Why so many conglomerates are splitting up and slimming down
On Dec. 18, Federal Communications Commission Chairman Kevin Martin won FCC approval of a pet proposal that will lift, in certain cases, the laws barring companies from owning newspapers and TV stations in the same city. Cue an outcry from sundry politicians and activist groups hyperventilating over the horrors of further media consolidation. Cue, delightfully enough, grumblings from a newspaper trade group contending that the proposal doesn't go far enough.
But wait. What good—or, to address the doubters, what huge deal-related layoffs—ever arose from owning stations and newspapers in the same city?
For that matter, what good ever came from media conglomerates' endless pursuit of big? The companies themselves are answering that last one, because 2007 looks like the year the media conglomerate finally broke. Yes, there were a few big deals: News Corp. (NWS)-Dow Jones (DJ), Reuters (RTRSY)-Thomson (TOC), and the pending Sirius (SIRI)-XM (XMSR) merger. But the narrative overwhelmingly centered around companies slimming down or splitting up.
Belo (BLC) and Scripps (SSP) will cleave their companies in two. Clear Channel (CCH) is jettisoning its TV division and about a third of its radio stations. Barry Diller split up IAC (IACI). Time Warner (TWX) keeps making noise about spinning out its cable unit, and incoming CEO Jeffrey Bewkes is expected to pull out the ax. And recall that in '06, Sumner Redstone hacked CBS (CBS) off from Viacom (VIA).
Those moves, along with generally dismal long-term market performance, suggest that the thinking behind the groaning multimedia behemoth (the "synergy" argument, if you'll forgive the term) was fundamentally misbegotten. Everyone more or less knows that now. But it also shows the limits to what a company gains by buying tons of properties in one sector—the "scale," or cost-cutting and shared-resource argument. Eventually hugeness stops delivering. Consider Clear Channel's plans. Or how Time Inc. (TWX), the nation's largest magazine publisher, discarded 17 titles in '07.
Not all of this is traceable to the Web's radical remaking of media. "Within hit-driven businesses, there were never any meaningful economies of scale on the content-creation side," says Jonathan Knee, senior managing director at investment bank Evercore Partners. A music executive scopes and signs just so many bands a year, and a director makes one big movie only every so often. Those jobs can't be made twice as productive by smashing companies together and trimming staff.
And the limitations of synergy and scale have long been clear. Tribune Co. (TRB) bought Times Mirror in 2000 for more than $8 billion, banking in part on more robust national ad sales thanks to newspaper and TV "duopolies" in cities like Chicago and Los Angeles. That never happened. (Tribune's Los Angeles Times has had multiple layoffs owing to market conditions, not because KTLA staffers invaded the newsroom.) A past regime of Thomson aggregated more than 160 mostly small-market newspapers—and then soured on the business and exited.
News Corp. (NWS) is an unusual conglomerate whose stock has beaten the market indexes of late. But remember that both smart and preposterous deals built it—evidently one MySpace (NWS) makes up for a few Gemstars—and that its recent performance follows less stellar runs. Also, News Corp. has long understood what a conglomerate can and cannot do. "News Corp. is not built around synergy. It's built around maximizing the profit and opportunities of individual segments," says Aryeh Bourkoff, a vice-chairman of investment bank UBS (UBS).
Two key constituencies are slow to recognize what has happened: The executives who lunge at megadeals until they're financially kneecapped by one, and think tanks and politicos who freak out over media consolidation. Both pay the giants a compliment they don't deserve by assuming being a massive multimedia company still makes sense, even though many conglomerates are furiously backpedaling, doing anything to look less like, well, conglomerates.
The executives and their opponents are singing a song from a bygone era—one ruled by presses and broadcast towers, one ignorant of Google's (GOOG) distribution clout and the limits to what conglomerates can do. The evidence shows combining local TV and newspapers doesn't work, that it's hard to shave labor costs given the vastly differing demands of each medium. But why should reality impinge on what executives and pols hold dear?
For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia