NEW YORK - The world's
largest media companies will grapple in 2007 with the need to invest in new
ventures for rapid growth while not tearing down their aging business models too
While the Internet triggered a new media era, the pace of change accelerated
dramatically in the last year. Small Web companies like YouTube and MySpace have
secured blockbuster acquisition valuations, and hundreds more media start-ups
are trying to ride on their coattails.
Such Web sites have given the well-entrenched businesses of television, film,
radio and print a run for their money by simply allowing viewers to share the
entertainment they love for free, cutting out media companies' share in the
"Increasingly the opportunities will be in these new markets ... the
challenge is that those new markets are hard to monetize," said Saul Berman,
head of IBM's global media and entertainment practice, referring to the ability
of media companies to attract advertising to their new digital outlets.
"The challenge is how do you sustain your existing cash cow" and not
cannibalize it before new business models start to pay off in the next three to
five years, Berman said.
Executives from the world's largest media companies will discuss their
strategies for identifying new growth while protecting the businesses that still
generate the bulk of their profits at the Reuters Media Summit in New York from
November 27 through December 1.
Many media powerhouses have already put into place major corporate overhauls
Viacom Inc. (VIAb.N: Quote, Profile, Research) split off its broadcast unit
CBS Corp. (CBSa.N: Quote, Profile, Research) into a separate company to allow
investors to more closely track its youth-oriented MTV Networks.
Warner Inc. (TWX.N: Quote, Profile, Research) is transforming its AOL Internet
division into an online media outlet that relies on advertising rather than
subscriptions charged for accessing the Web. Walt Disney Co. (DIS.N: Quote,
Profile, Research) cut jobs and the production slate at its namesake film
NBC Universal is trying to slash its operating expenses by about $750
million, hoping to invest some of the savings in new areas of media to bolster
double-digit profit growth.
"It's a matter of making sure the areas that are going to grow over the next
five years are supported," NBC Universal Television Chief Jeff Zucker said in an
interview last month.
Wall Street has so far cheered News Corp. (NWSa.N: Quote, Profile, Research),
which paid $580 million for social networking site MySpace, and Internet search
leader Google (GOOG.O: Quote, Profile, Research), which handed over $1.65
billion for video sharing site YouTube.
Their share prices have been fueled by the perception they invested in two of
the most promising new growth vehicles.
News Corp. shares have gained 35 percent since the start of the year,
compared with a 12 percent rise in the Standard & Poor's 500 Index
<.SPX>, while Google added nearly $6 billion to its market value close to
the announcement of the deal last month.
"Media companies have learned from previous experience that they are going to
have to take a few risks and experiment," said David Sanderson, head of Bain
& Co.'s global media practice.
"I'm not sure we have zeroed in on the ultimate business model here,"
Sanderson said. "Consumers are not yet voting for what they think is the best
business model. We're going to see maybe a greater proliferation (of ventures)
than a shakeout."
The cost of not moving forward fast enough is apparent,
particularly in the radio and publishing businesses, where a growing list of
companies mull private buyouts.
Clear Channel Communications (CCU.N: Quote, Profile, Research) agreed last
week to an $18.7 billion buyout by private equity firms and its founding Mays
family, while publisher Tribune Co. (TRB.N: Quote, Profile, Research) is
considering whether to sell the company whole or in pieces.
The risks of experimentation are also becoming clearer as media companies
grow more protective of entertainment aired not just on television, but shared
on cell phones or Web sites, demanding a cut of the proceeds or taking their
case to court.
Add to that the uncertainty over the staying power of any one new media
outlet, as ever more fickle audiences move quickly from one popular destination
to the next.
"The cool kids long ago left MySpace and they went to Facebook," said Berman,
referring to the rival social networking site. "If you want to scare a teenage
kid these days, tell them their parents are now on Facebook."