Media Outlook: Measuring Up

In an economic downturn, is it size, or is it agility that determines success?When news broke in early September that NBC parent General Electric was proposing to merge the entertainment assets of Vivendi Universal into its NBC TV network arm, there was a sense of completion in the media industry. As part of the deal, still pending final approval, NBC would gain control of well-known cable TV brands such as USA Network and Sci Fi Channel. Perhaps more important, however, the Peacock network will take over Universal's film and television production business, the latter of which creates shows such as Law & Order and The District for network TV and Crossing Over With John Edwards and Maury for syndication.When NBC subsumes all of Vivendi's goodies, the company will take the final seat at the table of the true media behemoths—conglomerates such as Time Warner, Viacom, News Corp. and Disney—that control soup-to-nuts operations to create, distribute and cross-promote entertainment content. NBC's inclusion in this select group comes at an intriguing time because the U.S. economy—both the general and the media economies—has been, diplomatically put, challenged. Downsizing, streamlining and plain, old-fashioned cost-cutting have hit nearly every media company in the last two or three years. The picture hasn't been pretty; the pain has been well shared.A reading of the tea leaves—that is, the collected wisdom of a half-dozen media merchant banks and industry analysts, who predict the economic future with all the accuracy that predictions of the future typically entails—indicates that the economy is beginning to turn around. A shimmering sliver of light is apparently visible at the end of the long, dark tunnel that has been the media business. But the industry is not out of the dark yet, and the growing spheres of influence of the multi-tentacled media companies continue to beg the age-old question: Does size really matter? In other words, do the conglomerates, particularly in the rough sea of a tumultuous economy, have an advantage over their midsized or smaller brethren? Or does the perfect storm of downward-spiraling NASDAQ, Dow Jones and S&P 500 indexes make the larger companies more vulnerable?Depending on whether you put that question to a small media company or a large conglomerate, you'll get a different answer. But, with the number of mergers that have taken place over the past few years, some observers believe that bigger is better."The companies that are disadvantaged and will continue to be disadvantaged are the ones that are not able to bring more than one media offering the table," says Michael J. Wolf, managing partner of the media and entertainment practice at McKinsey & Co. "The ones that can do these huge advertising deals across the full breadth of their properties will be able to get a much bigger share of advertising dollars. And that's what NBC is hoping to gain with Vivendi."When and if NBC and Vivendi come together, the advertising slump may well becoming a thing of the past…at least that's what the forecasters believe. The record-setting $9.3 billion broadcast upfront—and the fact that advertisers have reneged on only about 2 percent of their upfront commitments—is great news for the networks, always a bellwether for the industry.Veronis Suhler Stevenson predicts total U.S. ad spending will grow 3.8 percent by the end of 2003, to $177.6 billion, and will have a compound annual growth rate of 6.3 percent through 2007, to $231.9 billion. Two of the hardest-hit segments of the media marketplace—online and business-to-business print advertising—seem poised for improvement. Internet advertising rose 7 percent in the first quarter of this year, to $1.69 billion. And for the first time since November 2000, business-to-business ad pages are beginning to show some hope: Pages improved 0.9 percent in June and revenue was up 4.9 percent. In more bullish economic times, Wolf says, a rising tide tends to lift all boats. When the economy turns south, however, advertisers, often locked in one death match or another for market share, become more intent on squeezing the most out of their advertising dollars. That, Wolf says, leads to a heightened level of horse-trading for the best deals. And that sort of quid pro quo is more likely to occur at a media company with lots of components."Big, national advertisers like these conglomerates because they are always looking to trade up—for better media properties, for better pricing, for better avails. In boom times, to some extent, almost every media company will prosper. In a more challenging economy, size and scale can be a major advantage with these advertisers."Rich Hamilton, CEO of Zenith Media, agrees with Wolf, up to a point. He says he clearly sees the benefit potential of a media colossus, from the standpoints of ad sales and financial resources. But those advantages, he says, are there in good and bad times. And there isn't anything inherently good about being massive when the economy drags. Just ask the head of any small to midsized media company; they'll tell you they have the advantage of being able to turn on a dime when fortunes change."When you lump things together, you aren't going to necessarily have an advantage," says Jeff Smulyan, president and CEO of Indianapolis-based Emmis Communications. Emmis is a diversified media company with holdings in TV, radio and magazines. It's a powerful media firm, but it does not, nor does it pretend to, play in the same arena as the media giants. And that's fine with Smulyan."What it really boils down to is the quality of your operation," he says. "I wouldn't want to denigrate any of those larger companies, because they have fine operations too, but the ability to move more quickly is an advantage to us in some situations. Most advertisers are looking at very specific objectives, and what they really need is a very targeted approach. We can give them that, and we can make it happen quickly for them."The ability to pull together a top-flight advertising deal quickly also works well for Des Moines, Iowa–based Meredith Corp. The publishing/broadcasting company might not be among the largest media players in the land, but it's no pushover."What we hear sometimes from our clients is that other, larger companies can't get all their constituent parts to play together," says Stephen Lacy, president of Meredith's publishing group. "We haven't burdened ourselves with major silos, and we can move back and forth between platforms—whether that's consumer magazines or custom publishing or TV stations or Web sites. Our specific advantage has to do with the variety of media assets we can pull together in a very nimble way. When times are tighter, it becomes a question of whether you can execute that."Lisa McCarthy feels just as confident that she can. McCarthy is executive vp of Viacom Plus, the Viacom unit created in 1998 that is able to cut wide-ranging deals for advertisers with blue-chip properties such as broadcast networks CBS and UPN, cable nets MTV and Nickelodeon, TV and radio stations, and outdoor. "What we have is this huge playground, and as long as the client tells us what they need, we can bring everything together for them," she says. "When you look at our entire portfolio, we feel we're better-positioned whether the economy is strong or challenged."There's no underestimating Viacom's media muscle, but parts of the company have had more problems that others during the downturn. Although CBS is reaping the rewards of a revitalized prime-time lineup, Viacom COO Mel Karmazin publicly lashed out at the company's 185 radio stations for their lackluster performance in the first quarter. "Our company is so diverse that at any given time we're going to have businesses that are doing really well and some that aren't," explains McCarthy. "One advantage of having a company this size is that the strong parts can help the weak."Over at Disney-owned ABC, Mike Shaw can offer advertisers a pretty impressive playground, too. Shaw, president of sales and marketing at ABC and the executive who oversees ABC Unlimited, the cross-platform unit of ABC and Disney properties, sees a huge advantage to the resources he can tie together. Shaw's menu of offerings includes the ABC television network, TV stations, cable networks such as ESPN, radio, magazines and even cruise ships. ABC Unlimited, started in 2000, created a sweeping cross-platform Hispanic marketing campaign in early September with Denny's restaurants."I think there's been a fundamental shift in the way advertisers view these deals," says Shaw. "Good economy, bad economy, I think there's going to be more of them. You don't get 100 percent of someone's money, but you can get a lot more than if the advertiser is seeing 15 or so media companies."On occasion, he adds, advertisers looking to make a large, national deal will pit ABC Unlimited against other media giants to see who can come up with the sweetest deals: "Advertisers will tee us up against AOL Time Warner or Viacom. And in those situations, anyone who can't put together a deal on that level will be disadvantaged."And now, with NBC/Vivendi joining the ranks of the world's largest and well-connected media companies, there will be one more media goliath getting "teed up.""I would expect that now NBC will really be looking at talking to clients about their entire portfolio," says Viacom's McCarthy. Rich Brunelli is the former editor of Mediaweek Online.

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Media Outlook: Measuring Up

Rich Brunelli

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