This post is being written for everyone on the deal-team bidding for Focus Media.
It is also been written for everybody who is considering whether to lend the bid 1.5 billion dollars to consummate this deal.
Finally it is being written for Ashish Goyal from Prudential Investments who is Focus Media's largest shareholder and was quoted in the WSJ stating he wanted more than $30 for his shares. [Someone please forward this to Mr Goyal. He seems a reasonable man.]
I just want you to guess the numbers. Don't look them up. Don't calculate. Just guess. Put your guess in the comments - anonymously if you wish.
TV Revenue per screen in the US
There are about 310 million TV sets in the US - roughly one per person. People deliberately watch these for several hours a day. Indeed people sit their family down in front of them to eat dinner.
Their main economic purposes is to show advertisements - the content on them is the lure to get people to sit in front of them.
And there is an enormous industry producing content for them (whose costs have to be covered by advertising). A good part of the city of Los Angeles exists to produce TV content. TV advertising supports the lifestyles of every camera grip and editor and some very large indulgent lifestyles (Charlie Sheen).
TV advertising is still the biggest advertising category in the US.
So take a guess at the advertising revenue per screen. Per month, per year, I don't care. Just guess the revenue per screen.
LCD Revenue per screen in China
Focus Media has about 130 thousand LCD screens - the main format being 17 inch LCDs displaying almost entirely adverts.
The majority of these screens are in elevator lobbies and other low-traffic locations.
Here is a typical screen from a low-traffic area - this one 1030 Hua Min Empire Plaza Shanghai.
Nobody sits themselves down in front of these screens - but they are forced to watch (or at least be around) the adverts when waiting for an elevator.
On the plus side these screens don't waste precious time with content - they just show adverts (which would tend to make them more valuable). And you can't fast-forward through the adverts.
However they are in China where advertising rates (per thousand impressions) are generally lower than the US.
Moreover, nobody sits their family around these screens to eat dinner.
So take a guess at revenue per screen for Focus Media's LCD screens. Per month, per year, I don't care. Just guess the revenue per screen.
Ratios
Have a look at your guesses.
Calculate the ratio of Focus Media revenue per screen to US Television revenue per screen. Is Focus Media:
* 5 pernent of the revenue per screen of US TV?
* 10 percent of the revenue per screen?
* 25 percent of the revenue per screen?
* 50 percent of the revenue per screen?
* About the same revenue per screen as US TV?
* Double the revenue per screen of US TV?
* Four times the revenue per screen of US TV?
* Ten times the revenue per screen of US TV?
* Twenty times the revenue per screen of US TV?
Please put your estimate in the comments.
More tomorrow.
John
47 comments:
it's suprising for me that the largest shareholder "fusin" claimed they were not informed about the private equity deal. Yer, they released a letter supporting the deal immedately the following day - as if the letter is printed and ready the day before. it's unbelivable that fmcn didnt talk with their largest shareholder to dicuss this deal. i think it's totally possible fusin were aware of a deal to be announced but would rather to be an outsider as this event gave them an opportunity to exist an already profitable trade. For the ceo, he is just gving out the favor. According to a chinese blog i found, "someone close to the ceo" says the ceo is not as actively involved in the operation of the business as before. he spent all his times travelling in other cities during week days and flies to taiwan during the weekend to be with his taiwanese wife. he also turns off his cellphone during weekends.
nowaday in china, people are busy twitering using their smart phones while waiting for elevators.
US: USD 400 per year per screen
Focus Media: USD 20 per year per screen
Focus Media is 5 percent of the revenue per screen of US TV
7.5%
What seems plausible to me:
TV Revenue per screen in the US
I'll say $500 per year.
LCD Revenue per screen in China
I'll say $50 per year
So I reckon per screen it should be 10% of a USA screen.
Basically 10% seems plausible to me because Chinese advertising is probably less effective than USA, and the Chinese have less disposable income.
