by Sophia Banay Oct 15 2008
Ask any shareholder not named Murdoch or Redstone—big media just isn't working
Say what you want about the benefits of synergies and size for big media companies; for their shareholders, the bigger the company, the smaller the gains. Between last week and the same week a year ago,Time Warner shares were down 50 percent; Viacom was off 59 percent; G.E. had fallen 46 percent; News Corp. slid 65 percent; and Disney, the big winner, had tumbled a mere 34 percent.Is it time to say "Enough already" with big media and the dead-as-disco idea Japanese giants such as Sony had about buying movie studios to sell their VCRs? How about small media? Or at least smaller media?
It sounds fairly logical. The supposed "synergies" between the divisions of modern conglomerates like Viacom, G.E., and Time Warner have never really blossomed. Time Warner's magazine group, cable networks, AOL, pay TV, and movie-studio divisions barely communicate, let alone work together. And if that lumping together doesn't deliver value in the stock market, why suffer through it?
Time Warner took one step toward unraveling those holdings last spring, with the spinoff of Time Warner Cable, which delivered shareholders over $10 per share in dividends. Before that move, long-awaited by analysts, the cable unit's success was never reflected in the larger company's share price.
AOL, by contrast, has had a disproportionately negative affect on the company's stock, leaving many investors wondering when a sale of the unit—or of the floundering magazine unit—will take place. That's a tough break for the company's better-performing assets, like Turner Broadcasting, home to cable hits like The Closer, and stellar studio Warner Bros., responsible for summer smashes like Sex and the City and The Dark Knight. Spun off independently, any of these properties could deliver substantial value to shareholders. As it is, the albatross of AOL is the only thing visible to anyone looking at Time Warner's stock price.
CBS is a similar story. Last week, it put Showtime content front and center in a new partnership with YouTube, offering the channel's most recent series premieres of Dexter and Californication to viewers for free. In doing so, the company, whose share price was down 72 percent from a year ago last week, is trying to capitalize on its marquee pay-TV brand to bring viewers and media attention to its shows online, where it will take in revenue from ads played at the start, middle, and end of its shows. But could CBS unlock the value of its increasingly shiny Showtime brand by spinning off the network into its own independent entity? The premium-cable channel is obviously feeling its oats, as buzzworthy original series like Californication, Dexter, and Weeds have led a 2 million jump in subscribers, to 16 million, over the past two years.Some analysts agree that Showtime, as a stand-alone stock, could be the secret weapon of CBS shareholders. On its own, "Showtime would probably be worth more than CBS today," says Porter Bibb, a managing partner at Mediatech Capital Partners in New York."It's hot, it has an interesting future, and it's making money with video on demand." Of course, not every premium pay-TV channel would perform as well as a stock. HBO, for instance, is probably better served—for now—by remaining a part of Time Warner, under intense pressure as it is to deliver hot, game-changing new shows with the frequency it used to, says Bibb.
But in general, if a media property is strong, it performs better outside of a conglomerate than inside one. Why keep a company's most valuable assets hidden inside a decaying shell? The Dolan family's Cablevision, which owns a slew of valuable cable networks through Rainbow Media—including the Sundance channel, IFC, and AMC, home to the breakout hit Mad Men—is another example of a media company whose stock is undervalued. Cablevision would do well to spin off some subsidiaries—or even just stop making new acquisitions. After paying almost $650 million for the paper Newsday, the company got very little back in terms of stock value.
G.E., which has been urged to spin off NBCU by eager analysts, no longer has that luxury with G.E. Capital suffering in the economic crisis. But should it do so in the future, the new company—made up of a movie studio and theme parks, with business models that are not advertising-reliant, plus a mature slate of cable networks with dual revenue streams—would likely perform well in the stock market. News Corp. and Disney are two possible exceptions to the big-media curse. Disney makes sure that ESPN programming on ABC, for example, is obviously marked as such, an effective cross-marketing tool. And News Corp. is steadily integrating Dow Jones' components, such as MarketWatch, into its daily operations.
But even the most skilled managers are overextended when trying to grapple with the various subsidies of their enormous conglomerates.
A(nother) case in point: YouTube has lost some of its tech-darling status since being swallowed up by Google. Perhaps that explains the new partnership with CBS, which aims to expand YouTube's niche from clips of cats falling from trees to more mainstream content like you'd find on Hulu.com. But can one mammoth media company save another?
"I don't believe in conglomerates from a financial point of view because they totally depend on having good management," says Bibb. "That's a tough thing to depend on."
In other words, don't count on it.
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