Media conglomerates (MediaVertInt3)
Tangled webs May 23rd 2002 From The Economist print edition
Massive, widely spread media groups are in disgrace. But their strategy can work—if spun in
the right way
SUMMER in Hollywood begins with the race for the season's blockbuster. This year there are two contenders: “Star Wars: Episode II—Attack of the Clones”, which took $80m in America on its opening
weekend; and “Spider-Man”, which sold a record-breaking $115m-worth of tickets in its first three days in America. As the action figures and lunch-boxes are swept from shop shelves in the inevitable Star Wars and Spider-Man crazes, this pair of films might look like typical products of the mighty marketing machines that lie at the heart of today's media conglomerates.
Yet, oddly, both were released by media groups that do not fit strictly inside the conglomerates' inner sanctum. Sony, whose Columbia TriStar made “Spider-Man”, may be a films-to-electronics giant, but it
lacks any of the American broadcast, cable or Internet distribution that are held to be critical to the promotion of content these days. “Attack of the Clones”, though distributed by 20th Century Fox, part of a
conglomerate, was made by LucasFilm, an independent studio.
These successes from outside the core media conglomerates come at a time of revived scepticism about the very notion of such integrated groups. A couple of recent headlines sum up the mood: “Big Media
Mergers Raise Big Doubts: Is „Synergy' Achievable—or Even Desirable?” (the Washington Post); and “The
Big Fix: Suddenly, the turn-of-the-millennium lust for media-world consolidation seems absurd” (New York
Part of the disillusion reflects gloom over the groups' share prices. The markets have battered the media giants, taking aim particularly at AOL Time Warner and Vivendi Universal (see chart). Each of these has had to make vast write-downs of assets bought at inflated prices at the height of the media and Internet bubble. Shareholders who turned up to last week's AOL Time Warner annual meeting—at which Jerry
Levin, the man who engineered the merger of Time Warner with AOL in January 2000, handed over to Richard Parsons—were livid. “We were conned,” fumed one. Investors in Vivendi have given its boss,
Jean-Marie Messier, an even harder time. Its American shareholders mutter darkly about whether he has a future in his current job.
Another part of this growing clamour is to do with inflated
expectations about the potential of these groups. The disillusion is
embodied by AOL Time Warner. Two years ago, when AOL cleverly
took advantage of its extravagant share price to combine with Time
Warner, Mr Levin proclaimed “a new paradigm” in media. It was not
just the addition of a small new-media distribution channel to a vast
group of old-media assets, but a fusion of equals to bring about a
redefinition of media itself. Today, the contribution of AOL to the
group is put somewhat differently. In Mr Parsons's first speech as
the group's new boss, he identified his first priority: revitalising and
turning round the troubled AOL.
Mixed in with the current blaze of short-term negative publicity
about media conglomerates is a more general questioning of their
longer-term purpose. There is a sense that the concept of an
integrated media group, rather than just the price paid to build one up, is no longer right. Some industry observers have begun to
wonder whether groups such as Vivendi, so painstakingly and expensively pieced together, would not be better off broken up. This week Libération, a French newspaper, reported that some of Vivendi's French board members were considering promoting just such a plan.
Yet it is essential to distinguish between the broad idea of putting content and distribution together, and the specific way in which some of the troubled media giants have done it. Of the six big groups—AOL Time
Warner, Vivendi, Viacom, News Corporation, Disney and Bertelsmann—and the one hybrid—Sony—the
first two have been the most criticised. They are also the pair that embraced new media most enthusiastically. Overestimating the transforming force of new distribution platforms has been the source of much disillusionment.
AOL Time Warner's folly was to have both overhyped and underdelivered. As Mr Parsons put it last week: “We've learned the lesson of overpromising.” Adding the distribution outlet of AOL to the entertainment businesses—Warner Brothers film and television, Warner Music, Home Box Office's television series and films, Time Inc magazines—was not in itself foolish. AOL, after all, has 34m subscribers whose eyes tend to fall on whatever content is parked on the service provider's home page.
What was foolish, however, was to make such heroic claims for it. AOL was supposed to inject new-media dynamism into what were seen as frumpy old businesses, such as TV shows or music. With revenues in 2001 of $8.7 billion, just 23% of the group's total, AOL has turned out instead to be just another distribution channel: handy to have, certainly, but not in itself revolutionary.
This is not to say that AOL delivers no promotional punch. When Warner Brothers released the first “Harry Potter” film last year, it was an instant success, helping to propel the studio to the top of the Hollywood league table. At the time, AOL ran promotions and competitions on its websites, designed to supply tantalising extras to AOL “members”. The same will happen next month, when Warner Brothers releases
“Scooby-Doo”, a part-computer-animated film based on a classic animated TV series.