I don't have a final guess for you, but let me throw out, off the top of my head, some other guesstimates and hard numbers that may make the actual ratio more plausible than one might think initially:
-TV shows typically show 7 minutes of ads per half hour, roughly 1/4 of the time. So all else equal a screen with all ads could be 4x as valuable
-If the average TV is on 2 hours per day and watched by an average of 2 people at a time. (I think the hours per day is probably higher but people at a time is probably lower.) That's 4 hours of eyeballs per day.
-An office elevator is probably in serious use 10 hours per day. (More in a professional services tower, less in some other places, etc.) The lobby will have high traffic at "rush hour," vacancies at other times. Let's say 2 people on average. If you told me it's half that or twice that, I couldn't argue. But at 2 people, that's 20 hours of eyeballs per day, 5x a U.S. TV.
-5x the viewing hours per day and 4x the ads per viewing hour = 20x the impressions per day.
-Now start deducting for how much people are paying attention, how much they view the ads as entertainment vs. intrusion, etc.
I don't know what actual ratio you're going to reveal, but to me the numbers that are the more obviously intuitively unlikely are the margins -- why wouldn't the building owners charge more for the space. Years ago you could argue that they hadn't yet clued in, but now?
I'm short and have done this math. I won't ruin your fun by posting the real numbers, but I love how most of the first few commenters have already guessed as expected. Funny how the intuitive estimates tend to be right in the ballpark for one and not for the other (won't say which).
If this is set-up just to wash a complete fraud away; then I would expect that they would have attempted to do so with fewer players: Carlyle, CDH, FountainVest, Citic, Everbright - why so many? With the CEO rolling his holding, he does not need to involve all of these guys as well as the Citi, Credit Suisse - its only $3.5bn afterall. If it was a fraud for favors transaction it seems to me that the Carlyle pay-off would have to be huge (since they are lending a brand worth billions); given the sheer number of players, the outcome seems diluted for Carlyle.
So FMCN actually believe that they are selling some-kind-of-a-business which means the PE guys will be digging in to discern what they are buying. They should find the elements that John has so skillfully laid out here.
I would expect Carlyle to walk away; I don't see the deal "heat" here; muddy waters and John did the work. All the career risk for the PE guys is in them actually doing the deal now.
I suppose the others could still do the deal after Carlyle (and likely citi and cs) walked.
This is actually a test of how thoroughly your audience reads the blog.
Yesterday you told us that Focus claims more than $3000 of revenue per LCD screen. . . . .so half of the equation is already answered. . . .
I'd guess 300$ for US TV, 25$ for Focus Media. 8.33%
Total guess: $100 a month per TV in US - Focus media half of that
TV advertising revenue in the US in 2011 was close to $70bn. If everyone of the 300m people in the US had a TV, that would be revenue per TV screen of around $230 per year. If there are more than 300m TV screens in the US (bars/hotels/shops etc) then that figure drops even more.
So if FM are claiming $3000/screen, then that's roughly 15 times US TV screen ad revenue.
Logic would tell me it shouldn't be higher than 5% but I will say it is the same or greater revenue per screen than the US.
the other thing john, is that chinese people are "new" to adverts. if focus media is one of the few companies that reach eyes with consumer content, then perhaps they offer a huge value add.
people tend to develop loyality -- perhaps companies will pay a premium to focus media for use of their screens if they knowing create "new" loyality consumers.
also, maybe the chinese communist party is the largest purchaser of focus media advert slots. governments tend to always overpay for services.
FMCH claimed rev/ screen china :USA. about 20:1
Actual rev / screen china : USA. About 1:20
Assuming the total TV advertising revenue in the US is $100 billion annually (1% of GDP) that works out to about $250 per screen per year. I assume you are asking for a guess on Focus revenue as reported. So I will guess 5 times the us or $1250 per year or a total of $375 million annually
Is it more relevant to compare chinese TV revenue and FMCN? In 2010, according to the China communication research center, the tv, radio revenue totaled 94 billion yuan in 2010, or $15 billion. assuming half a billion people have tv. that's $30/tv a year. assume a quarter billion tv sets. that's $60/tv
chinese tv revenue was $15 billion in 2010 according to the official figuer. assume half of the population have tv sets in China, that's $30/tv a year.
I would guess about $800 per year per US screen (about $2 per day). It would seem realistic that the value of a Chinese screen would be about 20% of that, given that urban Chinese GDP per capita is around 20% of US GDP per capita.
I'm guessing that it is much higher than 20% though...
US --> USD100 per year
China --> USD50 per year (50%)
Focus Media is $3000 per screen, U.S. ad revenue per household I calculate to be around $850 (using 100 million households and $85 billion in ad revenue, which may be off). If you take total "faces" Focus Media's revenue per face is around $1,300 (TTM).
I guess the only explanation (other than fraud, which is more likely) would be significantly more eyeballs per screen in China given the higher population. But not very plausible given the lower GDP overall, even if Focus Media's screens were as effective of a medium as TV is in the US (they aren't).
Yeah - it is roughly $250 per screen in the US.
Also your captchas are harder than decifering Chinese accounts.
The revenue for US TVs look OK, but the estimates for wall mounted LCDs in China seems way off.
A TV in the US is worth about 2.5 hours a day per person at 80% attention. That's 120 attention-minutes. A wall mounted LCD in the US (subway, whatever) receives 5% attention at best, and people watch wall mounted LCDs for maybe 2 or 3 minutes a day. When zoning out on the subway, or when walking past. So that's less than 1 attention-minute per day for wall mounted LCDs.
Advertising in China is also worth much less than in the USA, so let's say that'a another factor 10 difference. So in total the Chinese LCD tvs in hallways (such as the one in the hotel pictured above) are worth 1/1000th of an American TV in terms of advertising revenue. Maybe even less.
So if US TVs are worth $230/yr (Jim's estimate) then China's wall mounted TVs don't even yield barely enough advertising money to pay for depreciation of the device itself. They may make a profit in locations with a lot of foot traffic, but otherwise I expect them to do very very poorly.
2.5%
John,
Why not compare them to AirMedia (AMCN)? AMCN generates revenue from digital signs, in China, which are placed in airports and on planes.
AMCN is unprofitable, and has been for a while now. But on the bright side that means that they probably aren't cooking the books.
Also, they are rated as "high safety" on ChinaTracker for having a good auditor, going public via an IPO, etc:
http://www.fixyou.co.uk/tracker_srm.php?s=AMCN
AMCN takes in $5,795/year for each screen in an airport. source:
http://www.wirespring.com/dynamic_digital_signage_and_interactive_kiosks_journal/articles/What_s_a_digital_sign_worth__AirMedia_s_ad_rates_give_us
_some_hints-346.html
This makes me think that FMCN's $3000/screen might actually be possible, in a hotel or whatever.
On the other hand, VisionChina only claims average monthly revenue per screen of $63.40. Source:
http://www.wirespring.com/dynamic_digital_signage_and_interactive_kiosks_journal/articles/Digital_signage_in_buses__VisionChina_s_model_for_growth
-348.html
So it seems like a very high-variance, hard-to-quantify industry.
Also, to play devil's advocate, at least with LCDs in office buildings you know that your audience has a job and presumably some disposable income.
Screens in public places attract many more different eyeballs than tv screens in homes.
100%... $1000 per year
I'll guess Focus is claiming 20x Rev per screen than the US does.
~horn
Advertising per US TV screen per year = between 50 and 100 $ (there are LOTS of television screens)
And here comes the trouble: that money is well spent in the US. The power of lcd screens to influence the purchasing behavior of the Chinese must be lower + the infrastructure cost is born by FMCN + FMCN is being charged for being allowed to install these screens. So, you cannot get the revenue and you have much much higher costs.
