Can con­sol­i­da­tion save pub­lish­ing?

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Re­gard­less of what in­dus­try you’re in, con­sol­i­da­tion seems to be hap­pen­ing ev­ery­where these days. The word it­self sounds proac­tive and pos­i­tive, so it is of­ten used to de­scribe pro­ceed­ings that are not so rosy.

Other id­ioms that of­ten ac­com­pany news of con­sol­i­da­tions in­clude: greater ef­fi­cien­cies, over­head re­duc­tion and “val­u­a­tions greater than the sum of the parts”. So it’s no won­der that for many ex­ec­u­tives con­sol­i­da­tion ap­pears to make busi­ness sense; but are they right?

Some­times, ab­so­lutely, when the value cre­ated by the con­sol­i­da­tion pro­vides bet­ter ser­vice for cus­tomers and fi­nan­cial ben­e­fits to share­hold­ers. Such was the case with the AT&T pur­chase of DIRECTTV in 2015. The deal not only in­creased share­holder value, it gave con­sumers more con­tent choices and the abil­ity to ac­cess TV con­tent on their mo­bile de­vices with­out in­cur­ring data caps (net neu­tral­ity con­cerns not­with­stand­ing).

But not all con­sol­i­da­tions end in a win-win for the deal mak­ers and their cus­tomers. Busi­nesses con­sol­i­date in dif­fer­ent ways – the ob­vi­ous one be­ing in the case of Merg­ers and Ac­qui­si­tions (M&A). It also de­scribes when com­pa­nies re­struc­ture their busi­nesses (AKA down­siz­ing them), such as the case early in 2016 when Canada’s largest news­pa­per chain con­sol­i­dated its news­rooms, lay­ing off 90 em­ploy­ees.

More re­cently, The Wall Street Jour­nal, con­sol­i­dated its print busi­ness, of­fer­ing buy­outs to 1,500 of its staff, fol­lowed by ad­di­tional cuts to cre­ate a “more con­cise, fo­cused daily re­port on life and busi­ness.”

And then there was Bloomberg News who con­sol­i­dated its cov­er­age of mar­kets, cut­ting 30 jobs in the process.

Even the fre­quently touted dar­ling of dig­i­tal sub­scrip­tions, The New York Times, no stranger to buy­outs and cut­backs, con­sol­i­dated its cov­er­age of books and pub­lish­ing in Au­gust 2016, ac­knowl­edg­ing that its news­room will down­size again in 2017.

This list goes on and on, but in the end, it would ap­pear that con­sol­i­da­tion in the world of journalism is of­ten just a nice spin on the on­go­ing prac­tice of news­room dec­i­ma­tion.

So let’s take a look at the other side of the con­sol­i­da­tion coin – M&As, which reached record highs last year world­wide in 2015.

Bank merg­ers led the way, fol­lowed by the ob­vi­ous tech­nol­ogy M&As one would ex­pect to see.

And al­though me­dia didn’t make the chart, it had its fair share of at­tempts to con­sol­i­date.

Led by what Ken Doc­tor clev­erly refers to as Gan­net­ten­freude, the Gan­nett-tronc de­ba­cle was noth­ing more than a match made in Hades, with di­vorce in the mak­ing be­fore the mar­riage was ever con­sum­mated. Now I take no plea­sure in the mis­for­tunes of ei­ther pub­lisher, but do you be­lieve the na­tional con­sol­i­da­tion of lo­cal news­pa­pers would have saved the fourth es­tate in the U.S.?

An­other ma­jor me­dia con­sol­i­da­tion was re­cently stymied when the New Zealand Com­merce Com­mis­sion dis­rupted Fair­fax Me­dia NZ’s plans to merge with NZME, stat­ing that al­though the fi­nan­cials look promis­ing, the merger would lead to, “an un­prece­dented level of me­dia con­cen­tra­tion”, in­creased risks of price hikes, re­duced ad­ver­tis­ing com­pe­ti­tion and “a re­duc­tion in the qual­ity and quan­tity of news con­tent, both on­line and in print.”

Frankly, in my opin­ion, with the flood of con­tent we face ev­ery day, much of which is pure com­mod­ity, fake or gen­er­ally of low value, scarcity of con­tent is ac­tu­ally a good thing, es­pe­cially given hu- man be­ings’ short­en­ing at­ten­tion space. So the “re­duc­tion of the qual­ity and quan­tity of news con­tent” should not be the is­sue here; it should be the re­duc­tion of the quan­tity of qual­ity journalism that should be of high­est con­cern.

The deal isn’t dead in the wa­ter yet, but it would ap­pear that one of Aus­trala­sia’s largest me­dia com­pa­nies has a lot of work to do to jus­tify con­trol­ling 90% of New Zealand’s print mar­ket be­fore a fi­nal de­ci­sion is reached on March 15, 2017.

Other eco­nom­i­cally-fea­si­ble deals hit­ting the air­ways in­clude AT&T’s

US$85.4B plan to buy Time Warner– a deal that is in jeop­ardy be­cause of the risky trans­fer of FCC li­censes to AT&T and the pos­si­bil­ity of pub­lic hear­ings on the mat­ter. And let’s not for­get, Don­ald Trump’s state­ment when he was still a can­di­date for the pres­i­dency of the United States, that he would block the deal, “In an ex­am­ple of the power struc­ture I’m fight­ing, AT&T is buy­ing Time Warner and thus CNN — a deal we will not ap­prove in my ad­min­is­tra­tion be­cause it’s too much con­cen­tra­tion of power in the hands of too few.”

