Markets fret over AI capex as TV advertising shows signs of life

Speaker 0 · 0:01

Hello. My name is Justin Levin, and I'm here with the fan favorite and all around industry legend, Ian Whittaker, talking on our usual podcast, Media Unfiltered. Today's pod will look at the wider media ecosystem with some fascinating news from gaming newspapers, agency results, AI investments, and, of course, the favorite one, which is the Super Bowl. The Feet wrote a story this week about the return of advertisers to the TV set paying north of 10,000,000 for a slot during what is TV's biggest event in the world. We've also seen q four results from Canada, Bell Media and Chorus reporting fairly substantial losses, but this is balanced by some decent results by Fox in The US. They've added 200 new cable advertisers, and the management described the last quarter as the most robust advertising market they've seen in some time. Does that mean we'll start to see a shift in desire and appetite for TV ad spend? Who knows? And then finally, the Washington Post had some bad news around job losses. And I just read Justin Sampson's piece about independence in audience measurement. Justin is the CEO of Barb, and they had the incident last week of YouTube suing Canton. Perhaps this is in response to that. He was arguing that joint industry measurement brings alignment, and it is this alignment which allows markets to function efficiently and fairly. Here here. Couldn't agree with that. Oh my god. What a week. Hey, Ian. Let's, why don't we start with the sort of gaming software and the agency stocks? There's a lot of q four reports. What have you seen, Ian? What has taken your eye particularly?

Speaker 1 · 1:50

Well, I mean, what's been interesting over the past year past week or so is just that we've had two market meltdowns in particular sectors that have been directly related to AI. So if you take what happened last week, you have the gaming sector went into meltdown because Google came out with its, Genie three point zero and allowed sort of people to create a game in in around thirty seconds or more. What therefore happened, of course, is that everyone was thinking, okay. This is just the start, and now what we're gonna see is develop better and better games products. Well, of course, if you're an investor in in game stocks, that's not something you want to hear. And particularly when you look at the gaming companies, they rely on hits that often take years to develop with big programming teams and so on. If you now have AI generated gaming, which quite frankly could do a fraction of the cost, completely obliterates those business models. So last week, the game in sector went into into complete meltdown off the back of that, and then we had a wider meltdown, which actually came this week, which where when you had with Claude come out with new legal software that immediately got the market thinking, if they could do this in legal, in terms of effectively disintermediate the providers there, they could do this in accounting, they could do it in finance, and, of course, they can do it in sort of marketing as well, which is why all the agency stocks fell as well. So there was something sort of, if you look across what happened this week, a swathe of sectors were massacred in terms of their share prices because the concerns that AI is fundamentally gonna wreck their business models. And what's underlying all of this, I think, are are some a couple of factors. The first thing is, if you look essentially at the models which have been as it were, which have been really affected, At the end of the day, they're all about execution and let's call it process more than anything else. Now that is something that AI sort of, threatens to actually record the business model because those business models before have relied on gatekeeper status. AI now is threatened to come along and blow that apart. So the future revenue streams of those business models is sort of more in threat. The second thing, of course, is the amount of money that is being spent on AI is astronomical, and not only that, it's expanding at a far quicker way than what the markets expect. So if we look at what Alphabet came out with yesterday in their q four results, they guided us to CapEx for 2026 to be between a 175,000,000,000 to a 100 and, and 85,000,000,000. The market estimates before the call for 2026 CapEx had been around 115 to 120,000,000,000 Now that sort of underestimation of how much spend is going through, It's unprecedented. I mean, I was an analyst for years, and and the the analyst could actually have such a a sort of underestimated the scale of AI spending. I think what it's bringing home to invest in it is, quite frankly, we don't know where where this is gonna go next. And, also, I think what it's bringing home to investors is, given the amount of spend that's going into CapEx, it needs to be recouped, and that's weighing on the tech stocks themselves because investors are asking, can you really get this money back? But, also, what's happening as well is investors are going, well, okay. If they do look to recoup it for from other sources, it's not just gonna be from advertising. It won't be from subscriptions. It essentially will be by eliminating a whole suite of existing business models. And whether that be software, whether it be analytics, whether it be marketing, whether it be sort of account services or whatever. And so what this spending is bringing fair to market is, essentially, this topic spend is gonna lead to a situation where, quite frankly, all sway of other business models are gonna have to be eaten up in order to satisfy the requirements of the markets when it comes to return they want to see from the tech companies spending all this money.

