Big Media Coming Apart at the Seams

Despite the grim warnings, lower earnings and massive layoffs, it appears the worst is yet to come for big, lumbering media companies. It all rides on what we don't know. We don't know how deep or how long the advertiser and consumer spending pullback will be. There is no historical precedent, given the powerful unraveling of the global economy.

We don't know how much revenues and earnings will drop over the next year. Even online advertising growth is dwindling to single digits. We don't know how much of the P & L gap companies will move to fill by reducing more headcount, closing operations and attempting asset sales. We don't know how companies will shuffle their financing obligations to remain fluid and solvent.

We don't know how challenged business models will hold up under economic stress and a digital sea change. Advertisers may be unwilling or unable next spring to support the upfront model responsible for securing $9 billion in prime-time commitments. Local TV station and newspaper owners will not have community-based or election-related ad spending model to rely on in recession-wrought 2009. Newspapers' classified revenue backbone already has been broken.

What we do know is that the absence of reliable ROI media metrics will contribute to advertisers' meager spending. Many of the major advertiser categories, such as automotive and financials, have been permanently decimated. When they resume regular ad spending, there will be fewer advertisers spending far lesser amounts. Other categories, like retail, will remain flat for the next 18 months. Many big and small advertising companies will merge or disappear. Traditional ad spending at prior levels is not coming back, although money will continue to shift to new digital platforms.

What we do know is that consumers will continue to become more fragmented in their attention and loyalties. They will take refuge in their social networks, where they can commiserate with friends. Traditional media consumer support (watching scheduled TV, attending movie premieres, buying books in stores) will continue to wane, but their attention and spending in all places digital will prevail.

What we do know is there will be no federally funded bail for media, internet, entertainment and advertising. Big media by definition is not nimble and innovative enough to simply dump what's not working, modify what can be saved, and grow what works.

There isn't much that big media companies can bank on or reliably forecast moving into 2009. They are hamstrung between deteriorating traditional costs and revenues and evolving digital business models that do not offset the losses, generating less than 10% of their overall incomes. Big media isn't just being ravaged by recession; it is being sacked by a technological transformation of enormous proportions.

You only need to look at General Electric (GE), parent of NBC Universal, to understand how dramatic and unpredictable the changes will be. The stock market's 300-point reversal to the negative in the last five minutes of trading Wednesday was partly attributed to erroneous reports that GE might face worse than it has forecasted: flat earnings on a 10% to 15% revenue decline in 2009. That level of skittishness has many wondering whether NBCU's recently announced $500 million in cost cuts are just the beginning.

The vast layoffs occurring across all media sectors are a predictable knee-jerk response to cutting losses. What really is needed is bold restructuring and reinventing, and even elimination of Big Media's overgrown, inefficient legacy structures, along the lines of what Ann Moore just announced at Time Inc. The publishing company isn't just cutting 600 employees; it is radically restructuring its resources and workforce across its branded titles. The result has to mean generating more permanent cost savings and increasing what falls to the bottom line. Time Inc. operating income fell 15% to $218 million on a 6% decline in revenues to $1.2 billion in the second quarter.

It's called blowing up the status quo, and it will have to occur at more media companies. As U.S. consumers and advertisers strengthen their digital adoption spending, many large, old-line media companies (and even some newer players) will have no choice.

What we don't know is how many more big media companies are considering such radical, but necessary, moves. Fourth-quarter earnings are not expected to be bolstered by anemic holiday season spending; the normally weak first quarter of the new calendar year could be disastrous. More immediate considerations as big-media reports third-quarter earnings:

How can CBS (CBS) (considered the most at risk with 70% of revenues tied to advertising) avoid structural change in its core television, radio and outdoor businesses? With local television earnings expected to decline 13% in this election year, where will its owned-and-operated outlets run for cover in 2009?

How will Viacom (VIA) and CBS eventually be impacted by the credit crisis-provoked loan covenant woes of controlling chairman Sumner Redstone and his private holding company, National Amusements? As Pali Capital analyst Richard Greenfield points out, it has yet to publicly detail its debt to leverage and renegotiated financing arrangements.

How can News Corp. (NWS) avoid the double whammy of steep double-digit declines and high legacy costs from its newspaper and television businesses? With print assets accounting for one-quarter of its earnings, will it respond with some of its classic business model innovation?

