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It is not only possible, but likely, that Time Warner, once the world’s largest media company, and 21st Century Fox, once the most aggressive and feared, will soon disappear from Earth. They will disappear into larger entities and become…scale. That is, more.
Bankers, investors and analysts say “scale” — “You’ve got to achieve scale,” “Now is the time to gain scale” or, more threateningly, “How are you going to get to scale?” — as though it were a scientific idea. But then sometimes they merely say, scientifically, “You need to bulk up.” The premium is on massiveness. The size is the strategy.
The known media world, now consisting of Walt Disney Co., Fox, Time Warner, Comcast, CBS, Viacom, Sony and Discovery, is reduced, in current projections, to Disney, Comcast, AT&T and one or more Digital Platform Behemoths. You are either a buyer or a seller.
Between 1985 and 2000, the media business, in the quest for what was then called “vertical integration,” shrank from thousands of companies to just a handful. In 2009, Jonathan Knee, a leading media banker, wrote his now classic book, The Curse of the Mogul, an analysis that found that while media M&As enriched bankers and CEOs, it returned little to investors. The media giants, many of which began to deconstruct — or deleverage — themselves after 2000, were, after a generation of effort, business duds.
But past is prelude. The post-1985 roll-up was largely a response to the rise of cable television, which dug deeply into network market share and which, during the prior 15 years, traditional media companies had mostly ignored. The present roll-up is largely a response to the rise of streaming and over-the-top services digging deeply into network and cable distributors’ market share, which, during the prior 15 years, traditional media companies have mostly ignored.
The thesis remains the same: Distributors need to lock in favored, if not exclusive, relationships with big-draw content to keep or lure customers. Or, content makers need ever more content to increase their leverage with distributors. And that is partly true. If you have a hit, people will come. But the roll-up strategy is, in effect, a workaround for the most difficult aspect of the thesis. Since hits are scarce and unpredictable, the fallback is to buy in bulk and count on both more bettering the odds to produce a hit and the mass to help promote dross into hits.
By this logic, in July, Discovery, a hodgepodge of cable channels (including the Discovery Channel, Discovery Kids, Discovery Travel & Living, Animal Planet and the Oprah Winfrey Network) controlled by John Malone, bought Scripps, another hodgepodge of cable channels (Food Network, DIY Network, Cooking Channel, Travel Channel). While this sent shares in Discovery down 35 to 40 percent, aggregating even junk appears preferable to not aggregating anything at all. This remains the strategy behind the continued push to recombine CBS and Viacom (up until 2005 united under the ownership of their mutual controlling shareholder, Sumner Redstone). CBS, no matter how well it performs, would be somehow more successful because it would be bigger with Viacom’s faltering channels.
Yes, but…when you buy a lot of junk, you increase your chances of also buying gold. AT&T wants Time Warner because of HBO and therefore can somehow feel good about the declining fortunes of the Turner networks and the Warner Bros. studio. Twenty-First Century Fox now appears to be on the market with most of its cable group, film and television studio and international interests. The thesis here is that in the search for scale, there is, on top of basic or necessary scale, “premium scale.” In this premise, AT&T — looking to compete with both Comcast, the leading cable system, and with the fast-emerging digital platforms, led by Netflix, and to eclipse other telco competitors — buys one of the pillar content companies. Likewise, Fox becomes a target for Disney or Comcast. This is the Death Star theory of media.
But curiously, the underlying notion here is that because so much of media has become nonessential, in a pick-and-choose world, you have to buy up — bulk up — to get to cover your losses. ESPN, once Disney’s shield, its ne plus ultra, now turns out to be nonessential in a skinny-bundle world. One-hundred percent of the market does not need ESPN — only, say, 20 percent does. That suggests, in essence, that nothing is essential. That “scale” is the aggregation of stuff that audiences would prefer to do without. In this, scale is a mountain of greater or lesser junk.
From AT&T’s point of view, that might somehow seem attractive. It’s a company that manages product lines of targeted consumer services. That is, in its view, media is about managing scale, rather than producing hits — which it is unlikely to know how to do. Of course, without hits, we have only diminishing scale — or we need ever more scale.
It is against this background that, no doubt instructively, Rupert Murdoch appears to be exiting the business. This, in everybody else’s search for scale, is now being viewed as an opportunity, instead of a cautionary tale. Nobody is quite unpacking what it means that the man who, arguably, began the quest for scale with his purchase of 20th Century Fox and the Metromedia television stations in 1985 and 1986, respectively, has now evidently come to the conclusion that scale cannot be reached and is probably a fool’s game.
This story appeared in the Nov. 29 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
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