KUHN CAPITAL Sunday, February 25, 2018
Dispatches from the front

Does Big Media Work?

The last year has seen unprecedented mass media company losses. Are these huge enterprises built on flawed expectations of post-acquisition synergies?

Viacom Inc., parent of CBS, Paramount Pictures and Simon & Schuster, lost $1.1 billion in 2002Q1, while another media conglomerate, Primedia (of specialty magazine fame), has never made money, last year losing $1.1 billion on sales of $1.7 billion.

AOL Time Warner recently announced the biggest quarterly loss in global corporate history and Vivendi Universal – owner of movie, music and theme-park companies (along with a telecom and water utility) – bled a staggering $12 billion last year, the largest ever for a French company.

In the Eighties and Nineties, Dun & Bradstreet grew enormously through the acquisition of various software and data businesses, then just as impressively, hemorrhaged, downsized and ultimately spun off most of its newly acquired businesses. Even stodgy McGraw-Hill, while spared massive losses due to limited acquisitions, blew millions attempting to combine disparate media properties into market-focused operating units.

In general, the recent gigantic media losses are driven by write-offs of high-priced acquisitions that didn’t pan out. The scramble to buy was abetted by the usual suspects: white shoe investment bankers and Bain or McKinsey consultants, in this case arguing that media players who don’t integrate comprehensive media content and delivery mechanisms under a single “silo” will get locked out of the game.

The idea was that all big content and distribution channels will be captured, and then the media landscape will be dominated by warring medieval fortresses lording over a vast competitive no-man’s land. (We sat in on meetings where – for the princely fee of $1 million – Bain even pressed these points to a regional phone utility!) Unfortunately, a lot of CEO’s, including some RBOC CEO’s, bought the scenario, and to them was left the job of making fuzzy theory into practice.

The obstacles to realizing synergy in media companies are legion, but they generally arise when managers look at the two types of operating opportunity: production and distribution/marketing savings.

Since most media company cost of goods are low, often only 20% of sales, “hard” savings in production operations tend not to have a material impact on profitability even when they are realized, for instance in ganging magazine print runs.

More usually, few production synergies exist to exploit: take the example of a product directory and a TV network both serving the home improvement market. Yes, some content may be reusable, but not only do the two outlets use different production technologies, the metabolisms of the content producers themselves differ – picture the annual directory editor and the TV producer working in the same room and “synergizing”.

The second source of expected synergistic cost savings, those realized through distribution and marketing, has also proved disappointing, again for rather obvious reasons.

Disney rationalized the acquisition of ABC in part by believing that ABC would act as a low cost channel for Disney product. But if Disney content managers can get a better price from an outlet competing with ABC, shouldn’t they take it? And should ABC producers be forced to take Disney product when they may have cheaper, superior or more appropriate alternatives? In sum, how do you measure the performance of a profit center when you require it to make sub-optimal arrangements for the theoretical sake of the whole? If these are the “silos” being built, they’ll be forever leaky.

To be fair, some incremental value has been created through combinations of similar content or even through management excellence. Disney’s leadership on behalf of its acquired ESPN network has certainly strengthened that brand, and AOL Time Warner has pumped up Time Magazine subscriptions through its online AOL service.

But analysts generally agree: in general, synergy for big, sprawling mass media empires hasn’t paid off. The details of these companies' operations are myriad and even fleeting; outstanding consumer content is always a matter of art and is often created by talented individuals, not corporations; and, finally, products and markets pair off into thousands of combinations that may not fit the distribution channels controlled by the parent.

That is, media isn’t manufacturing.

Ryan Kuhn

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