There was a thought-provoking commentary a while ago by Fred Wilson on his blog, in which it is suggested that traditional media companies should repurpose what Fred sees as their most valuable asset – their local sales forces – to outsource this strength to other companies. This makes a lot of sense, especially in view of what is most likely the case that the decline of traditional media advertising revenues is not the fault of an inadequate sales force but an inadequate product. In the meantime, those salespeople have undoubtedly established tremendous relationships in local markets, over decades of focused attention, which relationships are not easy or inexpensive to replicate.
But what if we were to take the argument even further? Each part of the traditional media asset portfolio, from spectrum to content creation to infrastructure, can be repurposed and directed towards its most economic use, which use will quite possibly be found outside of the original medium, and perhaps outside of media altogether. In fact, we don’t have to limit this discussion to traditional media, but can probably say the same thing about many new media companies. Take Yahoo!, for instance, which seems to have come to similar realizations and is already in the process of reconfiguring, shedding, repurposing, redirecting, and undertaking all sorts of other techniques that essentially amount to a deconstruction of its perennial web presence.
The debate about conglomeration versus “pure-play” equity value is an old one, and every generation goes through a cycle of M&A activity geared at building varied asset portfolios, followed by a wave of divestments designed to refocus the enterprise again on its strength. From a financial perspective, the argument is one of risk reduction through diversification at the company level, versus risk reduction through diversification at the shareholder level, assuming that it is more efficient for an individual stockholder to own a diversified portfolio than for a company to acquire diverse properties.
But in the media example at hand, this debate is taken to an even more intense level. The argument is not for the deconglomeration of diversified holdings, but rather the decomposition of pure plays. The case is made for the segmentation of such assets into individual components that may be more efficient in combination elsewhere. A broadcaster, to illustrate the point, is not a conglomerate that consists of broadcast spectrum, a signal tower, and a sales force, but these are indeed components that can repurposed, or multi-purposed, outside of the core broadcast operation. The same can be said about Yahoo!, which isn’t a conglomerate consisting of an email service, a news portal, and an advertising network, just to pick a few of the company’s components, but each of these components can be used in ways and combinations that might enhance the overall value of the enterprise.
Should such deconstruction ideas take root, then not only the media industry but the broader economy overall may prove to be a treasure of hidden assets and untapped potential. The equity market that many believe now to be overbought, may unlock enormous upside sooner than we realize.
Disclosure: No positions.