Speaker 0 · 6:18

So there's lots of people out there who are commenting saying that AI will not diminish or reduce jobs. But if you're talking about diminishing or completely eliminating some of these massive categories, it's gonna take a lot of jobs, surely.

Speaker 1 · 6:37

Well, I think that's, yeah, that's probably likely. I mean, whether it actually happens short term or not remains to be seen. But I'm definitely on the, you know, on the sway that of what we could see within jobs. It is, you know, a situation what you have forty forty forty years ago plus with, if you think about a sector like the car industry, car factories used to employ twenty, twenty five thousand people. Then what happened, of course, robotics came in, and then the same number of cars were produced, but obviously with much smaller workforces. Now, of course, those people got jobs elsewhere, but, obviously, the jobs were of a different nature than when they used to work in a car factory. That was the blue collar equivalent. I think, potentially, we do see the white collar equivalent here. And, yeah, I think sort of people go on about the industrial revolution and, essentially, that eventually led to new industries being created and and some new jobs coming through. And that's true. But what tends to be forgotten about the industrial revolution is that took several decades to occur. And, actually, in the first probably twenty, thirty years of the industrial revolution, what you had was that you had, you know, living standards for a whole sway of the population, particularly sort of in those times, male sort of skilled workers, sort of artisans plummeted. In fact, some studies suggest that actually the amount of food produced by people in in The UK during the first couple of decades in industrial revolution sort of declined because living standards have just dropped. Now I'm obviously not saying there's gonna be anything as dramatic here, but it is true that a whole range of industries that effectively relied on process and execution as really sort of barriers to entry, They face the threat of being wiped out by what's happening with AI, and it's the speed of change as well.

Speaker 0 · 8:37

Yes. It's a colossal sum of money. Do they break down exactly what they are investing in, or or do they just put it under the blanket of AI? That that might be a completely daft question, but what what exactly are they spending those sums of money that sum of money on?

Speaker 1 · 8:52

Well, a lot of it will be on on AI development. The the tech platforms don't necessarily spend sort of give a huge amount of of detail onto where this spending is going. For them as well, they also have an issue here, and this again sort of feeds into the the sort of issue around needing to look for alternative sources of revenues. They've obviously got to to fund the CapEx that is coming through. And and what investors do, when investors value a stock, what they're really interested in in the future cash flows. So they're really looking out and thinking, okay, what is this company going to do in the future? But also as well bear in mind with these sort of, massive capital expenditure investments is the other factor it has from the p and l from an earnings perspective. It also leads to significantly increased depreciation charges. Now that's not necessarily sort of a cash flow item. It's a p and l item, but it is a massive drag on earnings. And so with these stocks, they need to show earnings momentum year after year, and that's gonna be another thing that they're gonna be thinking about. Where are we gonna be actually getting new sources of revenues that will become that drag?

Speaker 0 · 10:05

Well, the other consideration, which doesn't seem to be raised, is that it's, again, it's a concentration of two or three companies who are able to invest the colossal sums of money going into AI, and they're going to have complete enough control over it. Is that not a concern or a consideration that these companies I mean, we're talking about their market dominance in advertising being absolutely staggering. They're, like, 55% of all advertising. Doesn't this concern you that they're the only ones who can afford to put the money in to develop AI, and they're basically going to control it going forward?

Speaker 1 · 10:40

Well, I think we tend to look at a very Western view of what's happening with with AI. One thing to bear in mind is that AI sort of what's happening in in AI is both The United States and China see it as central to the superpower race. So if you look at what's happening in China, there's plenty of development going on. Really, what you've got is a race between two two models of AI as it were, the American based model and then the Chinese based model. And the Chinese based model is actually making it's making a lot of progress, and the the Chinese government is not only put a lot of resources into it, both direct and indirect, but it's given a lot of support to those firms. We don't tend to sort of think too much about that except when we get moments like what happened with DeepSeek. You coming back to to in terms of The US, yes, it it is an issue. It is a case that it's effectively because of the the LLM model that you need huge resources in order to get the in order to be the sort of on a sort of sort of at the top of the tree. Concern, you know, absolutely. But, you know, I come back to this point before about national security. What's happened here is that, effectively, as far as The US concern is concerned, what it has done is outsourced what is quite frankly a major, as I said, major sort of strategic issue for for it has outsourced it as a tech companies. And it's worth sort of looking at The US strategic document from last year in terms of setting out The US's strategic priorities and national security. The strength of their tech companies, they specifically mention that the strength of US tech companies is central to US national security. And so this is the thing where what you have here is that these companies in a way, they got the massive resources in order to fund this investment, but also as well, there is pretty much of the implicit backing of the US government behind them.