When I look at all these ef­forts to con­sol­i­date, I can’t help but think that con­sol­i­da­tion isn’t all that it’s cracked up to be. Can it ac­tu­ally help an in­dus­try?

Con­sol­i­da­tion in the mu­sic in­dus­try

There have been a ton of ref­er­ences to the im­pacts dig­i­tal has had on mu­sic, news­pa­pers and video. I’m not im­mune to jump­ing on that band­wagon my­self from time to time, be­cause there is so much to learn from what’s hap­pen­ing from other busi­nesses faced with the mas­sive changes in tech­nol­ogy and so­ci­ety.

We all saw this sad state of af­fairs in mu­sic back in 2005 when ma­jor record la­bel rev­enues started to plum­met when the in­tro­duc­tion of pri­vate mu­sic so­lu­tions (e.g. iTunes, Spo­tify) all but killed CD sales.

It took al­most six years for record la­bels to ac­cept the fact the days of their con­trol­ling the pub­lish­ing and dis­tri­bu­tion of mu­sic were over. And when they fi­nally woke up to the fact that re­sis­tance was fu­tile, they stopped fight­ing a los­ing bat­tle and:

• Con­sol­i­dated from five down to three ma­jor la­bels by the end of 2012 (gain­ing ef­fi­cien­cies of scale)

• Adopted new pric­ing/busi­ness mod­els

• In­vested in stream­ing me­dia (col­lec­tively own­ing 10% to 20% of Spo­tify and Rdio)

• Sources re­port that Spo­tify, with an US$8.1B val­u­a­tion will go pub­lic in the sec­ond half of 2017.

• Mit­i­gated risks by shar­ing rev­enue with artists, only af­ter ex­penses were paid

• Diver­si­fied their in­come sources (e.g. mer­chan­dise, tick­et­ing, live events)

• Pro­moted artist brands over their own

• Started co­op­er­at­ing with each other rather than com­pet­ing

Global mu­sic rev­enues have since sta­bi­lized with Sony, Univer­sal Mu­sic Group (UMG) and Warner now own­ing the lion share.

“Suc­cess­ful pub­lish­ing con­sol­i­da­tion isn’t just about economies of scale and growth of as­sets; it must also in­clude a new vi­sion for the com­bined en­tity, new busi­ness mod­els and a new cul­ture fo­cused on qual­ity journalism and au­di­ence en­gage­ment.”

Mu­sic Busi­ness World­wide re­ports that on stream­ing mu­sic alone, Sony makes ~ $US3.3M daily, Warner US$2M, and UMG US$4M – a com­bined to­tal of al­most US$10M ev­ery sin­gle day! And their prof­its are even more im­pres­sive.

Ac­cord­ing to a founder of Net­twerk Mu­sic Group, Terry McBride, “In the last two or three years, record la­bels’ top line rev­enues have flat­tened, while their profit mar­gins have dou­bled. If you look at the Nordic coun­tries, which were the first coun­tries to be af­fected by stream­ing, they’re back up to the same rev­enues that they were be­fore piracy in the late 1990s. Now their profit mar­gins are 65%, where back in the phys­i­cal world they were 20 or 30% at best. North Amer­ica’s go­ing to end up in the same sit­u­a­tion. To­day they’re in a busi­ness that’s ac­tu­ally scal­able with­out mas­sive cap­i­tal in­put, un­like their phys­i­cal busi­ness.”

Con­sol­i­da­tion is just the start, not the endgame

While the eco­nomic test is fa­vor­able for a few con­sol­i­da­tions like Fair­fax and AT&T, many more ac­qui­si­tions fail to get a pass­ing grade (e.g. Gan­nett-tronc). But val­u­a­tions are not re­liant only on the eco­nomic value of the com­bined ven­ture. Be­cause, as we have all seen in this highly volatile pub­lish­ing land­scape, those val­ues are trend­ing rapidly in the wrong di­rec­tion.

Suc­cess­ful pub­lish­ing con­sol­i­da­tion isn’t just about economies of scale and growth of as­sets; it must also in­clude a new vi­sion for the com­bined en­tity, new busi­ness mod­els and a new cul­ture fo­cused on qual­ity journalism and au­di­ence en­gage­ment.

The ma­jor record la­bels that had more than one foot in the grave four years ago, have turned the page and are liv­ing the life of prof­itabil­ity by go­ing far beyond con­sol­i­dat­ing. Their big rev­enues of the past are not there and may never will be, but the bot­tom lines are look­ing pretty sweet and the op­por­tu­ni­ties for very high ROIs are sub­stan­tial when their dig­i­tal in­vest­ments go pub­lic next year.

It’s time for news­pa­per and mag­a­zine pub­lish­ers to take a les­son from those who have risen from the ashes and rec­og­nize that con­sol­i­da­tion is only the sec­ond step to­wards a brighter fu­ture. The first step of let­ting go of the past is much harder; but with­out it, no amount of con­sol­i­da­tion will cure what ails this in­dus­try.

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