Big media falls on hard times

Sept. 25  — A year ago, leviathans like Disney and AOL Time Warner ruled the media kingdom, proclaiming that smaller competitors would have to bulk up or die. But it turns out that some of the much-heralded synergies — especially those aimed at moving ‘old media’ content to new platforms like the Internet — have turned out to be tougher to pull off than expected. As French media conglomerate Vivendi found out, assembling a vast portfolio of media properties is a lot easier than coming up with a winning strategy.

AFTER A dizzying buying spree over the past two years transformed the French water utility into the world’s third-largest media company, Vivendi Universal has fallen on hard times. Since narrowly averting bankruptcy in July, the company has been working on a plan, outlined Wednesday, to cut the media giant’s $16.7 billion in debt by selling nearly $12 billion in assets over the next 18 months. CEO Jean-Rene Fourtou said the moves will include the sales of the conglomerate’s publishing and telecommunications units outside of France, cost cuts, and a sharper focus in Vivendi Universal’s businesses.

“The company’s major strategic thrust will be the media and entertainment business, in other words, the creation of consumer content,” Fourtou said.

Vivendi Universal’s downsizing strategy marks a sharp reversal from the conventional wisdom at the turn of the millennium that, in the media business, bigger was better. After a wave of mergers consolidated American media companies in the 1990s, Vivendi Universal’s problems point to the perils of conglomeration for its own sake.

From the beginning, the company had trouble convincing investors of the wisdom of combining media businesses like television and publishing with its existing water utilities and sewage companies. Even after the company announced it would divest its utility holdings, the planned synergies within the media side of the business left many investors unconvinced, according to David Miller, a media analyst at Sanders, Morris and Harris in Los Angeles.

“It was just was an absurd vision,” he said. “The vision of piping content through cell phones was something that the U.S. institutional (investor) community couldn’t embrace.”

But Vivendi Universal is not alone in its struggles to manage a far-flung media empire. Media top dogs AOL Time Warner and The Walt Disney Company, the biggest and second-largest industry players respectively, have seen their stocks plummet as earnings faltered and the benefits of combining disparate media properties proved less profitable than expected. And while News Corp.’s television and movie operations continue to generate strong cash flow, the company recently wrote off $2 billion from its Sept. 2000 purchase of a minority stake in Gemstar/TV Guide, which publishes interactive television listings.

One of the few mega-media companies that appears to be firing on all cylinders was formed by the May 2000 merger of Viacom and CBS. The combined company has fared better than its rivals, say analysts, by remaining tightly focused on two core businesses — broadcasting and movies.

“That merger wasn’t creating new business paradigms,” said Prudential Securities media analyst Katherine Styponias. “It was focused on making existing ones better.”

Viacom has also prospered where others have faltered, say analysts, because it’s businesses are more closely aligned. Selling ad time across a number of different cable television and broadcast outlets has turned out to be a lot easier than “cross-selling” advertising package deals that include cable networks, Web sites and magazines.

To be sure, big media’s problems are not solely the result of over-expansion or faulty business plans: Last year’s steep advertising recession cut a wide swath through the industry’s profits.

And much of big media’s current turmoil can be traced to mergers that were conceived at the height of the dot-com bubble. With the Internet expanding rapidly in the late 1990s, some media executives assumed that public consumption of content over the Internet would continue to grow at the same rapid pace, quickly transforming their businesses.

“The common issue that has hit Vivendi and AOL pretty hard is this high-falutin’, 10,000-foot, philosophical way of looking at the marriage between content and technology,” said Miller.

That marriage of content and technology continues, but it is proceeding much more slowly than hoped for. The collapse of the telecom industry and a sharp pullback in spending on high-speed connections to viewers’ homes has hampered video distribution over the Internet.

But some analysts think the long-term trend of distributing media over new Web-based platforms remains intact.

“With music, they’re going to have no choice,” said Styponias. “Have you seen the numbers for music sales lately?”

That doesn’t mean that combining different types of media automatically makes business sense. And there comes a point in the growth of any media company where buying more properties doesn’t automatically boosts the bottom line, according the Barrington Research media analyst James Goss.

“Beyond a certain size,” he said, “the incremental gains are going to be a lot less than they were early on.”

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