Media firms face struggle in search for growth

Updated: 2006-11-23 14:46

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 quickly.

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 process.

"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 this year.

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.

Time 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 studio.

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." \

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