Posts Tagged ‘Finance’

The Next Great Media War

Posted: January 6, 2009 in Uncategorized
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Who will win the battle between content providers like Viacom and distributors like Time Warner Cable? Viewers, of course.

The New Year’s Eve drama between Time Warner Cable and Viacom was the opening salvo in what promises to be a long and brutal battle for the future of our major media companies. It’s media’s version of the Hatfields and McCoys: Content vs. Distribution. Who should make more money?

At stake is how content creators will be compensated and control over the relationship with the consumer of that content. How this plays out could have a major impact on which companies own the future of media.

Based on last week’s dramatic showdown, we’re seeing the beginning of the shift of power from the companies that deliver content (broadcast networks, cable systems, satellite systems, etc.) to the companies that create and own it.

Large media companies will be watching as customers change their consumption habits, advertising revenues drop, and creative talent goes in a hundred directions.

This is all your fault of course. You, the consumer, empowered by all kinds of new technologies–from iPods and iPhones to Hulu and Slingbox–have begun to expect that you can view video programming whenever, wherever, and however you want to. And naturally, you want to be the judge of what content is good and how much you’re willing to pay for it.

This is what the Internet does. It eliminates middlemen. If you live in California and you want to buy a sweater from a boutique in New York, you go their website and buy it. Forget having to find the one store in your state that might carry that sweater, or poring over catalogues hoping to find it. Those days are gone. And at some point, many of those businesses in the middle may be gone, too.

That’s what is beginning to happen to content—the middleman is disappearing. But the fact that all video will be available on the Internet doesn’t mean everyone will see everything. In fact, it could mean that it will be even harder for programming to distinguish itself or even get the chance to be seen by large audiences. There just isn’t enough time for you to check out everything on the web, meaning companies that know how to package and market video content for you will still exist. And it will still be more efficient to deliver some programming, like live sports and mass market programming, down one-way delivery systems like cable and satellite. So networks and cable systems will exist and control some of what we see.

But as the business models for the new digital platforms – Internet, satellite, telephone–evolve, they will create opportunities for new forms of advertising or methods for consumers to pay directly for content (iTunes, etc.). In the end, the power of the good content providers should continue to grow in this equation.

That’s a huge change. Historically, the distribution platforms have played the dominant role in controlling what programming you would see on your TV. First the broadcast networks dominated because so few were licensed. Then the cable systems grew in power because once you became a cable customer, then everything you viewed on your TV came through that pipeline.

But if that cable system didn’t want to carry your programming, they didn’t have to. As they grew and picked up significant percentages of the viewers in a particular market, their leverage with the programmers grew. What cable and satellite systems carry isn’t only based on audience acceptance. It’s about their business. If one content player demanded more money from the cable company than another, it didn’t always get to you. Try to find the NFL Network on your cable system.

Still, we assume that most systems wanted to keep their price as attractive as possible so they aren’t thrilled with anything that raises the price to their consumers, especially if they don’t get that extra money.

With the advent of first satellite TV and now the Internet, the power is beginning to shift. Suddenly the cable system isn’t the only way you can get robust digital programming into your home. You can install a satellite dish from one of two major players – DirecTV and the Dish Network – and they will bring you hundreds of channels. And, in a growing number of markets you can get a competitive digital television service from your phone company – particularly Verizon and AT&T.

Of course, now much of today’s programming is also showing up online, where it can be viewed in several places by someone with no TV hookup at all. There are a growing number of people pulling the plug on either satellite or cable and getting all their TV programming from the web.

That brings us to last week’s face off.

Viacom threatened to pull its 19 cable TV networks—including Nickelodeon, Comedy Central, and MTV—off Time Warner Cable systems, serving 13.3 million people around the country, at midnight on New Year’s Eve if Time Warner didn’t agree to increase its payments to Viacom by between 22 percent and 36 percent per channel according

Viacom is king of the content side, with roughly 25 percent of all cable viewers watching their networks during the day. On the other hand, ratings of the Viacom channels on Time Warner Cable are down—fewer people are watching those (and many other) channels than last year. So if the content you are producing is less relevant, why should you get more?

Meanwhile, Time Warner Cable’s parent company, Time Warner, is the second largest provider of content, with 16 percent of all viewing on cable on their various networks (CNN, HBO etc). So it’s on both sides of this issue, and on the programming side it’s Viacom’s major competitor.

Viacom already received about $300 million from Time Warner Cable, according to BernsteinResearch, but that’s only about 2.8 percent of TWC’s overall video revenue. And since they are providing a quarter of what is actually being viewed on that cable system, Viacom wanted a bigger slice.

Truth be told, Viacom had a lot less to lose than in the past because it now has new ways to get its programming to its audience via the Internet, satellite and through the phone companies.

So it wasn’t a surprise when the details of the deal started to trickle out. According to “An executive with knowledge of the negotiation said that Time Warner had given in and agreed to pay a higher fee to MTV Networks.”

And according to the Wall Street Journal’s reporting, the major concession Time Warner Cable got from the new deal related entirely to its attempt to tap into the new digital revenue streams. It will be allowed to put some Viacom programs up earlier on TWC’s own video-on-demand service.

