One does not need statistics to know that a lot of media companies – music labels, film studios, newspapers etc – are facing a crisis of profitability. However, the figures do bear it out.
Some new research from Deloitte has found that, while many industries suffer from intense pricing pressures and falling return on assets, the media industry is doing worst of all. In fact, the industry now has a negative return on assets of 4.4 per cent, compared with a positive 7 per cent 40 years ago.
I wrote about the Deloitte Shift Index in a column in June but it has now been updated to break out results for individual industries. The results are gloomy from the point of view of corporate profitability, although the consumer is getting a good deal.
Interestingly, although one might think instinctively that profitability is transferring from media companies to technology companies – sparking, among other things, Rupert Murdoch’s protests at Google – the latter are themselves struggling to adapt.
John Hagel of Deloitte argues that falling return on assets results from intensifying competition, both from deregulation and the rise of digital technology. That means that increases in labour productivity are hard to retain as profits, instead being passed on to consumers in price cuts.
That looks very like the theoretical world of freely competitive capitalism, in which prices tend to fall to the marginal cost of production. Chris Anderson wrote about this effect in his book Free.
“All other things being equal, margins tend to get competed away. In the past, all other things have not been equal but they look pretty equal right now,” says Mr Hagel.
