Business Success

Voices in and around the newspaper industry would have us believe the industry is falling apart and taking its last gaps. Investors are fleeing newspaper companies, publishers are decrying the lack of newspaper advertising growth, debt challenges are plaguing many companies, and there are layoffs and buyouts everywhere.

If one rationally looks at the industry, however, one sees that it is fundamentally sound, but that a unique, financially golden period in its history is ending. It is that change which is creating the bulk of the turmoil in the industry, but the biggest problem is that those working in the industry have short memories about the newspaper business and don't remember it any other way.

The generation leading newspapers and newspaper companies today has only experienced a period in which extraordinary growth of advertising increased newspaper revenue across the nation. That growth, combined with the development of local monopolies, created a period that enriched papers highly. This, of course, created great interest in investors and produced capital that allowed public companies to grow and acquire papers, driving up newspaper prices and the value of newspaper assets.

Today, the conditions that drove the growth of the past 3 decades are ending, wealth is being stripped from the industry, investors are losing interest, and publishers are struggling with negative and low growth.

Things are terrible, right? They are worse than every before, aren’t they?

Those views are only true if one takes a limited historical perspective and conceives the industry as a way to riches, something few newspaper owners did in generations past. With the exception of a few major cities, one could not get rich being a newspaper owner. Publishers nationwide could make a living in newspaper, but much of their reward came from being socially influential in the community. Before the extraordinary profitability of the last quarter of the 20th century, newspapers were relatively unprofitable and breaking even was the primary financial goal of most publishers.

Contemporary developments are taking us back toward that situation, but even with the u-turn in the business, we need to recognize that newspaper revenue today is better than it was in 1950s, 1960s, 1970s, 1980s, and 1990s. In fact, adjusted for inflation, newspapers in 2007 had two and a half times the advertising income that they had in 1950. In terms of employment, there are still twenty percent more journalists working in newspapers than in the highly profitable years that fueled the growth of corporate newspapering.

Those working in the newspaper industry need to be realistic and understand what the effects of contemporary changes mean. They don’t mean disaster, but they mean changes in the business of newspapers, the way the industry has operated for the past three decades, and how they need to perceive the industry.

The privatization of Clear Channel Communications ends a 2-year effort to buyout the leading radio and outdoor advertising firm. The $17.9 billion buyout by Bain Capital and Thomas H. Lee Partners allows the new owners the opportunity to pursue strategies with less influence from unpredictable investors pursuing short-term interests. The sale comes amid heavy competition in terrestrial and satellite radio, but provides the new owners more flexibility in deciding how to best operate the 900 radio stations, radio programming services, and subsidy that owns one million outdoor ad locations.

The sale is just one more in a growing trend for private equity purchases of media firms. Their interest in media companies stems from the fact that the market value of many does not reflect the underlying cash flows and asset values or the mid- to long-term prospects of the firms.

The valuation challenge of media occurs in good part because advertising expenditures are not evenly distributed throughout the year and because advertising revenue is significantly affected by fluctuations in the economy. These variations create significant disquiet among stock market investors because they make revenue, returns, and dividends less predictable in the short term.

These realities—combined with unproven beliefs of many investors that new media are displacing all mature media and making growth in their businesses impossible—reduce the valuation of media stocks and make media firms attractive to private equity firms that think about the businesses in terms other than quarterly performance.

Sometimes companies forget what businesses they are in and Comcast seems to be the latest media and communication company to do so.

The problem evidenced in the dispute between the FCC and Comcast over its traffic management policies blocking or slowing BitTorret and other files in violation of FCC network neutrality rules requiring open access. Without addressing whether regulators or Comcast are right in the dispute, it is clear from the company’s response that it has lost sight of it core business.

Comcast argues it was engaging in reasonable business practices by limiting the flow of BitTorrent files (often used to download large video, audio, and text files) because they push up the flow of traffic and slow the system. In Comcast’s view, the system and its integrity are its raison d’etre and represent the business it is in. It is easy to understand why the company and its executives might think so.