But both are merely incremental moves on the seismic shift that is violently shaking up the media world today. The changes coming are so dramatic and widespread they will be hard to keep up with, both for businesses and consumers.

Just as you will struggle over which new devices to buy and use—iPhone or BlackBerry Storm?—media companies will struggle with how to create and pay for content in a world changing so quickly that no one knows how to get it paid for.

At the same time the large media companies will be watching as customers change their consumption habits, advertising revenues drop, and creative talent goes in a hundred directions.

If this was football, it would be like changing the field, the ball, the number of players and the rules at the same time. Maybe we could even throw in a BCS Playoff system to decide who wins.

More Bad News For Tribune

Posted: December 11, 2008 in Uncategorized
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UPDATE: Tribune filed for bankruptcy Monday, Dec. 8

They all knew better, or at least should have.

When several private equity firms were looking at the Tribune Company early in 2007, they came to the same conclusion. Even though they would be taking over some of the biggest and most influential newspapers in the United States, including the Los Angeles Times, the Baltimore Sun, the Chicago Tribune, Newsday and several TV stations—the media industry was foundering and the acquisition would collapse under the pressure of the debt that would have to be taken on to buy it.

But billionaire Sam Zell was just a bigger gambler than they were. And why not? He had bet on real estate for decades and been breathtakingly successful. With this deal he even found a way to use the Tribune Company’s employee pension and stock ownership plans to finance the billions needed for the acquisition. By risking only $315 million of his own money he would still get controlling interest of a company valued at $8.2 billion. Zell also took ownership of the Chicago Cubs in the package, which he said he would sell off to insure he had enough money to pay off the debt.

But now it appears – according to reports Sunday night in the online editions of the New York Times and Wall Street Journal — that the company has hired bankruptcy advisors to map out the next steps. It looks as if Tribune can’t maintain certain covenants that were placed on it when the company borrowed nearly $12 billion to buy the business from the previous shareholders. Essentially that means the company isn’t earning enough money (before interest, depreciation and amortization) to justify the size of the loans it has.

The biggest surprise to everyone involved is that it only took a year for this deal to crash and burn. During that year there have been massive layoffs throughout the company, Newsday was sold to Cablevision, and still the losses grew. In November, Tribune declared a third quarter loss of $124 million, vs. a profit of $85 million a year earlier. Even the sale of the Cubs has become problematic with the drop in the economy.

Many of you are familiar with this problem. It’s not all that different than having a home loan that is larger than your income would suggest you should have. It means you earn less money than it takes to make your monthly housing payment. How did that work out for all of you?

To be sure, when the potty-mouthed Zell came along there weren’t a lot of alternatives for the Tribune Company, which had given up the fight itself. They lost control of the management process and were firing editors and publishers at their marquee newspapers regularly because they couldn’t get them to support whatever corporate plans were presented in order to survive an industry downturn.

Since 2000, when Tribune went out and bought Times-Mirror Corporation and its stable of large newspapers (The Times, Sun and Newsday all came with that acquisition), it appears they were never able to absorb that acquisition and make it work. They didn’t use their new size to do what had to be done in the news business: Retrench and begin to develop new markets for their content.

But even Zell, the eternal optimist, didn’t anticipate how quickly the media industry would fall into deep trouble. In November, the company announced that total revenue for dropped 10% in the third quarter, to $1 billion, from a year earlier, while advertising was down a stunning 19%, to $584 million.

Around the country, once towering regional businesses, large metropolitan dailies like the San Francisco Examiner and the Boston Globe are losing huge amounts of money for their respective controlling companies, The Hearst Corporation and The New York Times Company. And the private companies that borrowed money to buy newspapers are all struggling. The local company that bought the Philadelphia Inquirer and Daily News, as well as the one that bought the Star Tribune in Minneapolis have recently suspended their debt payments, but neither has filed for bankruptcy.

So what happened?

The problem is that the media industry hasn’t paid enough attention to its customers. As the public continues to get more news, information, and even entertainment when they want to, as opposed to when news and entertainment companies want to give it to them, the industry didn’t moved quickly enough to react to that trend.

Meanwhile, newspapers, broadcasters and the advertising industry all under-invested in digital platforms. So while there were new messages every day – the growth of Craigslist, the dramatic uptick in digital video recording (and fast forwarding through commercials), the rapid growth of Google’s advertising platform—the media industry didn’t look outside the box for answers. By and large they kept doing everything they could to protect the huge profit margins they built when they controlled most of the distribution of their products.

To be sure, they are all trying to catch up now, but they still don’t know how to do it without jeopardizing their existing revenue streams, which while shrinking, are still quite large. The media industry needs to move quickly and learn how to create and deliver content across all platforms—and get paid for it.

The good news is that there is still great demand for news and entertainment content. And today’s generation is absorbing more content through more forms of media than ever before. Unfortunately, when it comes to developing creative, industry-changing ideas, many of our mainstream media companies already seem bankrupt.

RELATED: Kill the Media Zombies by Tina Brown

Larry Kramer, the founder of CBS’, spent 20 years in the newspaper business as a reporter and editor at The Washington Post and San Francisco Examiner.