Having lived through decades of M&A in the media industry, we are now on the cusp of another major restructuring of the industry. The previous rounds of M&A focused on two objectives: vertical integration tying content businesses with major distribution channels and efforts to build scale by buying properties across different media types. It is becoming increasingly obvious that neither strategy works very well.
The battle by Carl Icahn and Bruce Wasserstein to mobilize investor support for a break-up of Time Warner is one early indicator of the coming restructuring. Icahn and Wasserstein want to break-up Time Warner into four separate companies – the AOL Internet business, Time Warner Cable, the print publishing business and the video and movie business. Yesterday, Steve Case joined Icahn and Wasserstein in advocating a break-up of Time Warner, indicating that he had proposed this move to Time Warner’s Board of Directors last July, shortly before resigning as a Director of Time Warner. In a column in the Washington Post, Case indicated that:
Although I played a key role in bringing AOL and Time Warner together six years ago, it's now my view that it would be best to "undo" the merger by splitting Time Warner into several independent companies and allowing AOL to set off on its own path.
At one level, Icahn, Wasserstein and Case have it right. The earlier wave of M&A was largely driven by an assumption that physical distribution channels (e.g., broadcast or cable channels and movie theaters) were the key bottleneck in the media business. If you didn’t own your own distribution channels or build sufficient scale to achieve greater negotiating power with distribution channels, the thinking went, your content businesses would be at a permanent disadvantage. The growth of the Internet challenges this assumption at its core.
As the bandwidth of Internet connections, both wireline and wireless, steadily increases, physical distribution constraints erode rapidly. But media companies face a different challenge and opportunity that could provide a basis for restructuring the media business. We are seeing content proliferate and a new bottleneck emerging: our attention. We each have only 24 hours of attention each day – no amount of technology innovation will change that basic fact of life. How we choose to allocate that attention among a growing array of options competing for our attention will determine who creates value and who destroys value. I have posted about the significance of this development in transforming brands.
This same development will also force a restructuring of the media industry. Content will not be king – audiences will be king. The largest media companies will restructure around specific audiences. Several years ago, I used Martha Stewart as an early example of this new strategy. Martha Stewart has a very specific audience focus – homemakers – and she has built a new kind of media conglomerate consisting of media properties all focused on addressing the needs and interests of this one audience. She has steadily expanded her share of mind of this audience and, increasingly, also her share of wallet (through direct marketing on her Internet properties and through her branded product offerings available in retail channels). Stewart is not alone in this – many celebrities (for example, Oprah Winfrey and Russell Simmons) have started to build media conglomerates targeted to specific audiences.
In contrast to Martha Stewart, I looked at Time Warner three years ago and offered the following advice (reproduced with a few minor edits):
- Divest the distribution business and retain the content business.
- Create audience segment business units to address specific audiences that are economically attractive and fit with some of Time Warner’s existing properties - some natural examples: business executives, sports enthusiasts and teen-agers.
- Assign content businesses to report to specific audience segment business units (e.g., Sports Illustrated would report to the sports enthusiast business unit) or establish content production businesses as shared services units (e.g., Warner Brothers movie studio) to support the targeted audience segments
- Build distinctive overarching audience-centric media brands aggressively
- Invest in businesses and skill sets to deepen database marketing capabilities
- Acquire businesses selectively to broaden share of attention and share of wallet within targeted audience segments and develop licensing relationships to access an even broader range of relevant resources to serve target audience segments.
That was three years ago. My recommendations still stand, not only for Time Warner, but for the other four major US media companies – Disney (which actually would face the least amount of restructuring, given its traditional focus on parents with small children as a distinctive audience), NBC Universal, News Corporation and Viacom.
For these media conglomerates, this kind of restructuring would be the only viable option to the break-up championed by Icahn and Wasserstein. It would require a significant shift in mindset, organizational structure and skills. In the terms of my broader perspective on the unbundling of companies, these companies would need to morph from a portfolio of product commercialization businesses to a portfolio of customer relationship businesses. If successful, the specific content assets of these reconstructed companies would eventually become secondary. Their primary asset would be deep relationships built with individual members of specific audience segments. Companies targeting large audience segments could achieve significant scale by leveraging powerful network effects.
The alternative is simple: the managers of these unwieldy conglomerates should unbundle their product businesses. This would let the owners of the independent and focused content businesses develop the edge competencies that Umair Haque argues will be required to maximize the value of content assets in the networked media world. Their survival will depend upon it. If they don’t do it to themselves, impatient investors will do it for them.