Big Media Octopuses, Cutting Off Tentacles
Is the age of media deconsolidation upon us?
The media octopuses have taken to cutting off their own limbs. But the current round of media deconsolidation isn't driven by politics, media "reformista" activism, or government regulation. It's all about business. In the long run, entrepreneurs tend to have a very hard time making media conglomeration pay off.
E.W. Scripps Co. and Belo Corp. are among the most recent media conglomerates to spin themselves apart. Scripps announced plans in October to cleave itself into two publicly traded companies—a newspaper and television stations group and an outfit owning Scripps' cable channels and online shopping properties. In a similar move earlier in the month, Belo divorced its newspapers from its TV stations to create two new firms.
Wall Street, which had urged the breakups, rewarded both companies with bumps in their stock prices.
"Scripps was really viewed as a newspaper company, so it was trading in line with its newspaper peers," a Bear Stearns analyst told the New York Times. "In reality, the majority of cash flow was coming from higher growth cable and Internet businesses, but they weren't getting any credit for that."
Belo stock suffered similar prejudice among investors, who regarded it as a declining newspaper chain. An analyst speaking to the Associated Press recommended the self-amputation for megaconglomerate Gannett Co.
"If I were Gannett, and my stock were down to $44 [from $90 in 2004], I'd call in my investment bankers and see if this works for us," Edward Atorino of Benchmark Co. said. As I write, Gannett trades for less than $40 a share, and rumors (denied) abound that the company is preparing itself for sale.
Brandes Investment Partners doubled its Gannett stake to 11.3 percent this year. If the stock continues its slide, might Brandes decide that the parts are worth more than the whole and order the sell-off of Gannett's newspapers and TV stations? Such a move would be celebrated in cities like Louisville, Des Moines, and Nashville, where Gannett bought and wrecked some pretty good newspapers.
The New York Times Co. acted on the divestiture idea almost a year ago, peddling its nine TV stations to a private equity firm. Even so, some investors still want to shatter the remaining company—newspapers, Internet properties, a piece of the Boston Red Sox, Manhattan real estate—into several pieces in order to unlock its true worth. (See Seeking Alpha's discussion of the Wall Street Journal piece—subscription required—advocating such a path for the Times Co.)
If ditching TV properties were the medicine for ailing media companies, the Knight Ridder chain, which sold off all of its TV stations by 1989, would still be with us. Alas, those sales provided no permanent relief, and the company fed itself to the McClatchy Co. chain in 2006. This meal has only given McClatchy financial indigestion and, one senses, deep regrets.
Newspaper-centric corporations aren't the only bedeviled media conglomerates. Two years ago, Viacom, which owns no newspapers, split itself into a broadcasting/outdoor-sign/book company and a movie studio and cable firm. The Time Warner-AOL monolith ditched its music division in 2004, and wishes it had never met AOL. Genocidal tyrant Rupert Murdoch acquired a controlling interest in DirecTV after pursuing a satellite broadcasting dream for years, but now he's getting rid of DirecTV. And this week, Murdoch called broadcast TV a "highly challenged industry" and has put nine of his U.S. stations up for sale.
Obviously, some of these transactions are mere portfolio shuffling, but the deals indicate that media conglomeration doesn't always make economic sense, something media CEOs seems to relearn once a generation. Media scholar Ben Compaine likes to point out that CBS Inc. was the nation's largest media company in 1986. But CBS couldn't make all of its properties—the network, the broadcast stations, the music, magazine, and book divisions, and more—work together profitably. By 1999, CBS had essentially stripped itself down to its TV core before selling out to the newest conglomerator on the block, Viacom.
Compaine cites research by Adam Thierer and Daniel English, who found (PDF) that the newest neo-monopolists—Time Warner, Viacom, News Corp., Clear Channel, and Comcast—lost 52 percent of their value (in terms of market capitalization) over a five-year period at the beginning of this century.
"In large conglomerates, size and complexity is the enemy," Columbia University professor of economics Bruce Greenwald told the New York Times in 2005 in a story about the Viacom split. "Often, executives can't focus carefully on each of the businesses, so they don't run as well."
If far-flung media conglomerates so rarely harvest the bounty of their much-touted "synergies," why do CEOs keep building them?
The newspaper conglomeration that began in the 1960s owes much to a change in Internal Revenue Service appraising practices, writes (PDF) scholar Elizabeth M. Neiva. The new IRS rules convinced sole proprietors to swap their family newspapers for stock in companies like Gannett rather than take an inheritance tax soaking from the IRS.
Successful media companies ate up competitors because they had to do something with their profits. Purchasing a similar sort of business allowed them to hedge their current core holdings, and if they bought "growth" companies that moved their stock prices, Wall Street applauded. Some newspaper CEOs, mindful of newspaper publishing's cyclical nature, even bought timberland and paper mills as hedges!
Conglomeration works until it doesn't. And when it doesn't, it's because the lessons that, say, a newspaper CEO learned building his chain aren't always directly applicable to the running of superficially similar businesses such as radio, television, cable TV, network TV, outdoor advertising, music, and the movies. Sometimes the brilliant lessons a newspaper-broadcasting chain learned aren't directly applicable to the running of another newspaper-broadcasting chain it acquires, as Tribune found out when it gobbled up the Times Mirror Co.
Real estate mogul Sam Zell, set to take over Tribune, hasn't announced his plans for the troubled conglomerate, but he's never been sentimental about any of his holdings. He brags to The New Yorker's Connie Bruck that he's "had offers on every single asset in the portfolio." Zell continues, "Allentown's calling, Florida's calling, and, in L.A., David Geffen and Eli Broad. So all I can tell you is that for a dead industry with no future there are an awful lot of schmucks who want to take it away from me!" That's Zell's way of saying that he'll happily dismantle Tribune, piece by piece, if the prices are right.
Trimming limbs in the Scripps and Belo fashion won't automatically make the companies more profitable if the components are run as they were before. The destructive energy of today's market demands more than paper shuffling.
I'm reluctant to make predictions because I have a near-perfect record as a prognosticator—I'm almost always wrong. That said, I'm not climbing out on a limb to forecast that the Belo and Scripps splits, the Tribune deal, and other rumblings portend newspaper deconglomeration across the board to smaller, more nimble companies. That is, until the pendulum inevitably turns and somebody reinvents the media monolith.
Let's make a deal. What would you pay for the Los Angeles Times, the Nashville Tennessean, the Des Moines Register, Newsday, the Dallas Morning News, the Knoxville News Sentinel, or any other chain-owned property? Don't send your bids to me a email@example.com. Send them to the newspapers' respective owners and send me the finder's fee. (E-mail may be quoted by name in "The Fray," Slate's readers' forum, in a future article, or elsewhere unless the writer stipulates otherwise. Disclosure: Slate is owned by the Washington Post Co., a media conglomerate that never went insane with acquisitions as it expanded. Its smartest deal ever was to buy the Kaplan testing business.)