Primedia pins hopes on video in slow ad market

Oct 8, 2001  •  Post A Comment

Facing the stiffest challenges of his two-year tenure as Primedia chairman and CEO, Tom Rogers is pinning his hopes on a more aggressive video strategy to partly offset declining advertising revenues and hefty acquisition costs.
“We don’t have to do it tomorrow for the company to survive. But this is important to the future of this company because it plays to our core strength and diversifies our revenues,” Mr. Rogers recently told Electronic Media.
Still, the creation of a branded electronic newsstand-one that converts some of Primedia’s most popular niche magazines into television programs for broadband cable and satellite, the Internet and the direct-to-home market-may not develop fast enough to provide much-needed short-term economic relief to a convergence player with its fair share of woes.
With 65 percent of its revenues linked to advertising, Primedia recently lowered its 2001 earnings guidance to just below last year’s $250 million, down from an initial target that was closer to $300 million. Standard & Poor’s placed its Primedia ratings on credit watch due to uncertainty about earnings and debt coverage, despite recent refinancing and a new round of sizable cost cuts and noncore asset sales.
Not surprisingly, Primedia stock sank to a new $2-a-share low, wiping out more than $3 billion in market capitalization, which stood at nearly $4 billion when the stock traded at a 52-week high of $17 a share. Mr. Rogers, who recently demonstrated his confidence by acquiring $1 million of company stock at $5 a share, is wrestling with some internal strife at Primedia’s restructured Media Central, headed by Steve Brill, while absorbing the costs of $1 billion-plus acquisitions About.com and Emap.
It is against this tumultuous backdrop that Primedia is seeking to cultivate subscription broadband video as a core revenue stream, inspired by some of its more than 250 print titles. In the wake of last year’s dot-com collapse, print-to-video conversion remains one of the few viable vestiges of the convergence vision that has guided Mr. Rogers’ efforts to reshape and re-energize the company.
He joined Primedia in October 1999 with a grand plan to cross-pollinate the company’s print publications and growing Internet presence. Now, a more traditional, predictable video strategy is emerging, built on the foundation of 15 existing Primedia TV series and specials ranging from “American Baby” on FX and “The Seventeen Magazine Teen Choice Awards” on Fox to documentaries on MTV and “The Gravity Games” on NBC to canoeing and kayaking on the Outdoor Life Network and hot rods on Speedvision.
“What broadband means to us is the brands that only existed in the print world before now can have space in the electronic media world,” Mr. Rogers said. “We need to accelerate that process.”
The goal is to launch more specialized broadband programs-most likely in the automotive, outdoor life and teen areas initially-over cable, satellite and the Internet in about six months. They will be supported by video subscriptions and targeted advertisers, many of whom are new to television and carry-overs from the corresponding print publications. Primedia says such endemic advertising, which accounts for half of the company’s total revenue, is insulated from the current downturn because of the unique bond between special-interest advertisers and consumers.
Subscribers will be charged for the individual titles they select from Primedia’s “electronic magazine rack,” which could be offered on digital cable or high-speed Internet and matched by corresponding interactive Web sites. The efforts will be supported by Primedia’s existing cross-media marketing and sales teams.
Paul Noglows, an analyst at JPMorganChase, considers Primedia “well-positioned to exploit the benefits of digital distribution.
“Its niche magazines are well-matched with About.com’s targeted interest channels. It doesn’t cost much to add its own existing camera and production crews to the mix to produce a video version of things,” Mr. Noglows said.
Sources say Primedia is attempting to capitalize on its existing relationships to secure broadband distribution for its electronic newsstand and new individual video efforts. It has had discussions with Liberty Media Corp. (which has a 5 percent stake in the company) and its Discovery Communications; Cablevision Systems and its Rainbow Media Holdings; other major cable operators; and MTV Networks, Court TV, TNN, PBS, RealNetworks and NBC (where Mr. Rogers formerly worked).
As subscriber and advertiser support for streaming media grows, Primedia also will stream more of its own special-interest video content on its own related niche Web sites. Primedia operates the sixth-largest Internet platform, serving 28 million unique users.
“The only piece we’re working now to complete involves the initial broadband distribution links,” Mr. Rogers said. “When I faced the same challenge of finding distribution for CNBC a decade ago at NBC, there weren’t any of the same cable, satellite and Internet distribution options. Broadband will need our targeted content, subscribers and advertisers.”
But despite Primedia’s best-laid plans, its bid for an increased video role greatly hinges on how quickly cable, satellite and other broadband providers roll out new services and work through related technicalities, such as the particulars for advanced digital set-top cable boxes. That is being further complicated by a troubled ad market and the economic uncertainties exacerbated by the Sept. 11 terrorist attacks.