$3,000 of revenue / LCD screen sounds absurd. In Germany, the GEZ charges €216/screen p.a. for advertisement-free television. Sky in the UK costs c. £240 p.a.
To me, even $1,000 of COGS sounds absurd. How much is a 21inch LCD or even a 32inch? After rent, 5-year depreciation is the second highest cost component - but this can't be more than $100 p.a.
Anyhow, if COGS of $1,000/screen is accurate, FMCN needs to generate at least $1000/screen. And they probably don't.
If $3,000 of revenue/screen are accurate, I will move China and enter the indoor advertising business.
Assuming the average tv set is watched for 500 hrs p.a. in the US & the US tv adertising revenue was $US70B in 2011 then each of the 155 billion hours of tv watched raises 45c in revenue.
In China if i assume 2000 hrs p.a. (being 250 working days x 8hrs) are watched on each set and advertising rates are half that in the US, being 22.5c, then revenue should be cUS$60M or almost 0.1% of the US industry revenue.
which makes FM revenue per screen 2 times the US industry
Let me try to make an argument that the revenue per screen for Focus might be higher than one might expect. I have no position in this stock, and my best guess would be there is some fraud or funny accounting, but let's give it a try:
(1) China GDP/P may be 10% of US, but the screens are in areas where people have incomes much higher than average. Low traffic, but high-income audience. These screens are not located in the local fish markets or dumpling places.
(2) Given the brand-consciousness of many upper-middle class Chinese, I would imagine that it would be quite attractive for the likes of Gucci, Rolex, Audi, etc. to be seen every day by the managers and office staff in these locations.
(3) Consider the impact of the real estate bubble. When you travel in China, one of the things you notice is ads everywhere for new up-scale developments. My guess is this may really drive up ad rates in the right places. If you are a developer in a city in China, and you have a chance of advertising in the elevators of the say 50 main office buildings in that city, that will be worth a lot. (Which also means there may be a bubble in certain ad rates.)
Again, not claiming their numbers are right. And while I have spent limited time in China, I do not have any special expertise. But revenue may be a little higher than one might guess.
Finally, I do not see anything we can learn from comparing television screens in the US to these screens. The only thing in common is they are also screens. Apples and oranges.
A simple search on google returns http://www.emarketer.com/PressRelease.aspx?R=1008788 and 60.7 GUSD for spending in 2011 on TV advertising in the US, which would be 195 USD per screen if your estimate of 310 million TV sets is correct.
You mentioned earlier that for Focus Media, we stand at 3000 USD per screen so it is roughly 15 times more.
However, I would expect that "TV ad spending" includes the creation and all the money going to agencies as well rather than all the revenues going to TV operators only : no clue how much that is left for the US revenue per screen but 20 times more at Focus Media might prove to be a low estimate...
Beli beli good bizness indeed!
This is similar to other comments albeit more documentation (not to take away from others).
US TV advertising revenue for 2011 is $71.8 according to the NY Times.
http://learning.blogs.nytimes.com/2012/05/15/is-tv-stronger-than-ever-or-becoming-obsolete/
Given the 310M screens that is $231.61/screen.
FMCN claims >$3000/screen in China...a bonanza.
On the surface this is ridiculous. What could explain it. All advertising vs content + advertising? Perhaps that is 5-1. But as John has well laid out, people aren't spending the same amount of time willingly in front of the screens nor for the same lengths of time.
Another add-on possible explanation.
http://money.cnn.com/2012/06/26/news/economy/china-middle-class/index.htm
Here is some information on disposable information in Chinese urban areas. Someone with $800/month owns some pretty serious luxury goods in a country with high savings rates. Obviously there are many things unclear here but perhaps the bet is that this is a consumer culture even greater than the US!
I am skeptical and short.
John, just to clarify a point. I think the holdings in Focus Media are not in funds directly managed by Ashish. According to annual reports, the funds that hold focus media are Eastspring Dragon Peacock, Eastspring China Equity, Eastspring HK equity and Eastspring Gr. China.
