The plot thickens
Wealth Insight|August 2022
High reinvestment requirements and inappropriate accounting practices obscure the financial picture of media companies
Arul Selvan
The plot thickens

Would you pay to watch a movie that you have already seen? And what is your media expenditure for movie content that is older than two years? The answers to these two questions should give a sense of customers' payment tendency in the content business and the behaviour of media companies.

To understand whether or not media companies are attractive businesses, let's first learn what a good business, as well as a great business, looks like. In a good business, investors invest a certain amount of money at the beginning and (under ideal circumstances) make a reasonable amount of recurring profits on the original investment.

On the other hand, a great business not only makes a reasonable amount of recurring profits on the original investment but also provides similar or higher returns on the incremental capital that is reinvested. Media companies generally don't fall under either of these two categories because of the following reasons.

High reinvestment requirements

No matter whether it is news, sports, movies, TV shows or even music (to a large extent), people love consuming new content. And why wouldn't they? Given the proliferation of content, today's consumers are clearly spoilt for choice. Therefore, the value of content (leaving aside a few exceptions) tends to diminish quickly with the passage of time. And since content companies know that people predominantly don't tend to be repeat consumers for the same content, they have no other choice than to incur fresh expenditure, which is typically very high (especially for those companies that create expensive video content), to create new content.

Inappropriate accounting practices

Esta historia es de la edición August 2022 de Wealth Insight.

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Esta historia es de la edición August 2022 de Wealth Insight.

Comience su prueba gratuita de Magzter GOLD de 7 días para acceder a miles de historias premium seleccionadas y a más de 9,000 revistas y periódicos.