Speaker 0 · 13:03

They are using that line, though, as a, legal mechanism in order to encourage governments to support their tech platforms and to apply tariffs as well. So I don't know how much I trust that particular analysis from the US government that is tied to their national security because that's the argument they're using in order to put tariffs on countries and bypass congress in order to do it. Because if it's under the interest of national security, the president can do what he pleases. So I take I take all that what comes from the US government with a with a pinch of salt, but that is very interesting indeed. Let's have a look at some of the advertising related stuff that we've heard this week. We've obviously had some disappointing news from Washington Post. I mean, the only outlier we have in press tends to be, the New York Times, which has actually grown their ad business, which is great, which is from a lower base, but still, it's good positive news. And then we have, we have the Feet and WSJ who have come out with positive pieces about TV advertising. What do you what does it tell you then when these titles that are so tied within the finance industry are are telling their audience that advertisers are returning to the big screen. And 10,000,000 a spot for Super Bowl is just that's a fantastic rate. And they sold out. Let's remember. They sold out really, really early using up fronts and, selling it pre season. So it's it's it's fantastic story for TV.

Speaker 1 · 14:33

Absolutely. And from my view, I've always said that the the the sort of the narrative around TV been in structural decline has been massively overstated. You look again at what's happening with the Super Bowl, you said $10,000,000 for a thirty second slot. Last year, it was, $8,000,000. I think that sort of it shows a couple of things. First of all, sort of it shows that the tentpole events, they are still absolutely vital must have slots for advertisers, and we can we can definitely see sort of of that as well. The other thing I would also say as well, and what was interesting about the I thought particularly the Wall Street Journal piece was talking about how YouTube is struggling to persuade advertisers that it is indeed TV. And certainly at the CFO level, CFOs sort of still say, if we want TV, we go for proper TV. If you if you want to phrase it that way, rather than necessarily something a a product where, quite frankly, we have some doubts. Now don't get me wrong. I think investors, if you look at the performance of TV related stocks, you only have to look at what's happening in Europe and so forth. And and, yeah, investors still remain quite critical in the business model. They see linear in decline. Yet they recognize the growth of streaming, but as far as they're concerned, that is not going to to be enough to justify premium ratings for the broadcasters. But what we'd say is if you look what's been happening over the past twelve months, particularly, I think, in terms of the European markets, but also as well what's going on in The US, you mentioned in terms about Fox. So that there are clear signs that advertisers actually still believe in TV being a must have product. And I think sort of my view, maybe this is slightly optimistic view, but I don't think it is. But I think for the broadcasting industry, we may actually be through the worst. And what do I mean by that? Mhmm. Well, we've had the sort of decline of linear narrative that has been played out for years, and that, essentially, money is gonna switch across to platforms like YouTube. Well, one thing to say is that there are clear signs the broadcasting industry is getting this act together. And whether that be UK broadcasters targeting SME advertising, whether it be TF one talking about being in YouTube of France, whether it's been consolidation within the space, whether it's also as well been signs that indeed, your top tier products like the Super Bowl still remain very, very critical in order to advertisers. What all these suggest is that actually TV's sort of position, even though it has been battered to some degree, still remains fundamentally strong, and it still remains a must have product for advertisers. The other thing I think it's also worthwhile bringing here as well. Look at again, go back to the alphabet results from last night. Look at YouTube's numbers. The ad revenues were only up 9% year on year. I mean, we've heard, you know, the narrative that has come about that essentially there's gonna be a swathe of advertising revenues that is gonna go across to YouTube and management talking about the fact of the comps sort of against the US election of last year, but strong comps didn't seem to impact Meta nor indeed Google search, both of which were the benefits of this world. So I think what you have here is that, you know, whisper it maybe quietly, but I think that things are starting to turn where and it's definitely not a moment for complacency. Don't get me wrong. But things are starting to turn on the narrative.

