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Vol.
XXVIII No. 26
June 27,
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The
Stock Market Melt Down and the Media Hysteria
Prabir
Purkayastha
THE
response of media, particularly the electronic one, to the stock market melt
down of May 17, was revealing. It became the central story for days, pushing
mundane events such as the electorate throwing out the BJP led NDA government to
the back burner. The peoples mandate for change is obviously far less
significant in the books of the media than the stock market going down by 800
points in one day. While this makes clear that the medias heart beats much
more fondly for the stockowners, the two per cent of the countrys population,
some questions still remain. Is the medias reaction to the fall of the stock
market merely because of their closeness to the Shining Indians who have
money to invest in the stock market? Or are we missing some deeper connection?
To
understand the media and its reaction to the stock market fall, one must
understand some things about the stock market. The genesis of the stock market
is very simple. If we build a manufacturing plant, we can have more than a
single owner. A number of co-owners of the plant can then be given shares of the
plant in proportion to the capital they put in. Once these owners have shares,
the face value of the shares multiplied by the number of shares issued indicate
the amount that the co-owners put in or the capital base of the company. The
current market value of the shares reflects — in some sense — the market value
of the company or market capitalisation. If the plant does very well, the share
value of the plant in the market may be much higher than price of its assets; if
it does badly, the share value is less. The shareholders can then trade the
shares in the market the stock market and realise profits or losses
based on how the market perceives the value of the company. Typically, the share
value is related to the price earnings ratio (PE ratio) — what is the price of
the share as a ratio of its earnings (or dividend per share paid by the company
to the stockholder). If a company earns high profits as compared to its face
value of the share, the PE ratio is high and so is its share price in the stock
market.
STOCK
MARKET GOING
UP OR DOWN
Some
observations are in order here. High stock value may or may not mean anything.
The unknown animal called market sentiment, rigging of the market by
speculators, etc., all contribute to the stock market going up or down. The
important point is that a sudden spurt of high stock prices or its fall does not
affect the value of the assets. The loss is not in actual value of the assets
but essentially loss of money for some stockholders and gains for some others.
Essentially, stock market transactions do not create new wealth in society but
only re-distribute it. If the stock market booms, it does not indicate that the
total wealth of society in terms of production of goods or in terms of
productive assets has increased. Nor does its fall reduce the productive wealth
of society. For the brick and mortar companies, the asset value is much more
important; even if the stock value goes down due to a market panic, these
companies are relatively unaffected. However, high stock prices help launching
of public offering by companies and in raising capital from the market.
The
problem arises when we look at companies that are not brick and mortar companies
with tangible assets but companies that have only virtual assets. Take for
example a software company such as Microsoft. Or a media/entertainment company
such as Disney or Zee, the biggest vertically integrated media companies today
in the US and India respectively. Typically, the software companies rely on
monopoly to jack up their profits; software companies own the copyright on
products such as Windows. The media and entertainment companies have viewers or
own the eyeballs. The media companies sell the captive eyeballs to
other companies who want to advertise their products.
Or have paid channels that can charge higher prices as more people want
to see their channels. Both software/IT and media companies have intangible
assets, and the only way they can realise their value is through the stock
market route.
MEDIA
COMPANIES IN
INDIA
If
we look at media companies in India today, the economy of such companies is
based largely on advertisements. The amount of money through paid channels is a
fraction of what they receive from the advertisers. The commercial broadcasting
model where the channels earn profits through sale of other peoples goods is
the key to their success. The higher the viewership, the higher are the ad rates
that they can charge. This is the broadcasting model that has evolved in the
last 70 years, starting from the radio of the thirties to cable television
today.
Radio
and television as a medium to bring culture, science and education — or public
interest broadcasting — has been abandoned in this quest for eyeballs and
ad revenue. The response of the centralised state broadcasters has been to mimic
the private satellite stations. The struggle for a mass audience has led to the
state television becoming satellite television clones, a trajectory that all the
state broadcasters seem to be following. The mainstream media is now exclusively
for propagating Nike, Pepsi and Coke. Even though we have more than 100 channels
in the country, the fundamental question regarding public interest and
commercial broadcasting still remains. And it is also this ad driven commercial
broadcasting model that makes media so much a part of the new economy.
In
the area of media and software that lie at the heart of the new economy, the
rules are quite different from that of the brick and mortar economy. Much of the
worth of companies in this new economy lies in how the stock market values them
and not in the value of their assets. Instead of tangible assets of which they
have very little, they pledge their shares to banks to raise large loans. Or
raise large amounts of capital through stock placement with financial
institutions or public offering of their stocks. The stock market is far more
important for them to raise capital then for the brick and mortar companies, who
can pledge assets. If there is a sudden fall in the stock prices, it means the
loss a source of easy money for IT and media companies. For the owners of these
companies, it is even worse. A number of them sell their shares when the stock
market is high and become millionaires overnight. The dotcom boom and the IT
stocks created a very large number of such instant millionaires. Quite often,
the employees also ride the stock market boom hoping that their company stocks
will also make them rich. Some of the angst of the TV anchors when the stock
market fell could perhaps also be traced to this.
The
current market pundits refuse to distinguish between virtual wealth and real
wealth. When we talk of tens of thousands of crores being wiped out in one day
in the stock market, we are not talking of real productive assets but only
notional wealth. Undoubtedly, the wild speculative swings in the Indian stock
exchange calls for a stronger regulation. Speculation can also be curbed by
actions of the type suggested in Chtittaranjans columns earlier or through
other measures such as a variant of the Tobin Tax, where each stock market
transaction could be taxed a small amount. However, stock exchange reforms are
not the focus of this article. The issue here is not how to regulate the stock
market but to understand why the media behaved in the way it did, post election
results.
MEDIA
COMPANIES AND THE
STOCK MARKET ROUTE
The
media companies in India have also followed the stock market route and that is
why were so sensitive to its rise and fall. NDTV, Zee TV, TV 18, Balaji
Telefilms and TV Today (Aj Tak) have raised large amounts by placing their
stocks privately or through Initial Public Offerings (IPOs). TV
Today, which got listed on January 16, 2004, had a listing high of Rs 225. NDTV
got listed for about Rs 100 after their IPO gaining about 30 per cent in one
month between its IPO and listing.
Currently,
the stock prices of the Indian media companies are more than 10 times the face
value of the shares. Obviously, the stock market boom has been favourable to
media stocks. NDTV had raised 109 crore through an IPO in April 2004, with the
shares to be listed from May 18, 2004. If the share market had remained high,
all those who had bought or were holding NDTV stocks could make immediate
profits once the stocks were listed. In fact about 1.93 lakh shares of NDTV were
sold immediately on being listed, indicating the huge gains that some of the
stockholders were making. No wonder the stock market falling by 800 points on
May 17, the day before their stocks were to be traded, drove NDTV ballistic. The
problem is not that NDTV should be concerned with the rise and fall of the stock
market. But is it not their duty to inform the viewers that when NDTV and other
TV channels were abusing the left for the stock market fall, they had also their
self-interest at heart? Or is transparency limited only to the government and
not for those run our private media?
