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Transformation, efficiency, transactions

It being the time of year for predicting, planning, and reflecting, two more cents’ worth of prognostication could only augment the mood. Below is a sampling extracted from the past year’s glimpses around media, technology, the economy, and markets, as these may become more sharply focused trends in due course.

Transition & convergence. There is no new media or old media now, and digital media becomes an antiquated distinction when all media turns digital. Mobile and fixed are similarly soft qualifiers, as platforms are increasingly ubiquitous. Video, audio, and print have been converging for years, and data extends across all formats. Instead, the groupings to look for are Information, Entertainment, Social, and rapidly emerging, Transactional media. There has been overlap between these, which we expect to continue. We should think of the sector simply as media, and its components will continue to converge. This has always been the tendency in the sector.

Disintermediation. Media is less about moving content than about moving product. In this context advertising is the intermediation of consumption, a go-between connecting vendors to consumers. This form of intermediation, with its multitude of layers, filters, networks and exchanges, has become inefficient and vastly uneconomic. Because commerce tends to optimal efficiency, consolidation and disintermediation in advertising are probable. Early signals of disintermediation are manifest in coupon and daily-deal platforms. Such transactional media is a form of disintermediation and added efficiency, and the technologies that support it should continue to evolve and grow.

Fundamentals. It would be unnatural for web innovation to sustain the frenzied pace established in the mid-90s and into the last decade. As information flow, devices, media consumption habits, and any opportunities related to these begin to mature, execution will begin to trump invention as the central theme. At this point of diminishing returns, investment theses will become more focused on profit, and investors more attentive to fundamentals. Issues such as pricing, productivity, market share, competitive response, and the incremental development of growth platforms will draw the most scrutiny. Entrepreneurship will be more than ever judged by standards of professionalism.

Liquidity demand. Liquidity pressures for media investors will escalate in coming years. The spike in funds raised during the 2004-2008 timeframe will translate to a spike in exit requirements as these funds mature. For traditional media, depressed values set by purchasers, reflecting uncertainty and increased competition, should lead to further consolidation and restructuring of debt burdens. For newer media, IPO and M&A exits will be increasingly augmented by leveraged recaps as these businesses take on the recurring cash flow characteristics of traditional predecessors. Regardless of exit alternative, competition for liquidity events will increase due to the pent-up backlog of deals in private portfolios and the strategic reconfiguration of the established industry competitors.

Capital flows. Leverage and deficits across major economic segments will foster competition for capital allocations, even as economic performance continues to shape market trends. Liquidity added to the system – domestically and from abroad – will make its market presence felt, but will be systemically offset by fundamental pressures: unemployment and a general movement to reduce leverage. Consumption behavior in this environment will emphasize frugality and efficiency, which will directly impact media and its commercial applications. Investing will increasingly seek out current returns, adding to the profit requirements of ventures. Durations may tighten as early-return or quick-exit potential is increasingly sought. This will evolve into an increased debt-finance market for select platforms.

Hyper-focus. Trends described will cause investment and strategic decision-making to be marked by sharpened focus and long-term planning. Despite substantial corporate cash balances, the pattern of small but hyper-specialized strategic acquisitions will continue, augmented by occasional consolidation plays as suited. For financial investors, attention to future exit parameters and pitfalls that could jeopardize returns will be acute.

Geographical convergence. There are defining hubs in media, based on regional evolution, histories and cultural characteristics. These will remain and possibly grow. San Francisco is the primary center of technology innovation. Los Angeles is the primary center for entertainment production. New York is the national capital of commerce and finance, with an increasingly vibrant entrepreneurial community. New York’s growing presence in the sector is beginning to manifest itself well beyond the confines of Madison Avenue and Broadway. In addition to the international media titans headquartered here, the west coast firms are moving in, and will continue to. Themes such as transactional media and financial structuring are New York themes.

Flexible specialization. In the environment described, investors and bankers will require universal models that combine versatility with deep industry understanding. In an era characterized by transition, execution discipline, and economic risks, the optimal finance approach will more than ever necessitate a wide capital markets perspective, transactional flexibility, and a sector view that incorporates (without insularity) the full experience of two decades in media.

And on that note, we move ahead from past to future. Happy holidays, road warriors, do not take your eyes off the road. 

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.