The Economics and Financing of Media Companies: Second Edition

CHAPTER 13. Indicators of Financial and Economic Health of Media Firms

CHAPTER 13 Indicators of Financial and Economic Health of Media Firms In order to evaluate the operations of their firms and to compare performance over time or among firms, managers employ a variety of economic and financial indicators to measure the health of their media firms. These include indicators of economic and financial health and indicators of internal company health. indicators of economic health The economic health of media companies is exemplified by the state of its markets and consumers’ desire for the products and services produced by those companies. Changes in these indicators of the health of companies and their industries can be observed to determine elements of their future and the potential need to alter company strategies to respond to those changes. market share change or maintenance By considering a company’s share of the market for a particular good or service, one gains an understanding of its position in the market and whether that position is being maintained, improved, or degraded. Changes in market share indicate that competitiveness has been maintained, improved , or lost by firms or that the market structure is being affected by entry or exit or better competitiveness on the part of other firms. An online portal whose web site receives 15 percent of the hits for portals that organize and provide access to content will work to maintain and expand that market share as an evidence of its strength. If its market share 235 236 i n di c a to r s of f i na n c ia l a nd e c on o m ic h e al t h of m e di a f ir m s declines to 13 or 14 percent it is losing portions of the market to other competitors who are seen by portal users as better meeting their needs or providing better service or quality. Market share is measured in terms of circulation for print media, in sales for consumer products such as audio cassettes, CDs, CD-ROMs, videos, DVDs, and so on, and by ratings and share for most electronic media. As noted in Chapter 6, most of data regarding such items is provided by or audited by independent organizations that serve all media competitors and advertisers. These data provide means for monitoring developments regarding market shares. In the past, a media firm was evaluated as healthy if its market share was growing. Today, with the proliferation of media, health tends to be evidenced in maintaining market share or growth within a small niche in which the firm operates. changes in demand Changes in demand for a product or service can rapidly affect the state of any industry, so it is important for managers to monitor changes in demand. In many economic studies, price is typically illustrated as the dominant force on demand. Although there is truth to this view, media and other products are affected by a variety of demand factors for individuals, including income, time for use of the product or service, requirements for additional purchases (such as software, CDs, DVDs, and so on), and skills required to operate products. In additional, large-scale demand changes can be caused by the age of the users. In such cases, if the primary users of the product or service are older, they continue its use, but their numbers are reduced by mortality. In other cases, if the primary users are young people and birth rates decline, demand will be accordingly reduced in the future. Other cases of large-scale change include changes in linguistic needs of audiences caused by immigration, economic downturns, and the developments of new and more interesting products and services. indicators of financial health It is important for managers to review regularly the financial health of their firms because financial data provides the key indicators of whether a firm is becoming or remaining a viable business entity. Basic indicators that need to be regularly reviewed involve sales and cash flow, profitability, the status of working capital, and the condition of the balance sheet. Indicators provide both short-term and long-term indicators of financial health. Operating data, for example, tells what has occurred financially in the company during a given period and this can be compared to previous periods. But such operating data does not tell about the strength of the firm and its continued viability, so additional information from company balance sheets is...