Can consolidation save publishing?
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.