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A Sector in Transformation

Is Pearson worth more than 9 pounds a share? Yes, says Andrea Azzimondi, head of media research at Pali International. In fact, he thinks a price of more like 9.50 pounds tops. He thinks there is a reasonable chance the company will get bought by a private equity group which will add further leverage to the balance sheet and sweat the assets.

The sector is being run under the slide-rule -- as Andrea points out, "media ... is experiencing lower operating margins, higher invested capital, and lower returns than in the past." But the silver lining is in the nature of the business model.

"Return on invested capital is still relatively high and in some cases the de-rating might be overdone," she said. So to the punch line -- be selective. Andrea’s picks: BSkyB and Prisa.

As someone who makes a living in the media let me add a thought; the sector is experiencing a degree of paralysis. The response to the challenge from the so called New Media has been to cut costs and pander to the lowest common denominator in a bid to retain eyeballs. No one likes to invest in premium content when revenues are under pressure. The winners, though, will be the companies that take the plunge.

The new technologies have offered new routes to access, but in reality have not changed the demand for content. In fact, they have opened up more channels to consume content. Think DVDs in cars, the iPod, etc.

The winners will understand the best form of defense is attack. Embrace the technology -- shape the content to the delivery mechanism -- but don't stop investing in creativity.