political advertising and the expectation of an expanding general economy. In addition, we expect many media companies to repair debt heavy balance sheets, which has been a result of recent acquisitions. As such, we anticipate that media stocks, in general, should have a favorable 2020. We encourage investors to be selective, however, given the late stage economic cycle and the secular headwinds from the Internet. This report highlights some of the challenges and opportunities by sector and some of our current favorites for 2020.

TELEVISION BROADCASTING
Is The Golden Age of TV Stocks Over?

The TV sector slightly under performed in the fourth quarter 2019, up a 7% versus a 10% gain in the S&P 500. But, more importantly the TV stocks performed in line with a strong general market in 2019, up 28% versus the general market, which was up nearly 29% as measured by the S&P 500. This market weighted index was led by the shares of Sinclair Broadcasting (up 62%), Tegna (up 43%), and Nexstar (up 30%). Others lagged the industry and the market, including Gray Television (up 11%) and E.W. Scripps (down 16%). The increase in broadcast TV stocks also outperformed the industry's average 22% increase in off election years, which goes back roughly 30 years. The question on everyone's mind, "Has the long period of out-performance ended?“

Broadcast television stocks were the darlings of Wall Street over the past decade, increasing 736% versus a gain of 189% in the S&P 500 in the comparable period from 2009 to 2019. Leading industry consolidators in the M&A fueled decade outperformed most in the group. The shares of Nexstar, which led the industry's performance, increased a stunning 2,782%, followed by Gray Television, which increased 1,338%, and Sinclair Broadcasting, up 723%. Several factors influenced the strong performance including the increasing importance of Retransmission revenue.
Total Retransmission revenue for the industry was a modest $760 million in 2009, or 4% of total broadcast revenue, and grew at a compound annual rate of 30% to an estimated $10.8 billion in 2019. In 2019, Retransmission revenue accounted for roughly 33% of total Broadcast TV revenue. This high margin and predictable revenue stream became a ballast to support a heightened M&A environment. Having scale was important to protect and to grow Retransmission revenue when negotiating the fees with cable and satellite operators. But, this revenue stream has become largely exploited by the end of the decade. Retransmission revenues grew an estimated 6% in 2019 and is projected to grow in the low single digits for the foreseeable future.
Furthermore, the M&A environment has cooled. A number of broadcasters have reached the ownership cap of 39% of US total TV households and it appears unlikely that the FCC will make a move to lift it. In addition, a number of TV broadcasters are shoring up balance sheets as a result of recent acquisitions, which has taken several broadcasters out of the M&A market for now. But, importantly, there is a smaller pool of attractive stations left to buy.

We believe that the strong Retransmission revenue and Political advertising growth has masked some of the underlying issues over broadcast TV advertising. The Internet has recently taken share from the Broadcasters, with the total share of advertising expected to dip to 28% in 2019, the first time the industry has been below 30% of total advertising. In addition, the growth of OTT platforms could pose an even bigger problem. While net Retransmission revenue may not be affected, given that Broadcasters make the same economics on the OTT platforms as it does on cable, there is a substantial risk that continued audience fragmentation as consumers shift to paid content service providers, like Netflix, could lead to lower ad rates, or CPMs. There may not be enough viewers that are attractive to advertisers.

Competitive pressures from the Internet were the concerns in 2009. At that time, analysts under estimated the growth of Retransmission revenue and had dire forecasts for the next decade for the Broadcasters. However, at this point, there does not appear to be a growth driver as important as Retransmission revenue. A new broadcast TV standard, ATCS 3.0, is still in its infancy and significant revenue opportunities have not yet been determined. We believe that there will be significant pressure for Broadcast TV executives to seek new revenue streams from the new broadcast standard in coming years.

Consequently, it is very likely that the next decade will be far different than the roll-up strategy of the past in terms of what will drive stock valuations. The wild card is a possible shift in the Political will to lift onerous ownership caps, which does not appear to be likely currently. The Broadcast TV stocks likely will find it difficult to climb the wall of worry over the secular challenges in advertising. It is not surprising that many group TV station owners are looking for growth outside of TV stations, such as Sinclair and CBS. We believe that there will be increasing attention on content creation to be competitive with the likes of Netflix and Amazon. Nonetheless, the fundamentals of the industry appear favorable in 2020, a function of favorable Retransmission revenue growth, the influx of Political advertising, and a favorable general economy.

How should investors play the industry? We favor companies that are below the ownership cap and have the ability to make acquisitions, like Gray Television. In addition, we favor Broadcasters that have a developed business strategy into faster revenue growth areas, like E.W. Scripps. Its growth businesses include Podcasting and OTT broadcast Networks.

RADIO BROADCASTING
Is Radio Attractive Again?

It has been nearly 2 years since John Malone, the CEO of Liberty Media, the owner of Sirius XM and Pandora, tried to increase its stake in iHeartMedia. Those efforts were repeatedly rebuffed by bondholders. But, recently, Liberty Media, which currently owns 4.8% of iHeart, asked the Justice Department for approval to increase its equity stake in an effort to determine any roadblocks. The Justice Department likely will have some concerns regarding the need for competition between Sirius XM and terrestrial radio. The conditions that the Justice Department may set could determine the economic value of pursuing a move to increase the stake. Why would John Malone seek to own a terrestrial radio company when he is already invested in two of the fastest growing segments of the audio industry, streaming and subscription audio? What are the implications should the Justice Department allow Liberty to increase its stake in iHeart?