Comcast spends the majority of its effort and personnel creating and maintaining its system and infrastructure, tackling issues of system capacity and capabilities, and working to ensure system reliability and speed. It provides video, Internet, and voice services via 575,000 miles of wires serving 15 million cable subscribers, 13 million Internet users, and 4 million digital home providers. In the last three years Comcast has spent $13.6 billion in capital expenditures on the system.

Unfortunately, the extraordinary network it operates and maintains—the lines, switches, head-ins, Internet and telephone connections—are not the business of Comcast, they are just the requirements for conducting the business. Its real business is providing customers access to the video, audio, text, and voice communications they desire.

Its central purpose is serving the needs of the end users, including those who want to acquire capacity-eating BitTorrent files. It is the purpose that its executives seem to have forgotten when they decided their network management practices were more important than the wishes and desires of their customers. Their absent mindedness is not completely surprising, however, because the company has long had one of the poorest records of customer service among media firms. Lots of problems develop rapidly if you think it would be a good business if you just didn't have to deal with bothersome customers.

The announcement of the finalists for the 2008 Emmy drama nominations shows how weak major television networks have become and the feeble program strategies they are now employing. AMC’s “Mad Men” and FX’s “Damages” became the first series ever produced by basic tier cable channels to become finalists for best series and they were joined in the 6 nominee list by Showtime for “Dexter”.

The results were even worse for networks in the major acting categories: Only 1 of the five Emmy nominees for lead actor and 2 of the five for lead actress went to network programs.

Overall, 24 cable network programs received nominations and 7 cable channels received 10 or more nominations. HBO received 85 nominations—beating out all the broadcast networks, Showtime received 20 nominations, and AMC received 20 nominations.

Drama is a bellwether of the health of television programming and networks continue to fair poorly. It is a particularly important genre, socially and culturally, because it allows explorations of beliefs, attitudes, norms, aspirations, and fears better than other program types. However, success is unpredictable and good drama is expensive to produce. Historically it was the province of the well funded dominant networks, but that has now changed.

The decline of quality in network television programming is directly related to the increasing number of channels available in households. As the number of channels increases, the average number of viewers declines, producing declining advertising support, and thus reducing resources available for program investments. The responses of networks have been predictable. They offer more game shows and reality programs that are less expensive to produce, avoid productions that are edgy and innovative, and rerun programs as much as possible.

Network prime time filled with shows such as “I survived a Japanese Game Show”, “Wife Swap”, “Nashville Star,” and The Bachelorette” and the networks wonder why they have trouble capturing audiences and gaining financial resources. When they do provide drama it is all too often formulaic and a spin off from an already successful series. There are strong tendencies for network drama to have a criminal or legal practice oriented or take a prime time soap opera approach, such as “CSI”, “Law & Order”, “Desperate Housewives”, and “Grey’s Anatomy”.

The program challenge has been growing worse year after year since the development of cable television channels in the 1970s. I don’t want to be interpreted as saying the networks have produced no fine drama, but the amount has declined precipitously.

This raises the question of why cable channels are able to follow an opposite path, increasing their production of drama and gaining more acclaim for their work. The simple answer is money. Having additional sources of income other than advertising frees programs from the necessity of seeking audiences linked to interests of advertisers and from the content influence of advertisers. It allows producers, writers, and directors to employ greater creativity, to address controversial subjects, and to take the time to ensure quality in the production.

Subscriber-supported HBO has the longest and most distinguished record in producing original drama with highly rated and acclaimed series such as “The Sopranos”, “Angels in America”, “Six Feet Under”, “Deadwood”, “Band of Brothers”, and “Sex and the City”. HBO is premium channel financed by subscriptions from about one third of American households, a clear example that many viewers want and are willing to pay for innovative, quality programming.