The worst-case scenario is that Primedia could take up to 18 months to get an accelerated video plan under way even as it steps up its own production of directto-home videocassettes, DVDs and CDs, some of which can be distributed within its own magazines.
“Ironically, it looks like there could be more high-speed Internet connections than new-fangled digital cable boxes for a while. So, we’ll probably go both ways,” said Bruce Gamache, president of Primedia Digital Video.
Primedia executives say that while paid video distribution generally is underdeveloped and related revenues are uncertain, it will be one of the few reliable areas of growth for the company and the broadband industry over the next several years.
Until then, it will be important for Primedia to keep its video production and distribution costs at a bare minimum while squeezing for revenues.
“We produce a lot of this video anyway for our existing business efforts. The company already is very in tune to being multimedia and multitask oriented. People here work on print, Internet and video all at once. That’s a very big deal,” Mr. Gamache said.
Being the world’s largest publisher of specialty video and the largest producer of Web content renders “an enormous content reservoir,” Mr. Rogers said. Asked what it will cost to mine those reserves to produce broadband video programs, he said, “It is incremental.”
“An awful lot of what it takes for us to get there is an already imbedded investment. We already are the largest producer and distributor of specialty video through our Films for Humanities and Channel One. We already have tens of thousands of video hours,” Mr. Rogers said.
Analysts estimate Primedia’s 15 cable and broadcast network series and specials could generate up to $200 million in revenues this year, or about 13 percent of the company’s overall income, with as much as a 15 percent or better profit margin.
The number of programs could increase to between 20 and 25 in 2002, when revenues could be near $300 million, analysts say.
Many of those half-hours of special-interest programming may cost in the neighborhood of $50,000 to produce, compared with the $450,000 or more it takes to bankroll many half-hour broadcast network situation comedies.
The result could be assured break-even and almost immediate profitability-something virtually unheard of in TV program production circles.
A lot will depend on how well Primedia uses its existing resources. For instance, it has repackaged its school-supported Channel O
ne news for teens into segments for CBS’s “Early News,” for recent prime-time news specials and for series pilots on the younger-skewing WB Network.
The company also is making co-production deals such as last week’s announced joint venture with HowStuffWorks, whose 2,500 informational vignettes Primedia will repackage and redistribute for cable, satellite and broadcast TV and home video.
The company Mr. Rogers inherited in 1999 came equipped with state-of-the-art digital and HDTV-ready production and editing facilities in Dallas, Los Angeles and New York that include 10 soundstages, 20 editing suites, field camera units, 3-D animation equipment and the 100 employees of Primedia Productions.
Primedia recently launched Rural Free Delivery, a satellite-delivered service to 6 million rural subscribers that consists of niche programming related to topics such as agriculture, horse-breeding and farm equipment. It is representative of the special-interest program networks it already operates, including the Automotive Satellite Network, the Health & Science Network, the Law Enforcement Network and the Fire & Emergency Television Network-the latter two of which have received heightened interest since the tragic events of Sept. 11.
“Combining text and video in a way that is easily accessible and useful to people will put what we do at the heart of video-on-demand as it grows and becomes widespread. Rich media is the future of Primedia,” said Marc Krigsman, a onetime Fox and ABC executive who oversees Primedia Productions and is executive VP of content for Primedia Digital Video.
While Wall Street generally supports that strategy, some analysts warn it will take a while for Primedia to develop broadband video into a significant offsetting revenue stream.
“I don’t see it. They are basically an advertising company with too much debt,” said Peter Appert, analyst at Deutsche Banc Alex. Brown.
“There always are things you can do to build ancillary revenue streams around your existing businesses. But I don’t see some dramatic change in the business model that is going to create new revenue opportunities that people haven’t thought about before. Basically the issue is running these businesses better and keeping your fingers crossed for a turn in the advertising cycle,” Mr. Appert said.
Of Primedia’s seven revenue streams, only video, merchandising, licensing and Internet advertising posted second-quarter gains.
“The company is just a victim of bad timing, not bad strategy,” he said.
“They are a very leveraged company at a time when the already weak ad business has fallen off a cliff. The concern is that their financial leverage is so substantial they will run the risk of not being able to service their debt,” Mr. Appert said. Primedia’s $2.29 billion debt represents 71 percent of the company’s total capital-which is high for any ad-supported publisher.
“At $2 a share, the market is saying it is worried about the company’s viability. Such overriding concerns might, for now, overshadow any growth efforts in areas such as video,” Mr. Appert said.