Speaker 0 · 18:27

Yeah. And and and narrative momentum and emotion is absolutely essential because we all know that the media and advertising market is completely irrational, and it's a lot of decisions made on how people feel towards the medium. And I think there are a lot of mid sized brands who have maxed out on digital, and they realize that in their results. And then one of the things that have occurred has occurred, particularly in The US market, is linear has held up poorly. So when you look at actually viewership, it's about fifty fifty split between streaming and linear. But when you look at the available ad units, so if you're looking at the entire TV industry and where you can find ad units, 89% is delivered by linear TV. Despite that, over a ten year period, they've lost close to 40% of income because brands have shifted much of that spend into CTV. But they're chasing 11%, available, ad inventory, which has led to all sorts of problems. It's got crazy fraud. It's got a lot of ad tech companies as well, with their with their hands in the jar. And I think they're realizing that, actually, also, this whole theory of one to one versus one to many is actually hugely effective. So the narrative change and it comes from The US. The US is so important for that narrative change. You know, I I always say this that about 150 of the top, CMOs reside in The US. And if they make the changes to their media mix and decide to put more money on TV, I think you'll see that six months, twelve months down the line spread to the rest of the world. I certainly hope so anyway.

Speaker 1 · 20:06

Yeah. I guess on the I just wanna say that. Agree with that? Yeah. Well, no. I would I sort of would agree with that. I I think also as well sort of if you step it back, it's also as well not just CMOs, it's CFOs. And Yeah. This this again is an important point that was brought out by the Wall Street Journal article. Yeah. That effectively many CFOs still see TV as the premium product. And I think one of the things that you're again, there has been as as you said, there's been a, the the there's been a whole swathe of of sort of over the years, money shifting over into digital. The question is, though, for many companies when they look at actually what has managed to support pricing growth, which is absolutely critical for them for earnings growth, you have volume growth for many of these companies. It's not really doing that much. I mean, the dynamics of volume growth they had before in terms of the emerging markets, China growth, etcetera, they're starting to stall. So they Yeah. Have to switch back to pricing growth and particularly in in markets like The US. And if you need sort of if you do pricing growth, particularly in this environment where the consumers you've got the whole affordability agenda, you need a strong brand. What is the best way to build up your brand strength and therefore get through your price increases advertising on TV. And it sort of leans into the into the product. I would say this. So this is something that we we haven't talked about, and, you know, it could be something that we sort of explore in the in the future. What's very interesting from the results so far, we haven't had Amazon yet, so we'll see what they say. But if you look at the results that have come out for Meta, sorta, Google, also as well Snap that came through last night, it's very clear in terms of the online platforms that is there seems to be a difference between what they're getting from SMEs and what they're getting from big advertisers. Mhmm. So if you take search, which is 85% SME for Google, you've got very strong double digit growth. 17, 18% growth that came through in ad revenues. But if you take YouTube, which is more sort of heavily focused on some larger advertisers, that was only 9%. You take Snap at Middle East, second tier, 5% ad growth yesterday. But they talked about the fact that that was being driven by SMEs. Your brand spending is still down. Meta, again, 85%. You you strong sort of growth coming through or sorry. Are, 85% that's coming through from SMEs, very strong ad revenue growth. And this is something, again, we've got in the advertising market, which is quite interesting. We seem to have a difference there between what larger advertisers are spending and what smaller advertisers are spending.

Speaker 0 · 23:04

Yeah. And it and it's it's always great to get that breakdown because there is a clear distinction. And when you look at the the meta figures, 22% growth last year on only about just under 4% growth of audience. With the YouTube figure at 9% growth, it'd be interesting to see what their audience growth is during that time as well. I don't think it marries up to the nine, but I'd be very interested to to see to see what that is. And, I think this this sentiment or this this approach to actually looking at your media spend and putting it into more trusting environments. Channel four just came out with some great research on this Newsworks and the IPA as well. But the the the shared impact, if you like, of in advertising within trusted environments and how that affects your brand is really interesting. I saw Nestle's results as well through on, is a piece in the Feet as well. They've really, really struggled, and it'd be interesting to look at that business and look at their marketing strategy to see if they've moved away from classic brand building. We'll have a break, have a KitKat, and all that sort of stuff, and what impact that's had over the longer term. I know they had a huge focus on digital for the past few years as did most companies, but I wonder if that has had a, negative impact on the FMCG businesses and all the other stuff that they do. Well, with that in mind, do you wanna wrap up on this, YouTube stuff? Obviously, Justin Sampson, you may not have read it, has come out with a fairly strong piece, in response to YouTube suing Kantar to prevent them from measuring, YouTube on a TV screen in a sort of comparable way, if you like, to, to the broadcasters. How do you feel about Justin coming out with with something like that? Is that the right move, do you think, from the jig? And, obviously, he speaks on behalf of his client base too, which typically is broadcasters and TV companies and ad agencies.

