Thursday, July 10, 2008
Media Survival: Avoid Obsolescence
by Diane Mermigas
Obsolescence is a word that sends chills down the spines of most corporate executives. It also is something we are going to see more of as sweeping changes in digital technology, fuel prices and financial fundamentals disrupt and displace the norms.
This trend is starkly evident at U.S. automakers struggling with car sales at a 10-year lows, and most particularly General Motors, whose stock is trading at 50-year lows. At the core of these troubling trends is a dramatic, swift shift in consumer demand caused by the oil crisis. Detroit automakers are still selling the SUVs and minivans that consumers wanted when gasoline was selling at $2.50 a gallon, but have quickly shunned at $4-plus per gallon.
The knee-jerk response of production plant closings, massive layoffs and other cost reductions do not get to the heart of the problem. GM and other U.S. automakers must unload their existing inventories of gas-guzzling vehicles and completely revamp their operations and infrastructure to accommodate demand for new products. Liquidity is a big issue, as is the ability to revise existing cost structures and union contracts without resorting to bankruptcy. Since none of this can be accomplished overnight, there is going to be transitional pain. They simply cannot shift gears fast enough. For proof, look no further than the financial and logistic nightmare haunting domestic airlines.
Media companies - in particular, broadcasters, cable operators and content creators - must take heed, too. They could be confronted by a similar obsolescence that renders their assets and operations with shrinking value and flexibility. The marketplace's pervasive digital conversion is well ahead of where most traditional media players need to be. There are many instances where their products, services and business models are no longer what technology-empowered consumers want. These companies' public values, balance sheet stability and cash reserves are in decline.
They can't generate new digital revenues fast enough to offset the decline in traditional revenues due to an inability to reform their inefficient legacy structures. They also are limited in their ability to raise capital. Media companies of all stripes have seen their valuations tumble, not just because of the overall stock market malaise. Their revenue and earnings forecasts are being thrown off by massive shifts in content distribution, services and the general flow of money. It is challenging to value new interactive connections between target consumers with the most relevant advertisers and content, much less redefine the value of entire companies.
The parallels to the auto industry are disturbing. GM's market cap has fallen to $6 billion, compared with foreign-based Toyota at $147 billion. CBS is treading a $13 billion market cap compared with Google's low-end $169 billion valuation. New business models, methods and markets are both creating and destroying value.
The media sector where this is most painfully evident is newspapers, which are sustaining record double-digit declines in annual advertising revenues and even some operating margins. The entertainment and broadcasting sectors collectively are down 25% from the first half of 2007, based on soft advertising trends in a worsening economic environment and local markets "more exposed to recessionary trends and lower digital penetration," according to Lehman Brothers analyst Vijay Jayant. All media and telecom (67 stocks in 14 subsectors) were collectively down -15.5% from a year earlier, underperforming the S&P 500 (down 12.8%) the first half of 2008.
However, there will be even more dramatic structural and fiscal fallout evident for some broadcasters when there is no election or Olympic year ad spending in 2009. Local TV broadcasters will be confronted by what veteran analyst and consultant Tom Wolzien has described as the $16 billion challenge, or the growing gap between their primary channel and total revenue goals based on mining digital opportunities.
Wolzien made the point during a TVB presentation that local broadcasters - like their affiliated broadcast networks - will need to do more than shift some of their TV programming and ads online. He made the point using 2006 newspaper statistics. Although newspapers collectively sold $2.7 billion in Web advertising, up 31%, overall newspaper industry growth based on all revenues sources was flat.
In other words, for the beleaguered newspaper industry to post even just 5% returns, it needed for its online sales to rise an estimated 161%. Not all revenues are made equal, especially when priced differently and held up against legacy operating expenses that can only be permanently reduced through a complete embrace of e-publishing models - akin to GM shifting from SUV to hybrid car manufacturing.
On the broadcast front, Borrell Associates estimates that local TV station Web revenues will grow 48% this year to top $1 billion, and grow to an estimated $1.4 billion in 2009. However, analysts point out that online revenues still represent 5% or less of TV stations' overall revenues and generally will not completely offset lost or declining revenues especially in non-election years. The only way to secure more significant, permanent growing new revenues and profits is to structurally alter the local TV broadcast business. It is a tactical overhaul that TV broadcasters - like car manufacturers - must squarely confront and execute to achieve lasting change and a path to survival.