Media Blog

Don’t Blame the Internet

Here’s a great piece in The Atlantic by Bruce C. Greenwald, Jonathan A. Knee, and Ava Seave on the problems of the big media companies (excerpted from their upcoming book). Well worth a read, but here’s the beginning:

Time Warner announced in May that it plans to spin off its AOL division by year end. The new AOL’s value will likely be barely 1 percent of the market price of the inflated stock that Time Warner accepted in the original $175 billion merger almost a decade ago—despite the inclusion of numerous subsequent expensive add-on acquisitions. While extreme, the Time Warner–AOL combination was no aberration. The deal represents less than half the financial damage done during an unprecedented era of excess in the media business. Since 2000, the largest media conglomerates have collectively written down more than $200 billion in assets, a record that would make even Citigroup blush. These write-downs reflect a broad-based legacy of value destruction from relentlessly overpriced acquisitions, “strategic” investments, and contracts for content and talent.

One might be tempted to give media executives a pass because of the impact of the Internet. If we take Netscape’s public offering in 1995 as the birth of the Internet era, on average over the next 10 years the biggest media conglomerates achieved less than a third of the returns available from the S&P as a whole. But even more telling is that these companies, as a group, had also underperformed the S&P for much of the previous decade, before the Internet upended their industry. Indeed, one aspect of the media business has remained largely unchanged for a generation: the lousy performance of its leading companies.

Although individual media moguls have come in for skepticism and scrutiny, the industry’s underlying strategies have mostly escaped question. Executives, investors, analysts, and the press seem to agree that the primary imperatives are to accelerate growth, diversify internationally, invest in content, and exploit digital convergence. Unfortunately, these are precisely the strategies that media companies pursued aggressively during the past lackluster decade.

Understanding the fundamental flaws of these four tenets of conventional media wisdom—growth, globalization, content, and convergence—is essential to saving media shareholders of the future from the anemic returns of their predecessors. Each myth reflects its own confusion about the sources of competitive advantage. Indeed, media executives have been remarkably successful at convincing outsiders that this sector, possibly because of its reliance on mysterious creative factors, is somehow governed by unique business principles. Unless tomorrow’s media moguls jettison these beliefs and return to sound business practices, their companies will remain unable to achieve the kind of returns investors can get by closing their eyes and throwing a dart at the stock tables.

And the conclusion:

Without drastic action, the performance of media enterprises during the next 10 years is unlikely to improve—and is likely to get much worse. The drastic action required here entails jettisoning all four entrenched media myths and going back to basics: understanding the key characteristics of various media segments and applying established business principles to determine the best way forward. Although such an approach is hardly revolutionary on its face, the stark contrast between it and the conventional wisdom suggests how much work needs to be done.

In the media industry, senior executives seem to prefer “strategic visionary” to “first-rate operator” as an appellation. There is nothing wrong with searching for ways to reinforce competitive advantages under threat. But once the barriers have fallen, managers are left with the most unglamorous of activities—improving the efficiency of their operations. In the absence of investments likely to generate superior returns, an executive committed to shareholder value would not diversify for the sake of diversifying or reinvest in a clearly dissipating franchise, but simply return the money to investors. Empire-builders may find that course distasteful, but over the past two decades, media investors would certainly have been far better off if this had been the road taken.

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