The media like nothing more than to cover the media. For that reason, there has been near-endless coverage of the struggles of “old media” companies trying to succeed online. Pundits debate the possible return of “pay walls” to the web, the prospects for “freemium” products that coax some subscription revenue from a larger pool of non-paying users, and the like. All of these are appropriate and necessary discussions of media products and business models. But it’s time to start talking more about the media companies themselves — not what products they should offer or how much they should charge, but how they should be organized and managed.
The barriers to entry in media have fallen. That means successful media companies will start many more ventures than they have in the past. New opportunities arise all the time, and the capital requirements are typically minimal. Fortunately, the barriers to exit have fallen, too. Without sound stages, broadcasting facilities, or printing presses, a new media company can shut its doors with minimal asset losses. The diversified media company of the future will enter (through startup and acquisition) and exit (through shutdown or sale) businesses very rapidly. The line between an operating company and an investment vehicle blurs, but shareholders can benefit despite, or because, of this rapidity of business creation and destruction.
The evidence of disruption in the U.S. media business is hard to miss. It’s worst in print, of course, with newspaper and magazine circulation and advertising revenue continuing to plunge. In Hollywood, this year’s rise in box-office receipts can’t undo the damage of years of soft DVD sales and the failure of Blu-ray (subscription required) to move beyond a niche product. Even the television business, supported by continued increases in viewing hours, is struggling to adapt as advertisers lose interest in the up-front sales model that propelled the industry for years. Meanwhile, the display ad market online remains soft. (Ironically, the only secure business seems to be the newest: the sale of sponsored links on Google.) Lately, yet another trend has left media strategists puzzled: “Social distribution” — most visible in the increasing roles of Twitter, Facebook, and other media as ways for users to share links and discover interesting content in real time — may well become more important than search as a driver of traffic. While social distribution won’t threaten Google’s revenue for some time, if ever, it complicates media companies’ efforts to build traffic through search-engine marketing and optimization techniques.
Economies of Scope
Modern media conglomerates — News Corp., Disney, Time Warner, and the like — succeed when they have economies of scope. Television production does exist at independent companies, but production companies owned by conglomerates (like Twentieth Century Fox Television and ABC Studios) benefit from predictable demand from TV networks owned by the same company. Similar arguments hold across the range of media companies and explain why so many once-independent media businesses (such as home video distribution) are now the province of the conglomerates. Disney’s planned acquisition of Marvel (40 years after Warner Bros. acquired DC Comics) is just one more attempt to maximize the value of media assets (in this case, comic-book characters).
But online, the story has been different. Successful online companies have had little incentive to acquire adjacent businesses or become part of traditional conglomerates. Google’s YouTube should not acquire a video-production company — it’s one (good) thing to control television production when you need to fill just 21 prime-time hours per week, but it’s clearly mistaken to think that Google could benefit materially if it owned full rights to a few of the ten of the thousands of videos uploaded to YouTube every day.
Why doesn’t the traditional model work online? In short, the web is too fragmented (millions of videos, millions of web sites), too loosely coupled (countless hyperlinks, embed codes, APIs), and too nascent (too few revenue models, too little clarity about the future) to fit comfortably into a media conglomerate as they exist today.
But many of the same economic forces that drove consolidation in 20th-century media still exist. Small companies still need access to resources. Content producers still seek privileged access to distribution. The challenge is that the scarce resources are different: while the media business continues to rely on “talent,” today’s talent may be writing code rather than screenplays. Distribution still creates value, but it can mean a quickly passed link on Twitter or Facebook instead of an 8 p.m. slot on a broadcast network.
What’s the Answer?
How should new-media companies address these forces? Is there a way for these companies to get the benefits of belonging to a media conglomerate without falling into traps? If the conglomerate structure does not work in new media, what will? In the near term, diversified new-media companies should and will be smaller than the conglomerates, if only because the revenues and profits online are still small compared with those in traditional media. But there are ways that small media companies can get the very real benefits of being in multiple adjacent businesses online. One model is to build a network of focused media businesses. Building good online businesses is hard, and the entire industry is still in its adolescence. Simplicity, focus, clarity — these are core principles for success.
But these focused companies need to cooperate and work together. Businesses should encourage cooperation through publicly accessible application programming interfaces (APIs) and publicly accessible data. Every time a business creates such an API, it enables others (including, perhaps most importantly, its corporate siblings) to work with it. It cements its position as a company that matters to others, and it does so without executive mandates or endless licensing negotiations.
Cooperation within the enterprise is only half the battle. Successful businesses need to work with other companies to succeed. The diversified company can help, building links between its constituent businesses and critical partners (large potential corporate customers, venture capital firms, business partners, etc.). Larger companies have more connections and more clout, and so belonging to a larger group provides a direct benefit to small media companies. Traditional media conglomerates own 100 percent of their core businesses. They reward talent (actors, directors, producers, etc.) with contractually determined compensation. But that model fails when the talent are writing code. The best alternative is for the key talent to own equity in their venture. Perhaps this structure is an interim step toward a day when star engineers take home $10 million paychecks, or a “share of the gross.” In any event, the most valuable company in the near term is one that will own less than 100 percent of its constituent businesses.
It’s clearly early days for diversified digital media companies, and they may never be as big as the traditional conglomerates. But the economic forces that drive cooperation among media businesses are going to continue to exist, and it’s up to the entrepreneurs and investors in new media to figure out how best to benefit from those forces.
Josh Auerbach is senior vice president at betaworks, a media company focused on the real-time web and social distribution of content.