Seven West Media Limited's (ASX: SWM) decision to write down the value of its television licences and other goodwill by $1.1 billion could see the other broadcasters follow suit.
Investors were obviously non-plussed by the decision, with Seven West Media's shares up 1 cent in late afternoon trading. And the writeoff is non-cash and has no direct impact on generating revenues in future – given it just means the company values it assets less.
The real problem is what the writedown indicates.
It means television advertising revenues have fallen significantly, and the broadcaster sees no turnaround in the trend – stating "this adjustment reflects the revision of future growth rates…"
With the arrival of Netflix on our shores next month, that's all the likes of Seven, Nine Entertainment Co Holdings Ltd (ASX: NEC) and Ten Network Holdings Limited (ASX: TEN) need – as my colleague, Mitch Sonogan pointed out last week.
Indeed, Seven posted an 8.4% fall in net profit for the six months to December 2014 – after significant items. The company may boast that it has the market leading advertising revenue share, but if the total tv ad market is in decline, it really doesn't mean much, except perhaps to push its competitors to the cliff face first.
Seven still has $2.5 billion worth of intangible assets on its balance sheet. Ten has $733 million worth of intangibles, having written off $292 million in 2013 and an additional $53 million last year. Nine has $1.4 billion worth of intangible assets plus an additional $593 million in licences on its books.
If tv ad revenues continue to fall, you can expect Seven, Nine and Ten to all take the knife to the value of their assets. And that is highly likely, even if the trio is successful in transforming their 'old world media' into profitable digital platforms.
You could potentially compare their flight path with that already taken by the newspaper publishers Fairfax Media Limited (ASX: FXJ) and News Corp (ASX: NWS), but it may get worse before it gets better. As such, Foolish investors may want to ignore their juicy dividend yields – Seven, Nine and Ten are more likely to be value traps than good value.
Besides, there are plenty of more quality stocks worthy of your hard earned, including these 3.