First, one of the most attractive attributes of terrestrial radio is the reach. While time spent listening has declined (as it has for most mediums), radio still reaches roughly 92% of the US households, which has been relatively stable over the past 10 years. Furthermore, radio still has a significant amount of engagement with its audience. Consequently, radio is a megaphone that could potentially drive business. iHeart has effectively done this through the development of its podcasting business, for instance. It uses its own air time to promote it. Streaming audio companies, like Akazoo, uses free radio stations to drive its premium subscriptions, which is one of the reasons its customer acquisition costs are low. Similarly, iHeart would be able to use its megaphone to drive subscriptions to Pandora or Sirius XM. But, importantly, iHeart's platform is not just the terrestrial radio audience, but includes roughly 100 million users from its Digital businesses and an estimated 200 million from its social media presence.

Yet another reason for Malone's interest in iHeart is that advertisers seek a multi platform buy that delivers a significant audience. In our view, this has been one of the gating factors for the likes of Pandora and Sirius XM. There are very few people that listen to a particular station at any given time. Consequently, a combination of Pandora and Sirius XM, with a large terrestrial radio platform, a digital presence, concerts and social media presence, could offer compelling advertising platform opportunities. iHeart management has stated that advertisers may come in its door for one of its offerings and then expand into other platforms.

Finally, we believe that John Malone likes cash flow businesses. The radio industry, in general, and iHeart, in particular, is a cash generating machine. iHeart is expected to generate $375 million to $400 million in free cash flow in 2019. The company is expected to pare down debt in 2020, allowing it to reduce its debt leverage into the 4s by the end of the year.

What are the implications for the radio industry if the Justice Department grants Liberty approval to increase its stake? Such a move would be a "cattle call" for the industry to consolidate. Scale would be important to compete with the audience levels that iHeart delivers. There will be a need to compete against the potential increased competitive threats from the likes of Pandora or Sirius XM. But, radio companies need to consolidate smartly, without significantly levering up balance sheets, especially given the late stage of this economic cycle.

The Radio stocks had a nice bounce recently. The stocks outperformed the general market in the fourth quarter 2019, up 18% versus the market's 10% advance. The gains in the fourth quarter, however, were not enough to offset the year earlier declines. As a result, the Radio stocks under performed the general market for the full year 2019, down 6% versus the market up 29%. This market cap weighted index masks some poor performances, like Entercom (down 41% for the year) and Beasley Broadcasting (down 17%). The strongest performer in the sector was Cumulus Media, up 35%. The company had a series of favorable quarters following the emergence from bankruptcy. The radio stocks performed poorly over the past decade, as well. Over the past decade, the radio stocks on average was up an estimated 9% versus a general market gains of 189% in the comparable period. This is an estimate given bankruptcies in the industry.

So, what does the future hold for radio? We believe that the heightened interest in radio by a proven value creator, like John Malone, should provide a reason for radio investors to take notice. The fundamentals in 2020 appear favorable, which should allow radio broadcasters to aggressively pare down debt. Furthermore, many in the industry have restructured balance sheets, providing more financial flexibility should the economy turn sour. Companies like Townsquare Media, which have a compelling, fast growing digital media business, stand apart from the pack in terms of growth and stock valuation. As such, it remains our favorite in the sector. In addition, we believe that there is still a favorable risk/reward relationship with Cumulus Media, as that company continues to execute on an aggressive debt reduction strategy.

PUBLISHING
In A Precarious Spot

Publishing stocks had a good 2019, but lagged the performance of the other traditional media companies in the fourth quarter. In the fourth quarter, the group was up a modest 5% versus a 10% increase for the general market. But, for 2019, the Noble Publishing Index increased a strong 24%, slightly under performing the 29% increase for the general market. The favorable performance for the year was bolstered by a good showing by the New York Times and the merger between Gannett and New Media.

New York Times has successfully pursued a digital business model and its shares outperformed the sector. The company set a goal of delivering $800 million in digital revenue, roughly 50% of its total revenue by the end of 2020, and it appears to be well on its way toward that goal. The shares of New York Times increased 13% in the fourth quarter, outperforming the market's 10% advance. In addition, the shares increased 28% for the year roughly in line with the 29% growth for the general market. The New York Times shares increased a solid 160.4% for the past 10 years, but that increase was below the general market's increase of 188.5%.

The digital strategy of the New York Times and the revenue growth that the company exhibited over the past several years were inspiration to the rest of the publicly traded publishing companies to pursue a digital strategy. Certainly, the NYT shares reflected tangible benefits to its shareholders for executing on its digital strategy. The question is whether or not the New York Times model can be replicated by other publishers?
At this point, the rest of the industry is disheveled. Certain private equity firms are seeking an exit strategy from its investments in the industry, some of which appear to be milking cash flow and not investing into a digital future. Others are seeking scale to provide more opportunity for operating synergies and for an improved digital footprint. Finally, many in the industry are burdened with a significant amount of debt, which limits the ability to invest in a digital future. These are issues weighing on investors in the sector.

In our view, financial restructurings are likely and necessary. We agree that there are benefits from scale, but it is important that balance sheets are not burdened with a significant amount of debt. As such, we encourage investors to be selective and view investments in the industry as speculative. Our favorite in the industry is Tribune Publishing, which currently has no debt and a sizable cash position. We would note that the company's current largest shareholder owns newspaper assets and its interests may not be aligned with all shareholders. Finally, we view the shares of McClatchy as a option towards that company's financial restructuring.