In recent years there has also been significant growth of drama from cable channels receiving both subscriber and advertising revenue, thus giving us programming such as USA network’s “Monk” and TNT’s “The Closer”. Original television drama is now being produced by other channels, such as AMC, Lifetime, and Showtime, as well.

One of the side effects of the increased production of drama by cable channels is that they are now playing significant export roles and their programming is regularly appearing in prime time on national channels, especially public service channels, in Europe and elsewhere.

Network executives need to seriously reconsider their programming strategies, particularly where drama is concerned, or they risk become secondary channels in the years to come. Unless they find ways to develop and support quality drama, it will increasingly become the trophy programming of cable channels in the years to come.

Five decisive trends are driving changes in the media environment and forcing media companies to change their thinking and operations: media abundance, audience fragmentation and polarization, product portfolio development, the eroding strength of media companies, and a overall power shift in the communications process.

Abundance is seen in the dramatic rise in media types and units of media. The growth of media supply is far exceeding the growth of consumption in both temporal and monetary terms. The average number of pages in newspapers tripled in the twentieth century; the number of over-the-air television channels quadrupled since 1960s--supplemented by an average of about fifty-six cable channels in the average home; there are four times as many magazines available as in 1970s; 1.5 million new web pages are created daily, and created and stored knowledge (as measured by information scientists) is growing at a rate of 30 percent a year. We used to think of competition among newspapers or competition among television channels, but this media abundance has created competition not only among media but also competition between media and other leisure time activities such as sports, concerts, and socializing at cafes and bars.

The abundance has created fragmentation and polarization of the audience because people are spreading their media use across more channels, books, magazines, and websites. This produces extremes of use and nonuse among available channels and titles. In television, for example, there is a tendency for individuals to focus most use on three or four channels. Increasing channel availability does not create an equal amount of increased use. For example, if twenty channels are received in a household, the average viewed is five. When fifty channels are received, the average rises to twelve, and if one hundred channels are received, the average viewed by all members of the household is only sixteen. Advertisers understand this development and have responded by spreading their expenditures and paying less for smaller audiences. The audience-use changes mean that competition is no longer institutionally and structurally defined but is being defined by the time and money audiences/consumers spend with media, and the competitive focus is now on the attention economy and the experience economy.

The difficulties faced by individual units of media have led media companies to create and operate portfolios of media products. This response occurs because declining average return per unit makes owning a single media product problematic. The portfolios are efforts to reduce risk and obtain economies of scale and scope. These portfolios can increase return if they involve efficient operations and joint cost savings.

Despite the growth of portfolios and large media companies, the strength of the companies is eroding. Today no basic media content companies are in the top one hundred companies in the United States or in the top five hundred worldwide. Moreover, the reach of media companies is declining, even though they have grown bigger. Each has less of the viewers’, readers’, and listeners’ attention than in the past, and their difficult strategic position concerns many investors. As a result, media companies are struggling with their major investors, and all major media companies fear they may become takeover targets.

Underscoring all of this is a fundamental power shift in communications. The media space was previously controlled by media companies; today, however, consumers are gaining control of what has now become a demand rather than supply market. And media consumers are not merely content to be passive receivers any longer, many are now participating in production through the variety of forms of interactive and user generated content. This shift is apparent in the financing of contemporary initiatives in cable and satellite, TV and radio, audio and video downloading, digital television, and mobile media, which is based on a consumer payment model. Today, for every dollar spent on media worldwide by advertisers, consumers spend three. In the U.S., that ratio is 1 to 7.

Media companies worldwide are struggling to understand and adjust to wide-ranging external and internal changes that are altering modes of production, rapidly increasing competition, eroding their traditional audience and advertiser bases, altering established market dominance patterns, and changing the potential of the firms. The need for media managers to perceive, understand, and adjust to the new conditions increases daily because such changes can lead to failure of both existing and new products and, ultimately, lead to the loss of value or collapse of firms.