Speaker 1 · 24:57

I think I did read the piece, and it's great to see that, Justin was got his

Speaker 0 · 25:02

his history analogies in there. So I saw that. I thought you'd like that.

Speaker 1 · 25:07

I did like that. Is it fair? Yes. I mean, I think with something like that and YouTube have their own reasons, which they have stated. But with something like that, I think if you are, Bob, you have to come out and give your side of things. I mean, I do wonder from a YouTube standpoint how sort of how wise this is. I would say that it I mean, my feeling is, certainly from conversations I've had, is that it has raised the the obvious question of what exactly you're trying to hide. Yeah. And that's not just coming from to, the usual sources of broadcasters, but it's also as well at the agency and the advertiser level as well. One thing I think sort of, I think I've mentioned before in this sort of podcast is, you know, there's there's some quite interesting analogies here between what the tech platforms do and how China operates in global affairs. And one of the sort of, things that you see, which I think is quite common between the two is a desire to control the standards in terms of of the markets in which they operate, whether it be China in terms of trade or whether it be the tech companies in terms of the advertising markets. And I think they've been quite successful over the years. In fact, I would say it's probably one of their biggest successes is that they've managed to to turn the narrative on advertising really sort of, to areas that very much favor them. Yeah. The whole scientific measurement of management, of advertising, you know, what we talk about in terms of return and investment and so forth. And I think this was probably sort of another move in that strategy to say, look. You know, we don't trust Barb, and and, you know, that's if you get that sort of criticism, of course, there's the issue there that people may start to question Barb's authority. It doesn't seem to have worked this time. And I think that's quite interesting, you know, on that. And sorry. Go on.

Speaker 0 · 27:14

Well, I I think what's more interesting is their PR approach. They haven't said anything on this topic at all. They've they've got a they've got a statement out, which was limited, but there's been nothing. No response. They're definitely not responding to any of the stuff on socials and with comments. They're probably under strict guidance not to engage in that sort of stuff. But have you heard anything from Google themselves? Have you seen anything that suggests that they have a response to this?

Speaker 1 · 27:42

No. And and as you say, I mean, I would give I would go to Google. Quite frankly, I wouldn't be doing that either. I mean, here, again, it it is they will have their own reasons for not doing this, and, yeah, that it is I mean, we can speculate as to why they haven't haven't done it. But as I say, I think the way I think what's quite interesting one of the things that I I think it is quite interesting about sort of what's happened with Barb is my feeling is twelve months ago, if this had happened, people would have shrugged their shoulders and moved on. Actually, what's happening now is, you know, they're taking a greater interest in it and saying, hold on. What's happening? And I do wonder where I agree with that. Some of the different reaction is whether it linking in the earlier conversation, whether it's actually sort of linked in with the fact that many people in the advertising world, advertising agencies, have woken up in the past, you know, certainly six to twelve months of the potential of the potential threat to their own industries coming from what the tech platforms are doing with AI. Given that, that may may be changing some of the opinions within the industry towards the major platforms.

Speaker 0 · 29:02

It'll be interesting to see. I I actually totally agree with that. I think barbers raised their stock globally as well. So other jigs and TV companies are noticing, and they are aligned. And it's created a narrative or some fuel to fight back against the power, if you like, of the platforms, and certainly good for television. And I think you're right about that twelve month thing. I think had they done it a a while back, it probably wouldn't have had the impact. But they, in the meantime of showcasing this data and how public this fallout has been, I think it doesn't look great for YouTube. And and you and I know from having private conversations with buyers. That is definitely the sentiment that we're hearing. Well, it'd be fascinating to continue to watch. It's been a brilliant episode. All this AI stuff and and the analysis from the financial markets is is fascinating. So, Ian, I appreciate your time and your dedication to all this, and I'm sure the audience too. Until next time.