Why digital is winning the ad wars and 2 companies to benefit

While some technological innovations change established business models quickly, it is far more common for innovation to happen gradually.

A case in point is the digital out-of-home advertising trend. High resolution digital screens of all sizes have been available for over a decade now, and billboard advertising has been a staple of the industry for over a century.

However, the meeting of the two has been a slow process, with attention for digital media companies only accelerating now.

The market

The digital out-of-home advertising market is attractive for advertisers. For example, the effectiveness of television advertising,  is declining, as people stream or record TV shows, or simply switch to their “second screen” (phones or tablets) during commercials.

As a result, around $5 of every $100 spent on advertising is now on outdoor formats. The attraction is capturing the interest of car, train and bus commuters when there is less competition for attention, and as a result, achieving better advertising effectiveness.

So which two companies are best placed to benefit?

APN Outdoor Group Ltd (ASX: APO) is one beneficiary of the increased spend on digital out-of-home advertising.

APN has market share of around 30% in Australia and New Zealand. Growth initiatives being pursued by the company include converting their traditional static billboards and smaller scale signage in busy urban areas to digital assets.

This gives advertisers more flexibility, and the ability to target messages more effectively. For example, a digital billboard at a Melbourne bus stop might be advertising winter escapes to tropical North Queensland, but could be tailored to show the message “Sick of the rain in Melbourne this week?” at the top during bad weather. This makes it more relevant and likely to connect with the commuters viewing it.

Digital billboards also command better advertising rates and the ability to serve larger clients with more robust advertising budgets, which should see the overall returns on assets of APN rise as it converts its billboards and signage.

XTD Ltd (ASX: XTD) is a much smaller company than APN, but with a similarly attractive investment profile.

XTD focuses exclusively on advertising to commuters via large scale screens placed opposite train platforms. This system is called cross track digital, and is configured to the specific needs of train stations with advertisements pausing when trains approach, and the sound effects tailored as well.

The company owns 32 digital screens in Melbourne as well as several more in the fast-growing Brisbane market, where total passenger movements are 55 million annually. Both agreements are partnerships with the local transit operator for seven years, underpinning future revenues.

Although there is significant capital required initially to buy and install the screens, servicing and maintenance is minimal, meaning that advertising revenue once the cost is recovered should be converted to profit with increasing efficiency. XTD collected $1.8 million in revenue in the previous half, and has attracted clients including major car brands, the Australian government and national insurance companies.

XTD has stated that its intention is to now use the Australian operations as a live demonstration for selling the cross track advertising system in major urban centres internationally.

Foolish takeway

Buying stocks with a unique value proposition in growing industries is a good way to position your portfolio for growth. APN Outdoor appears to have a strong strategy already underway to increase the efficiency of its existing assets, while XTD could re-rate significantly if it is able to contract with a transport operator in an international market.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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