Just as with “Spider-Man” and the latest “Star Wars” movie, however, these films were “pre-sold”:
everybody knew about them before they were made, let alone released. A better test of what AOL can really bring to the party is whether it can lift a mediocre piece of content. “Cats & Dogs”, for instance, a
forgettable part-animated children's film that Warner Brothers released last year, might have sunk into obscurity had AOL not picked it up and, as Bob Pittman, the group's chief operating officer, puts it, “turned the firehose” on it. AOL stuck images and news about the film on its welcome screen and devised competitions and games around it. The movie made a respectable $93m at the American box office.
Nowadays the heads of all the various bits of AOL Time Warner meet every fortnight to discuss ways of co-operating, and a helping hand from a sister division is more readily secured. Such extra promotion is not a bad outcome of the merger. But it is a far cry from the dazzling force for innovation and transformation that was once promised.
A similar case of heroic futurology afflicted Vivendi's Mr Messier. Parts of the conglomerate that he built up—in publishing, films, music and pay-TV—fit nicely into the traditional model. But what captured Mr
Messier's imagination was the idea of combining his first-class entertainment businesses with his European-based interactive television, mobile-telephone and Internet portal operations, to provide a dizzying new multi-media experience. A track from Eminem or Shania Twain, say, released on a group record label, would be zapped to a mobile telephone; a clip from the group's latest Universal movie downloaded to a handheld device.
One day, some of this might actually happen. But for now Mr Messier has gathered an incomplete set of assets. Not only is it entirely unclear what the group's sewage-treatment and utilities businesses deliver to the mix; but the new-media distribution channels have also yet to prove their usefulness. It has been hard enough to persuade users to pay for music online, let alone via a portable wireless device.
For all these shortcomings, the troubles with new media at AOL Time Warner and Vivendi do not by themselves undermine the case for media conglomeration. This is because, if unleashed appropriately, two potent forces apply particularly strongly to the media industry: economies of scale and vertical
The force is with you
The first force works with media because, unlike toothpaste or cornflakes, there is little extra cost in distributing a piece of content to 10m viewers or to 5m. As Christopher Dixon of UBS Warburg, an investment bank, argues: “The media business is all about the ability to spread the cost of content across as broad a distribution network as possible.” Once the cost of making a TV show has been recovered, the
revenue gleaned from anybody else who can be persuaded to watch it flows straight to the bottom line.
That is why American broadcast networks have been so keen to create or to acquire sister cable channels on which they can repackage their content. Such channels helped News Corporation, for instance, to draw bigger audiences to “24”, a cleverly crafted drama series set in a counter-terrorism unit. Made by Fox
television and aired on the Fox network, the series is repeated throughout the week on FX, Fox's cable
channel. The principle also applies internationally. MTV, for instance, owned by Viacom, has already attracted its best-ever American audiences to “The Osbournes”, an oddly compelling reality-TV show
depicting the baffling antics of a former heavy-metal singer and his family. MTV now plans to show the hit series on its channels around the world.
Moreover, scale helps a media group to afford the escalating cost of content. The more the industry is driven by the need to create hits and brands that stand out from the crowd, the more crucial it is to be able to afford the sort of content that will catch the eye, or lure the subscriber. The collapse of several small European pay-TV operators recently, partly under the cost of the rights to movies and sport, only underlines the disadvantages of being small.
The second force is the clout that comes from putting together content and distribution. If any company controls enough of both, it can promote its own content and control access to other people's. In the everyday negotiations that take place over the lunch tables of Beverly Hills or mid-town Manhattan, such leverage can crank up bargaining power. A network, for instance, might agree to buy a TV series for another year from a television production company, but only if that company's sister cable channel buys a couple of films from the network's sister Hollywood studio.
Without such power, independent content makers find it hard to get their stuff on air. Writers, for one, now have far fewer doors to knock on. Fully 70% of all spending on American screenwriting is done by six media giants. Solo entertainment groups fear exclusion. Sensing the danger, EMI, an independent British record company, has in recent years twice tried and failed—each time on competition grounds—to merge
with a record company belonging to one of the conglomerates. It is now losing market share. Part of Vivendi's trouble today is precisely that it lacks a decent distribution channel in America.
More than this, a vertically integrated company can, if cleverly managed, transform a creative business into an exercise in brand management. Disney pioneered the practice, turning animated films such as “The Lion King” and “Toy Story” into lucrative product lines pumped through various distribution channels.
When Warner Brothers releases “Scooby-Doo”, all the bits of the group will swing behind it: the Cartoon Network will run old episodes; new episodes will be shown on the WB network; and the soundtrack will be released under a Warner Music record label. Already, the entertainment division has been staging “live” Scooby shows.
