Media business synergy update: Distribution assets are sooo last year

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Remember a few years ago when media moguls touted the benefits of combining big content and distribution assets?

Yeah, Sumner Redstone always has said that content is king, but leveraging two sides of the entertainment business seemed the way of the future not too long ago. That was the reason Comcast wanted to buy Disney and why the News Corp. empire gobbled up DirecTV.

"We felt very strongly that we needed to have distribution. Content is king, but you've still got to get distribution," News Corp. chairman and CEO Rupert Murdoch said in November 2005.

Now, those days seem like distant memories. Nobody has brought up a Disney-Comcast merger for a while, and Murdoch said in February 2007 that News Corp. has no more need for a distribution play in the U.S.

"Our content is pretty well established," he said after the handover of DirecTV to Liberty Media.

Similarly, Time Warner recently said it will spin off Time Warner Cable into a separate company.

This has left John Malone's Liberty as the only media company to own a big U.S. distributor.

The list of reasons for this change in sentiment is long. Entertainment biggies have had to restructure to be more focused and nimble, Wall Street folks say. Synergies (we cringe when we see this overused word) likely never were as big as they were made out to be, and new channel launches have slowed.

Plus, the digital age has shifted the balance of power in favor of producers, who suddenly can get their content on many platforms and try to make money on all of them.

With distribution companies facing lost leverage and heated competition, it takes full focus to succeed in this money-swallowing business.

"The problem recently realized by the major content owners is that distribution is a really big capital-intensive business that at its root has little in common with the content production sides," longtime industry expert Hal Vogel says.

Adds Dennis Leibowitz, managing general partner at media-focused hedge fund Act II Partners: "Distribution used to be a monopoly, and now it's much more competitive, which makes it less financially attractive, while making content (that benefits from the competition) more attractive."

Miller Tabak analyst David Joyce also doesn't expect the content-plus-distribution mantra to be back in vogue anytime soon. "It was a rationale for a different period," he says.

Rest in peace, oh vision of the mega-merged content and distribution powerhouse.

Georg Szalai can be reached at georg.szalai@THR.com.



MALONE: AN OLD-STYLE MUSCLEMAN

John Malone has made a career out of raising eyebrows. But why is his Liberty Media betting big on satellite TV giant DirecTV at a time when other sector biggies are shedding distribution arms to focus on their content businesses?

"Content and distribution help each other," Liberty president and CEO Greg Maffei said at the end of 2007, without getting more specific. A year earlier, he argued that Liberty's networks need more "distribution muscle."

Wall Street also points out that Liberty's content businesses, such as Starz and QVC, can use the leverage of a satellite TV cousin in showdowns with cable operators.

Miller Tabak analyst David Joyce cites the current HD push and Malone's longer-term vision as additional motivation. "Malone still likes that content-plus-distribution model because he wants to be more of the HD frontiersman, (and) there still is some necessity for distribution space to be allocated to the incremental HD channels," he says.

Using DirecTV to help gain carriage for the HD networks of another Liberty cousin, Discovery, also can "accelerate the path to profitability" for Discovery, Joyce says.

Whatever the day-to-day business rationale is, remember that the key word is "muscle." After all, owning Liberty's content assets and DirecTV makes Malone look much more like a mogul again.

-- Georg Szalai
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