Future of Old Media Conglomerates

Lately, we’ve been having this conversation often: Have you noticed how CNN sticks in an ad every 3 minutes? Boy, television is getting unwatchable, but for a reason: old media is imploding at a fantastic pace right now. The cost of producing quality content is still high, especially the kind of content that CNN and a handful of others produce. Yet, advertising dollars are scarce during this recession, with car companies going into bankruptcy, and retailers struggling. Ad rates are dropping. Ad frequency is going up. And the poor consumers are squinting their eyes trying to extract the few droppings of real content out of the idiot box that is getting more idiotic by the day! Is this sustainable?

Let’s start by looking at some numbers.

CNN’s parent Time Warner’s Q1 revenues of $6.9 billion were higher than the market’s expectations of $6.7 billion, even though they slipped by 7% from $7.47 million earned a year ago. EPS of $0.45 was also significantly higher than the street’s expectations of $0.39.

Their publishing and AOL divisions witnessed a drop of 23% each to $0.81 and $0.87 billion respectively. While publishing revenue declines were led by a 30% fall in ad sales, AOL’s revenue drop was driven by 20% reduction in ad sales and 27% reduction in subscription sales. Filmed entertainment revenues fell 7% to $2.6 billion while the networks divisions’ revenues grew by 6% to $2.8 billion.

Time Warner is looking at four focus areas in the years to come. First, leverage their brands and the operating scale to make the best content. Second, make operations as efficient as possible through cost savings initiatives, and productivity improvement across the company. Third, expand their global presence. And finally, develop business models that adapt to changes in technology and consumer usage.

To cater to geographical expansion, they announced an investment and a partnership with CME, in Central and Eastern Europe. Besides having identified a strong market for CNN in the international English language news for both TV and online space, they have also identified countries such as India and Brazil where they are looking at expansion in the local languages. Recently they launched a general entertainment network, RealNetworks, in India.

Time Warner’s brands have been their real strength. According to Nielsen, CNN is the most integrated brand on TV with the largest audience of television and online users of any network. Of late, they are talking of development of HBO Go which will be an online extension of the HBO service where users will have access to over 650 hours of programming through a simple authentication process. This is part of their TV Everywhere initiative which will focus on letting users subscribe to a TV channel at home and watch it for free on broadband from any provider wherever they want.

Meanwhile, Time Warner finally seems to be moving toward a pure content player model and after having completed the spin off of their cable division are now evaluating AOL’s synergy with the group. In the recently announced results, they also hinted of the future of Time, Inc. taking me back to what I had proposed nearly a year ago: spin out AOL and Time, Inc. and combine them to make them a vertically organized digital media play centered on online advertising.

Part of the problem Time Warner and its peers are facing is that their content production cost structures are incredibly high, while monetization rates are drastically falling. While CNN’s calibre of content is hard to produce for random small players without the necessary deep pocket, and therefore, it may be able to sustain itself as an independent business, when you mix them with AOL and Time, Inc. you get a mix of businesses that have completely different business model, cost and monetization issues.

Time Warner’s stock is currently trading at $21.83 after having announced a reverse split of 1-for-3. Its market capitalization is currently at $26.1 billion.

Q1 results for IAC were not very impressive either. Their revenue fell nearly 10% to $332 million and managed to beat the market’s expectations of $330 million. They made a loss of $0.02 per share against the analyst’s expectations of a profit of $0.01 per share.

Segment wise, Media & Advertising revenues of $167.6 million were the worst hit with a decline of 22% over the year. Match.com’s revenues of $90.1 million recorded a slight 1% fall primarily led by a 15% fall in the exchange rates resulting in declining revenue per subscriber in the international markets. Service Magic and Emerging Businesses grew by 8% and 1% to $31.4 and $44.0 million respectively.

IACI is following three focus areas. First, Search which is led by their Ask Network which was ranked a dismal 6th in the US web properties. They also launched an iPhone application of their Dictionary.com service which is on the top 10 most downloaded applications for iPhones.

Their second area of focus is the local business and they continued their inorganic method of expansion through the recent acquisition of Urbanspoon. Urbanspoon is an online restaurant guide which offers a free application for the iPhone. They also acquired Market Hardware, a provider of online marketing solutions for SMBs during the quarter.

Finally, they are focusing on Personals where they saw Worldwide subscriber base grow by 6% in the quarter with significant growth in the U.S, U.K and Japan. They announced an agreement to sell Match Europe for shares of Meetic and also seem to be eyeing Yahoo!’s Personals.

During the quarter they repurchased 3 million shares at an average price of $15.15 per share.

The stock is trading at $16.02 with a market capitalization of just over $2.2 billion.

Viacom’s (VIA) right moves were no match for the current economic conditions. Revenues fell 7% to $2.91 billion but were marginally shy of the market’s expectations of $2.97 billion. Revenues had a 4% impact on account of foreign exchange depreciation against the US Dollar. EPS fell 31% to $0.29 from $0.42 earned a year ago while beating the street’s expectations of $0.26. This is despite the significant cost cutting measures adopted by the company last quarter.

Segment wise, Media networks’ revenues fell 8% while Ancillary revenues reported a steep fall of nearly 37% over the year. They ancillary revenues fell on account of the slow down in the sales of the Rock Band video game. The Filmed division brought in $1.1 billion revenues and recorded a fall of 5% over the year which was primarily led by the worsening economic conditions impacting the retail segment.

Viacom had been outperforming their peers in the last quarters. However, this quarter was significantly bad. While Time Warner reported domestic ad declines of nearly 2%, Viacom talked about a 9% fall in the domestic ad revenues.

Viacom, however, feels that the worse is almost over and are hoping to see a recovery by the end of the year and are hopeful of using the current conditions to gather more market share.

They were optimistic about the future given that they witnessed “advertising markets stabilize” over the past few weeks. It seems that customers are not shying from the ad spend that they had committed for the Q2 and while the volume has not picked up, pricing has not declined either.

The stock meanwhile is trading at $20.66 taking its market capitalization of $1.2 billion.

In general, these businesses are becoming very difficult to analyze because they are so diverse, and organized in a way that is impossible to understand exactly what is going on. Conglomerates, in any case, have to account for discounts because of this lack of transparency and clarity. But beyond that, I feel that these businesses do such a poor job of explaining how their audiences are segmented, and how they monetize them – it becomes impossible even for the closest observers to reflect what’s going on with any degree of accuracy.

There is a simple fact that everyone seems to be missing: brands care about audiences. Ad rates are audience driven. When I look at a company like Time Warner, or IAC, or Viacom, as long as they’re operating on an advertising revenue basis, I’d like to see (a) what are the audience segments (b) what brands are advertising to those audiences (c) what ad rates are they paying.

And that brings us back to the point I have been harping on for years: verticalization. Old Media conglomerates, it seems, still don’t get that they need to organize by verticals, and report their results by verticals.

Instead, we have a messy blob of ‘stuff’ that most analysts cannot make head or tail of. And I am one of them!