How much will Walt Disney Co. (DIS) be compromised in a difficult economy by declining consumer spending at its theme parks, products and entertainment businesses?

What are the content assets of a streamlined Time Warner (TWC) really worth when they are revaluated?

With digital revenues comprising less than 10% of companies' overall revenues and doing little to ameliorate the cannibalization from time-shifting technology like DVDs and pure-play internet filters like Google (GOOG) and Amazon (AMZN), how will entertainment conglomerates respond to what Credit Suisse analyst Spencer Wang calls "an uphill battle?"

Disclosure: none

Comments

[Doug Poretz:]

I'd like to provide another perspective on the issue of what is happening in the communications business. I have spent 40 years on the side of working for the enterprise trying to communicate a message (P.R. et al), having the weird good fortune of reporting to the senior person since I was 23. I spent a chunk of about 20 years just focused on investor relations in-house for three major corporations and on a retainer basis for a whole bunch. Now I am co-founder and partner of a successful communications firm. Anyhow ...

I think we are about to see a really major phenomenon. Imagine a pie chart with two slices, one represents messages that basically say "buy this" and the other represents messages that basically say "support this." Although "support this" messages have become more visible over recent years, the communications business, and, in particular the advertising business, has been dominated by those wanting to get consumers to buy something. There is about to be a major change in the way that pie looks for two reasons: 1) a surge in need on the part of special interest groups of all ilks and sizes to get out their messages, and 2) the redirection of "buy this" messages toward interactive.

As to the first reason, consider what is about to happen in this country. Whether Obama wins or McCain wins, the White House is going to be dramatically energized versus the inert Bush Administration. There will be a new cabinet and there be new priorities. At the same time, the Hill will change not only in terms of the Democrat's lead, but a very large voter turnout will fuel a momentum for change. That momentum will begin to be translated into actual proposals, both legislative and administrative. The mood will encourage more than just change around the edges -- what will be at risk will be game-changers. New rules and regulations, new impacts on the P&L, probably new accounting rules, new ways of doing business, importing, taxing, addressing the environment, and that says nothing about, well, name it.

And for each proposed change there will be numerous special interest groups, right or left, public or private, the whole gamut, who are going to want to defend their current position and/or promote a new one. That is very often the case, of course, when there is a change in the White House. This time it is different by an order of magnitude by virtue of degree. The special interests won't only want to communicate their messages .. they will absolutely need to, because the political environment and the escalating speed by which things are done during a crisis will combine to create really bold (and very often dumb) ideas. And those ideas will be so significant that the special interest groups (including many non-U.S.) will not be able to sit on the sidelines and let whatever will happen happen.

So, we're going to see a major fight over who controls the various public (and private) debates. And that means, we're going to see a major surge in "support this" communications campaigns.

At the same time, we're going into a deep economic slump -- call it "recesssion" or "bula-bula" -- it won't matter. Unemployment will be high. The consumer will no longer have the home equity and credit card piggy banks. And those with money in their wallets, well they've accumulated enough over the past bunch of years and they are going to keep their wallets closed. So what will those who need to push the "buy this" message do? They are goling to get as close to the consumer and the consumer's buy decision as possible. Like in front of your eyeballs right now where you can make an impulse decision by clicking a button. Ask me, as a guy who communicates messages, whether I'd prefer to get my message to someone when they are sitting at home and have to remember to go somewhere to buy my product, or whether I'd prefer to get my message to someone who can litterally lift a finger to buy my product rigtht now. Duh. But while I am answering the question, I'll volunteer some more preferences. I prefer to get my message to someone who is more than moderately interested in what I have to say. I prefer to get my message to someone who is experiencing a rainstorm if I am selling umbrellas. I prefer to get my message to someone I know will react positively to this particular image and this particular word.

My goal in this post was to provide another perspective -- the perspective of someone in that industry that very often pays the bills and provides a lot of the content in the media/communications industry. From at least this one person's perspective, the depth and speed (and cultural consequences) of a fundamental change in the communications business will all be greater than most imagine at this point. It won't take long to see it. There will be economic consequences of course, but there will also be very serious consequences to the business models in the entire industry. If you follow the big ad/pr/etc agencies, watch out. I think they are about to see that they have operated under an outdated time-based business model in a value-based world.

I write about ideas like this at my blog, deathoftime.com if you are interested.

2008 Oct 31 11:34 AM