At least two of these funds are managed by one Nicholas Koh, according to Morningstar.
And as a percentage of the various portfolios, make up between 2% to 4%. If you add that up across all funds, the total exposure to Focus media could be quite substantial indeed.
As for Ashish's comments, i think he was just doing his job as Asian Equity CIO representing Eastspring (formerly known as Prudential Asset Management) on the WSJ. And yes, he seems very reasonable indeed.
How do I short this (who would take the other side of the trade?) - this looks, walks & quacks like the duck that it surely is.
I'll do what you asked and just guess. $500 per US tv screen. $100 per year., so 20%. I was going to go lower, but started thinking f about cot of the screen, installation etc.
Revenu from advertising in US was about 36,000 million in 2010 and divided by about 300 million screens gives us $120 per screen per year.
Income from LCD screens for FMCN is about 300 million divided by 130,000 screens gives us $ 2,300 per screen per year.
19 times the revenue per screen in the USA
5 per cent. or less -
based on rough guesses that US revenue is c $80 per screen so FM would make $4 at best.
Well, the TV industry will also support much of the sports and film industry…so I would go with that being say $100bn or so, rounding it down a bit, $300 per screen – that is a complete guess.
However, I would not say the issue of the screens in China not exactly being destination viewing which may lower their value vs US TV screens…what is the GDP per head in the US, 48k more or less, China 5.5k. or so, About 12% of US GDP per head...ok, let’s say the screens are in affluent locations, so let’s say the average income of the passer-by is 30% of that of the US TV watcher – so that gets us down to $100 per screen before even taking into account the nature of the product which is the passer-by not actually looking at these screens.
I guess some screens can be geared to locality which might be worth more…ie “your nearest McFlurry is 200 meters to your left”…but that simply rivals having a poster. I would have thought these things would be less than 5% as effective as TV, but in a lower income economy.
Now allowing for the not very accurate ways of measuring ad spend effectiveness and the over selling of the concept, coupled to a somewhat higher proportion of disposable vs gross income in China.
I personally would not value these at much more than 5% of the value of a US TV screen.
So 5% is my answer
Bet their answer is a little more bullish!
tg
I'm going with 25%, but that's only because New York advertising prices are crazy.
I eagerly await the outcome of this debate, as FMCN's $3,000 per screen margin has given me a really good business idea. I'm going to buy 1,000 tablets from BestBuy ($129 each) and ship them to China, where I will hire people to hold them in prominent public places (such as elevators).
Now I did the math on this - and based on Focus's revenue per screen, I'll only break even. But I've got a solution to that: my employees will hold one IN EACH HAND! Projected IRR of 50% -- and that's assuming I don't get greedy and ask my employees to tape a third screen to their backs.
For any investment bankers reading this, who wants in on the IPO?
I see no reason to think there should be any relationship between revenue per TV screen in the US and a dedicated display advertising monitor in China.
Perhaps there could be a benchmark to use display advertising rates at subways, bus stations etc. or perhaps the revenue received by a cab for advertising.
Focus Media's revenue per screen may or may not be reasonable but I don't think you'll come close to demonstrating that with this analysis.
For example you note that Focus' screens are in 'low traffic' areas. But what could be lower traffic than a living room? or a bedroom, or a den in the basement?
I believe I saw recently that US ad Spend on the Internet is 25% of the pie at $30b, implying total US ad spend of $120b. I believe TV was 40% of that pie, meaning $48b. $48b/310m screens = $160 per screen per year.
I'll assume that the spend per screen in China is 1/10 of US, consistent with the average wage. $160 per screen / 10 = $16 per screen x 130k screens = $2.1m annual revenue for the LCD portion of Focus Media.
50cent/day, max.
Has anyone phoned up Focus and asked to book a particular screen for a year to see how much they charge?
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