Tuesday 14 May 2002
Mergers and ‘Synergy’ in the Media Business
A story on the front page of today’s Washington Post discusses the merits of a number of recent mergers of large media companies. Headlined ‘Big Media Mergers Raise Big Doubts’, its tone is generally negative.
It points out that Viacom, Vivendi, and AOL Time Warner are all bleeding money following mergers that were meant to introduce a new golden age of ROI, and it suggests that, even if the elusive ‘synergy’ that was the alleged motivation for these mergers were attainable (which it doesn’t appear to be, at least for these players), that this might not be a good thing. Wall Street doesn’t know how to value large conglomerates, the story says.
However, the very anecdotes in the story don’t seem to support these conclusions, and the Post seems to miss the point entirely.
Well, there’s an example of synergy right there, albeit synergy of a negative and dubiously profitable kind.
The happiness and profitability of its affiliates are of some value to CBS; and presumably, the happiness of CBS affiliates is more important to Viacom than is the happiness of UPN affiliates (who have, after all, got less money invested in their businesses). By being able to shrink the market for “Amazing Race 2” reruns, Viacom can make more money by showing them on CBS stations, where the ad revenues are higher. This isn’t corporate squabbling; this is sound corporate decision-making, favoring a higher-profit activity instead of a lower-profit activity. ‘Squabbling’ would be if both UPN and CBS stations were showing the same stuff, with Viacom competing with itself with identical products for ad revenues. Instead of that, though, UPN has been directed to sacrifice some potential earnings so that the corporation as a whole can realize even greater revenue via the CBS channel.
If you want to see real corporate squabbling, on the other hand, you need look no further than AOL Time Warner. The Post article says:
Never mind that Parsons’ statement —‘We’re … the No. 1 online company’ — does not support the Post characterization of him saying that the AOL division is not performing well. That’s another topic entirely.
The problem is that he sees all of these as separate companies.
AOL Time Warner owns cable TV systems (Time Warner Cable), a cable-modem ISP (Roadrunner), an online service (AOL), a broadcast TV network of sorts (WB), software companies (Netscape, Winamp, others), an online music system (Spinner), NHL, NBA, and Major League Baseball teams, TV and movie production companies, record companies, book publishing houses, CNN, and scores of magazines and comic book titles. The company is almost absurdly well-equipped with ‘content’, and reasonably provided with mechanisms for delivery of that content to consumers.
Yet it refuses to combine the two. I suspect that the original intent of the merger — on the AOL side — was to acquire the incredibly vast range of information controlled by Time Warner, and to distribute it electronically. I further suspect that since the merger, Time Warner people have been in control (Parsons is a Time-Warner person, not an AOL person), and have refused to let this happen.
If AOLTW made its full range of content available over its online service, sales of DVDs, CDs, and HBO subscriptions would certainly fall. But nearly everyone in the country would subscribe to this new and improved AOL service, pumping money into the corporation’s bottom line every month. To a certain extent, this is possible today: to offer every cartoon in their archive for viewing, on demand, at any time, would be a piece of cake. Certain other activities, like streaming full-motion, full-length motion pictures, would probably require some sort of multicasting arrangement that would require a bit more thought.
But the point is that they don’t seem to be even moving toward any of this. On the one hand, AOLTW, with its Spinner service and its cable-modem systems, is one of the major enablers of music online today. On the other hand, with its participation in the RIAA’s war on online music, it’s one of the chief foes of the same thing. There is no corporate strategy; rather, there are turf wars between divisions likely to benefit from new distribution mechanisms and channels, and divisions whose distribution mechanisms have become obsolete and whose businesses would be harmed if the market were allowed to take advantage of new technologies and opportunities.
This, and not some immutable law of the media business, is why the expected synergies of these mergers have not been seen. These synergies will produce more corporate profits, but some individual units will suffer. Since the division honchos seem to be calling the shots, the media companies will not try anything that hurts an existing market, regardless of the upside.
The pinnacle of this idiotic reasoning by division-managers was seen recently in comments by Jamie Kellner, CEO of Turner Networks, a division of AOL Time Warner. (These comments are quoted in an article here, but it costs $2.95 to read the article. A critique of Kellner’s comments, with quotes, is available here for free.) The comment that got the most press was this:
Which is pretty idiotic in itself, and clearly illustrative of the fact that these people are out of ideas, and panicking. More illustrative of this, and of the fact that Kellner is an idiot and a loose cannon is this:
He’s talking about Sony v. Universal, which basically established that VCRs were legal for home use, over the objections of the movie industry. The studios maintained then, much as they and the RIAA do today, that this new technology would mean rampant piracy and the end of their entire industry.
The movie companies lost the case, and gained literally billions of dollars in additional revenue through sales and rental of videotaped movies.
And this man — who works for the largest movie company in the world — is talking about challenging that precedent. “We didn’t succeed in shooting ourselves in the foot in the 1970s, so we’re going to have another go at it,” he might have said.
No matter what you merge, no matter what strengths a company has, if you’ve got people with no brains at all and with an utter aversion to any risk running the show, you’re not going to see increased profits.