Big changes on the horizon for media industry in 2003

Dec 30, 2002  •  Post A Comment

The new year for media and entertainment companies could be more about making up for past excesses than about building for the future.
“We’re still in the hangover stage,” conceded a leading Wall Street deal-maker. “But everyone will be ready for the next party when it comes.”
That won’t be for a while, however.
Against the backdrop of an uncertain advertising and economic recovery, Charter Communications and Adelphia Communications are among the media concerns that will be restructuring well into 2003. And AOL Time Warner and Vivendi Universal are among the players shedding assets and equity stakes to reduce debt.
The reshuffling of assets and the ongoing accounting probes and adjustments will continue to dominate in the coming months until big deals-and the catalysts for big deals-take center stage, and they will. It’s all reflective of the massive restructuring of corporate America that is wending its way through media, insurance, banking, transportation and other major industries.
The return of deals
On the other hand, a few fortified players will move transactions back into high gear following a record-low year of only $50 billion worth of announced media-related mergers and acquisitions, according to Thomson Financial.
Companies such as Viacom and News Corp., with strong balance sheets, low debt and empire-building tendencies, are going to act swiftly on the availability of choice assets such as DirecTV and Vivendi Universal Entertainment. One prominent investment banker I spoke with, hungry for some old-fashioned mega-deal-making, even fantasized about a Viacom-AOL Time Warner combination. Stranger things have happened, and it’s certainly doable financially, considering that AOL Time Warner is trading at a market capitalization of about $60 billion, which is one-fourth of what it was at the time its merger was announced.
Certainly John Malone’s Liberty Media Corp., which has declared itself a buyer for VUE and a 50-50 partner with News Corp. in its renewed pursuit of DirecTV, has indicated it will barter more aggressively in 2003 with its assets and equity interests. For instance, it has said it would expect to be a majority owner of any new publicly spun-off entity that would include its 100-percent-owned Starz! Encore, VUE and a major media player such as DreamWorks or NBC-both of which have expressed interest in such a deal.
Industry sources last week said they were betting Barry Diller will walk away as operational head of VUE with the nearly $1 billion due him by Vivendi Universal, keeping his USA Interactive’s continuing stake intact.
Even the new Comcast Corp., which has vowed to complete $2.5 billion in upgrades on its recently acquired AT&T Broadband systems before plunging back into deals, would not be able to resist the lure of a pact with Disney. It isn’t just that Comcast Cable President Steve Burke, a former top Disney executive, innately understands the business; in one fell swoop, a merger with Disney would fill all of Comcast’s content voids.
The hot pursuit of existing cable channels and content libraries will continue to be a major focus in the new year, as possibly USA, Sci-Fi Channel, Discovery, AMC and the MGM platforms change hands.
Even the debt-heavy AOL Time Warner will return to the deal game, using the public currency of its soon-to-be-spun-off Time Warner Cable assets to possibly acquire anything from all of Cablevision Systems to stray Adelphia and Charter systems. But generally speaking, the stock market is expected to remain volatile, and deals will be done more with cash and creative financing than with securities.
The most formidable deal catalyst in the new year will be the long-promised deregulation that will lift ownership caps and crossover restrictions on broadcast and cable companies, which may feel more comfortable selling off of improved 2002 cash flow multiples.
Deregulation will sweep small, midsize and larger TV station groups together in a massive consolidation move to take advantage of scale and duopoly economics. Large diversified, financially flexible broadcasters such as Tribune Co., Hearst-Argyle Television, Gannett, Belo and Scripps will lead the way.
Deregulation also will see cable systems continue to consolidate in an effort to more effectively roll out new services such as video-on-demand to counter satellite rivals.
And that is where an intensified bid for media viewers, advertising dollars and content will go on-in the local markets and on the niche platforms.
Shifting power base
Subtly but surely, several trends are reshaping the media industry in ways that will become more readily apparent in 2003. Comcast’s merger with AT&T has created an unprecedented distribution giant with 40 percent control of the U.S. cable market, which is on parity with broadcast on every front except for advertising pricing-and that, too, will soon change.
A Morgan Stanley Dean Witter team report speculated the new Comcast will “change the face” of domestic cable programming. A decision by Comcast whether to carry or financially support cable channels can make or break the company.
When you factor in the consolidation of other global pay-TV markets in places such as Italy, Australia and Hong Kong, plus the lower returns expected on entertainment businesses in general, you have what Morgan Stanley analysts said is a shift from content to distribution that will reach to markets outside the United States.
Cable and satellite distributors will control the fees paid to cable channels, while remaining virtually unfazed by generally lower advertising spending because of their reliance on subscriber fees. “By contrast, with the bulk of capital invested in building out digital platforms, we believe that returns on incremental cash flow for the distribution companies could be in excess of 20 percent,” making it the first time in many years that returns are higher in distribution than in content, Morgan Stanley analysts said in a recent report.
Another emerging trend that will continue to challenge content and distribution players alike is the growth and impact of consumer control technology. Whether it comes in the form of TiVo technology, personal video recorders or video-on-demand services, TV viewers will increasingly control what they watch and when and how they watch it. It gives new meaning to the term “rebroadcast” and signals the beginning of the end of by-appointment television for all but the most appealing live, big-event programs.
That phenomenon, along with continuing network fragmentation, will challenge advertisers to explore supplementary ways of connecting (such as product placement)-and even transacting-with consumers. But not before advertisers and media companies come to terms with the notion that the recent uptick in ad spending could come to an abrupt halt-or at least to a crawl-in 2003.
Analysts such as those at Morgan Stanley point to a number of one-time issues that have boosted the U.S. TV ad market, including fall political elections and zero percent car financing promotions, bullish 24 percent to 40 percent scatter price increases off of extremely limited inventory and favorable year-earlier comparisons.
Even more significant than that is that advertisers will finally come to grips with the ratings and share and pricing disparity between broadcast and cable networks. “Advertisers will be more discriminating in terms of allocating their marketing dollars to channels that are really performing and they will seek to reduce the power ratio on those that disappoint,” the Morgan Stanley analysts said.
The bottom line is that advertising-and the businesses dependent on it, especially broadcast and cable TV and ad agencies-could be confronted by growing evidence of permanent change in 2003. That will bring new pressures against which conventional responses-such as cost-cutting and counterprogramming-will prove useless.
Broadcasters in for a jolt
If all of these trends and events take hold, grass-roots broadcasters stand to sustain the biggest jolt to their archaic business model.
le deregulation will force many broadcasters to merge, all broadcast companies will find their markets under siege by increasingly savvy cable operators snaring local ad dollars and parochial content such as regional sports.
Additionally, broadcasters and cable operators, who now must deal with each other on digital terms, could face increased competition from a domestic satellite service owned by another broadcaster, Fox and its News Corp. parent.
Struggling with flat to slightly declining revenue growth next year, local broadcasters especially could be hurt if the advertising rebound can’t be sustained. As in-home competition intensifies from nontraditional sources, such as the Internet, video games and DVDs, broadcasters will begin wrestling with how to reinvent themselves for a new media age already well on its way.
The next 12 months in media and entertainment should be all about closing the gap between investing and reaping returns, mastering scale economics and harnessing interactivity, and capitalizing on fragmentation. But the possibilities of an economic crash, more terrorist attacks or war with Iraq remain caveats to whether better days are ahead.
More likely than not, the media landscape will remain dominated by more uncertainty, caution and efforts to make the most of the present despite the deal-driven actions of the past.#
The Deals page is edited by Diane Mermigas, who can be reached by phone at 708-352-5849, by fax at 708-352-0515 or by e-mail at dmermigas@crain.com.