Bertelsmann's boss, Thomas Middelhoff, has reorganised his company's structure precisely to capture these benefits. The group has a “chief creative officer”, whose job is to promote cross-fertilisation; it
awards “synergy” prizes each year; and it runs “universities” to help managers dream up ideas together.
One of its current successes is “Pop Idol”, a TV talent contest judged by viewers. Its format was devised by Fremantle Media, Bertelsmann's production house; the winner secures a recording contract with BMG, the group's record company; and the series is expected to be shown in Germany on Bertelsmann's broadcaster, RTL. After taking Britain by storm, the show is due to be seen in America this summer. “The
question no longer is whether co-operation among the divisions makes sense,” says Ewald Walgenbach,
Bertelsmann's chief operating officer, “but only how great the advantages from such co-operation can be.”
Not all in the family
There are nonetheless limits to the advantages of media conglomeration. Crudely, they fall into three categories. The first is that exclusive favouritism can be counter-productive. The supplier of good content wants to get it in front of the best audience available, which is not necessarily the one that happens to be accessible to the same media group.
Warner Brothers Television, for instance, shows “Friends”, its hit comedy series, on the mighty NBC (owned by General Electric), not on its own far smaller sister network, the WB. Even “Pop Idol”,
Bertelsmann's favourite synergy example, was shown in Britain not on Channel Five, a broadcast channel that the German giant controls, but on ITV, a rival channel that has far bigger audiences. Equally, a distributor cannot afford to supply only content made in-house. No user of AOL Music, for instance, an online music service, wants to be limited to music recorded only on Warner Music labels.
The second limit concerns businesses whose raw material is editorial opinion. In theory, magazines or newspapers sound like natural marketing outlets for content produced by a sister division. AOL Time Warner, for instance, owns Time Inc, whose titles include Entertainment Weekly and Teen People as well
as Time and Fortune. Yet the credibility of such magazines would be undermined were they seen as a promotional tool.
For this reason, Time Inc, under its exacting boss, Don Logan, jealously guards its editorial independence, as do publications belonging to Bertelsmann's Gruner + Jahr. Indeed, some of the fiercest editorial criticism can come from these groups' own publications. “The Mess at AOL Time Warner” was the title of a harsh look at its parent company that appeared in a recent issue of Fortune magazine.
The third constraint has to do with the nature of creativity and size. The big Hollywood studios and their sister TV production houses may have the budgets to afford the special-effects films or glossy, well-crafted series that European content-makers would die for. But there are drawbacks to scale too. Independent screenwriters argue that creativity has been stifled now that the broadcast networks have been swallowed up, with production houses, into giant conglomerates. “The vital marketplace of ideas is paralysed by a system of preferential treatment”, argued a recent report by the Writers Guild of America. Some media bosses are beginning to raise the same question. Peter Chernin, the president of News Corporation, put it forcefully earlier this year: “All the benefits of size, whether it's leverage, synergy or
scope, are fundamentally the enemies of creativity.”
Hollywood studios have tried to manage this by allowing autonomous boutiques to flourish within their conglomerate structure, designed to nurture a more creative, less formulaic, spirit. It is a pattern that has characterised creative industries throughout their short history as mass-entertainment media. The record industry has for years been built on this model: small independent labels (such as Island Records), which are better at spotting new artists, are bought by the big guys (in its case Polygram, now part of Universal), which then begin the search for small independents again. It can work in TV too: HBO is given freedom within AOL Time Warner, for instance, to create challenging new drama, such as “The Sopranos” and “Six Feet Under”.
This solution may sometimes work well. Indeed, some of the most ground-breaking drama now comes from television companies within conglomerates. It does not necessarily help spread the risk, however. In television, for instance, the broadcast networks used to share the cost of developing new shows with separately owned production houses. In a year when an increasing number of pilots have been developed in-house, the broadcast networks are not only relying more on the creativity of their sister studios, but are shouldering more of the financial risk. Most of the pilots now produced for Disney's ABC network, for instance, have been made in-house. So Disney is trying to turn round the fortunes of its lagging broadcast network, which has struggled since “Who Wants to Be a Millionaire?” fell in the ratings, largely at its own expense.
For all the constraints of operating within the media conglomerates, life in the entertainment industry remains extremely hard for those stuck forever on the outside. Over time, the media giants, as they have grown, have managed to renew their creative vigour by constantly hoovering up new, independent companies as they emerge—and trying to preserve their creative spirit thereafter. These days, any independent content-provider that does not somehow hook into this structure will struggle to be noticed. And what's the point of creative brilliance locked in a distributor's bottom drawer?
The hits that media conglomerates manufacture may not always qualify as great contributions to world culture. But in an entertainment business which is increasingly fed by such hits, the conglomerates will usually be best-placed both to create and to exploit them.
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