The Stock Market Melt Down and the Media Hysteria

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 media’s heart beats much more fondly for the stockowners, the two per cent of the country’s population, some questions still remain. Is the media’s 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 Chtittaranjan’s 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?

27th June 2004