BOTTOM LINE: comScore and Rentrak announced an agreement to merge on Tuesday. Our view is that the two research companies will undoubtedly continue to grow, but not necessarily at Nielsen's expense. We see the role of third party measurement becoming increasingly important to large marketers. This allow for growth opportunities from different providers such as Rentrak and comScore, who can offer new services within growing markets and new services that are complimentary to more mature ones without necessarily taking away from Nielsen.
Rentrak and comScore have announced plans to merge, producing a digital and video-based media-focused research company with LTM revenue of $457mm, ~$350mm of which was generated within the United States. The company will likely move up one position among the top market research companies in the US, following Nielsen, WPP's Kantar, IMS, Ipsos, IRI and Westat. On a global basis, they will rank behind the aforementioned group as well as GfK. However, it is and should remain by a substantial margin the fastest growing company in the sector.
As the CEO of WPP, the two companies' largest shareholder and also one of the largest buyers of research services on behalf of marketers said in August, "we very much would welcome them coming together." Nielsen investors who had concerns about the potential for competition from either company would probably have reason to have greater concern following the completion of a merger and the introduction of integrated products.
We think such concerns will be misplaced. While there will undoubtedly be many existing customers of Rentrak and comScore who may become bigger customers of a combined entity, the merger is unlikely to meaningful alter Nielsen's position in the United States so long as the largest nationally-oriented marketers continue to prioritize the use of age and gender-based metrics in their media planning and buying efforts. Under this highly likely circumstance, agencies will continue to buy media on this basis, meaning that they and media owners will continue to rely on Nielsen for data services. Long-term contracts between those entities and Nielsen will further reinforce this orientation. Arguably, both companies can continue to expand their businesses as third party measurement and related services become increasingly important to marketers. Whether the money to fund incremental services comes from other research providers or (more likely) from media owners or agencies becomes the bigger question.
As an important side point for investors to consider, we have heard (and disagreed strongly with) commentary from those who argue that the likes of Nielsen and comScore become less relevant if Google and other sellers of advertising can provide advertisers with their own counts of views and then provide attribution tools connecting those views to sales or other metrics that brands care about. On the contrary, as evidenced by recent academic research regarding sales of fraudulent impressions by YouTube and ever-emerging news around the prevalence of 'bots in programmatic media trading, advertisers and agencies have good reason not to proverbially let an opposing player serve as referee.
Third party providers of measurement of audiences and other metrics such as viewability retain – or possibly improve – their importance as digital media continues to grow. When publishers fail to allow those third parties into their systems, it is the publisher's growth that will be constrained. Meanwhile, set-top box-based viewing metrics and the appending of other data sets to those viewing metrics helps buyers of TV justify ever-granular media choices and inventory selections, which ultimately must be reconciled with the conventions that marketers prefer to plan against, namely age and gender. All of these factors suggest strongly to us that the dynamic between comScore-Rentrak and Nielsen is not necessarily a zero-sum game.
VALUATION. We value Nielsen with a DCF, using a 6.5% near-term discount rate, an 11.4% long-term discount rate and long-term 4.0% growth. Our target equates to a 30x unadjusted 2015 EPS or 16x on an adjusted basis.
RISKS include macro-economic trends, the rising availability of less-expensive research solutions (which could impact Nielsen's discretionary services) and the potential that Nielsen's status as the provider of a TV advertising trading currency could be threatened.
FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE: NLSN 9-30-15.pdf
The opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillage.com / MyersBizNet, Inc. management or associated bloggers.