Internet October 2009

The Moguls’ New Clothes

Media executives lament what the Web has done to their business. But that complaint conveniently ignores the dismal financial performance of most media conglomerates in the pre-digital era. Until media companies are willing to get back to basics and jettison the flawed thinking that has guided them over the past two decades, they will continue to disappoint their shareholders.
Myth No. 4: The Cult of Convergence

As the media industry emerged from the devastating recession of the early 1990s, it latched on to a new concept that represented a ray of hope. Most of the largest sectors were quite mature; others showed signs of maturation creeping into their previously relentless growth trajectory. The opportunity on the horizon for each of these very different businesses came in the form of a digital revolution that would break down the walls between distinct and unrelated business lines. New growth would come from getting into businesses that had been beyond their reach.

In 1992, a group of analysts from Goldman Sachs produced a hugely influential report that introduced a new term into the media vernacular: Communacopia. Goldman Sachs successfully leveraged this newly established “brand” into an annual conference trumpeting the supposed benefits to investors of these revolutionary changes. When the Internet boom came, the Goldman analysts looked even more prophetic.

Many of the Goldman analysts’ predictions were largely correct. But, as the subtitle of the original report, A Digital Communication Bounty, suggests, they missed, or at least did not wish to highlight, the fundamental economic implication of these observations. Sure, the report acknowledged, as in every revolution, there will be winners and losers. But in this case, their view was that the former would dwarf the latter. Music companies, production studios, and any owner of copyright, according to Communacopia, would be big winners: “The litany of potential new business opportunities is practically endless.” Even a seemingly obvious loser like Blockbuster, according to the authors, shouldn’t be overly concerned about the negative impact of communacopia. In their view, “the beauty” of the emerging products and business models was that they would not cannibalize Blockbuster’s core franchise but instead offer “enough distinguishing features to allow [them] to be largely incremental to the videocassette industry.”

Whenever someone suggests to you that breaking down barriers to entry is good news, hold tight to your wallet. A decrease in barriers inevitably means more competition, and more competition means less-lucrative businesses. The introduction of the Internet has only accelerated this trend of value destruction among incumbent media players, without creating many profitable newcomers.

The Internet strikes at the very heart of the core competitive advantages historically enjoyed by traditional media companies—economies of scale and captive customers. First, it radically reduces the fixed-cost nut required to engage in all manner of activities. And it all but eliminates the actual or psychological cost that impedes a user from trying an alternative product or services.

Even as they blame the Internet for their travails, the largest media companies, like moths to a flame, continually reach out to it as their imagined salvation. Time Warner, Sony, News Corporation, Viacom, CBS, NBC Universal, and Disney together have completed more than 100 digital-business deals since the Internet bubble burst in 2000. These have ranged from early-stage investments to major strategic acquisitions, and have represented almost every business model, subject area, and geographic region. Most have been misguided or overpriced, and many have been both. And regardless of their individual merits, the relentless process of identifying and adding and integrating these businesses has distracted leaders from the crucial task of just running their existing assets, which face genuinely unprecedented challenges.

Without drastic action, the performance of media enterprises during the next 10 years is unlikely to improve—and is likely to get much worse. The drastic action required here entails jettisoning all four entrenched media myths and going back to basics: understanding the key characteristics of various media segments and applying established business principles to determine the best way forward. Although such an approach is hardly revolutionary on its face, the stark contrast between it and the conventional wisdom suggests how much work needs to be done.

In the media industry, senior executives seem to prefer “strategic visionary” to “first-rate operator” as an appellation. There is nothing wrong with searching for ways to reinforce competitive advantages under threat. But once the barriers have fallen, managers are left with the most unglamorous of activities—improving the efficiency of their operations. In the absence of investments likely to generate superior returns, an executive committed to shareholder value would not diversify for the sake of diversifying or reinvest in a clearly dissipating franchise, but simply return the money to investors. Empire-builders may find that course distasteful, but over the past two decades, media investors would certainly have been far better off if this had been the road taken.

Jonathan A. Knee is an adjunct professor and the director of the Media Program at Columbia Business School. Bruce C. Greenwald is the Robert Heilbrunn Professor of Finance and Asset Management at Columbia Business School. Ava Seave is co-founder of the Quantum Media consulting firm. Reprinted by arrangement with Portfolio, a member of the Penguin Group (USA) Inc., from The Curse of the Mogul. Copyright Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave, 2009.
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