FCC asks: Do media ownership limits make sense?

"Even the news industry's free fall probably will not be enough to wipe out complicated federal rules designed to restrain the power of media companies," is the conclusion of an Associated Press analysis of the forthcoming FCC's mandated quadrennial review of its ownership regulations.

Although the legacy media companies are "no longer the almighty players that they were when the ownership rules were first enacted, only modest changes are likely to be enacted because "the agency is also under pressure from public interest groups that support strong limits."

On the one hand, says the article "Newspaper readers and advertisers have migrated to the Internet, where a lot of content is free and advertising costs less. As a result, newsrooms have shrunk and newspapers have sought bankruptcy protection or shut down. Television broadcasters are suffering. too as cable, satellite TV and the Internet splinter audiences and siphon ad dollars - forcing stations to seek new revenue streams and even raising questions about the future of free, over-the-air TV."

On the other hand, there is the position of groups such as the Free Press and the Media Access Project that is summarized by Georgetown Law professor Angela Campbell, who represents several public interest groups defending strong ownership limits. She "fears more consolidation would lead to newsroom layoffs as media companies combine operations and feed the same content to different outlets."

The FCC has still not resolved the objections of the Third Circuit Court of Appeals, which threw out the FCC's rules loosening cross ownership rules that followed its 2002 review. The landscape of the media industry has changed dramatically since then, with large newspaper chains disaggregating (e.g., Knight-Ridder), cable networks eating into the old broadcast networks, printing less than daily (e.g., Detroit Free Press and News), or going through bankruptcy (e.g., Philadelphia Inquirer, Tribune Co.). The trend of falling advertising revenue, seen in the accompanying chart, preceded the recession and falling circulation of newspapers has been a decades-long process. TV evening viewership not only declined in 2009 from 2008 but is about half of its peak even though there are more households today.

Matt Welch takes media reformistas to task for hypocrisy

Matt Welch, in a post at Reason, pinpoints the hypocrisy of the media reformistas movement. Given what Welch documents they are on the record as lamenting—-the faceless corporate control of newspapers, the cost-cutting pressures that come with being a publicly traded newspaper company, the lack of local ownership (and concern with local affairs that comes with it) and, above all, the trend of media companies gobbling up ever more media companies—-they should be applauding the new ownership of the Tribune Co. by its employees and Sam Zell—a mensch with a face.

But, Welch continues, they have dissed Zell as well. That’s because, as I add in a comment to Welsh’s piece, it is increasingly clear that the leaders of the movement have a real agenda that can be gleaned from the writings of Robert McChesney, the academic who mixes their Kool Aide. In his book Rich Media, Poor Democracy McChesney holds that you cannot have a democratic society so long as the media—no matter how many firms—are privately owned, profit-seeking and supported by American commercialism. So long as the choice is from privately run media companies no number of providers is acceptable.

Media reform, McChesney contends, is prevented because the people think there is diversity and that the media “give people what they want.” That’s a far more condescending attitude than even Newton Minow might have pinned on the mass audience. The reformistas, of course, are smart enough to see behind this illusion—-but not the rest of us constituting the great unwashed. How imperious!

Retiring WSJ Managing Editor Says High Profits Created Newspaper Industry’s “Golden Age”

Today is the last day on the job for Paul Steiger, who has been the managing editor of The Wall Street Journal, for the past 16 years. That’s an impressive run by any standard.

Last Saturday the Journal published his valedictory on the front page under the headline “Read All About It: How newspapers got into such a fix, and where they go from here.” (Sub. still required)

It is a marvelous recap of where we've been and a forthright how-we-got-here, a no-tears tree-top look at the newspaper industry. Having been writing about the industry and its love-hate relationship with technology and consolidation since 1973, I have found that journalists are often the least objective when writing about their own industry. He smartly captured the ebb and flow in a way that the vast majority of Journal readers-- who have not followed every wrinkle and trend -- would understand.

But in the midst of this guided tour guided, Steiger makes an observation that would surprise many media reformistas. First he describes what journalism was like when he started out:

As a kid reporter in the '60s, I heard tales from newsmen and photographers about how, just a few years earlier, they had sat in cars, engines running and radios tuned to police bands, trying to get an edge in covering the next murder. The national and international news would be handled by the wire services. Lurid local photographs on page one were what sold newspapers in that era.

A certain fast-and-loose, devil-may-care attitude often prevailed. I remember walking past a photographer's open car trunk and noticing that he carried a well-preserved but very dead bird among his cameras and lenses. The bird, he explained, was for feature shots on holidays like Memorial Day. He'd perch it on a gravestone or tree limb in a veterans' cemetery to get the right mood. Nowadays such a trick would get him fired, but in the 1950s, this guy said, there was no time to wait for a live bird to flutter into the frame.

But then, he says, something happened. Starting in the 1960s the industry “morphed into a series of mini-monopolies. This came about first as “mounting costs forced a shakeout -- mergers and newspaper closings that typically left one city paper preeminent in the morning market and another in the evening.’ Then the evening papers ran into troubles, “crushed by a phenomenon that can be summed up in two words: Walter Cronkite. More and more families gathered in front of the tube at the dinner hour.”

This is how Steiger characterizes the results of a newly prosperous newspaper industry:

Many of these information behemoths invested heavily in quality, expanding their reporting locally, nationally and internationally. This was good business as well as a boon to readers, because it raised barriers to entry for would-be competitors.

The result was a golden age of American journalism. In New York, Washington, Chicago and Los Angeles, of course, yet also in Boston, Philadelphia, Miami, Milwaukee, Atlanta, St. Louis, Des Moines, Louisville, St. Petersburg and more, daily papers were willing to send reporters far afield in pursuit of stories exposing corruption or explaining the world. Newspapers opened or expanded Washington bureaus and added reporters abroad. Some stationed them not just in London, Moscow and Tokyo but in places like Sydney and São Paulo.

As their financial strength and staff size increased, they became fearless in pursuing corruption.

The “golden age of journalism.” Profitable newspapers had the resources to invest more into their product. Intuitive? Or counterintuitive?

Isn't competition what we seek as the mechanism to ensure that the juices flow? Shouldn’t more competition – not less—be associated with the golden age of journalism?

Although he is not writing about competition per se, in his chronology Steiger provides some answers:

• “The news operations of the three main television networks in those days followed a similar pattern. As profits grew, they added to staff and launched foreign bureaus and investigative projects. The Sunday-night magazine program CBS launched in 1968, "60 Minutes," set a new standard for expensively produced and deeply reported video journalism.”

• “Cable TV added a new worry, because here was a medium that could target smaller, exclusive audiences and thus pose a greater challenge to print.”“Then in the 1990s came the digital networks and the Internet, unleashing forces that would ultimately undermine newspaper business models that had been so supportive of journalism.”
  
  
• Finally: “The decisive blow may have been Google's, with its powerful search engine that would either give you a quick answer to a question you had or steer you to sites that could. The irony, of course, was that some of the most useful of those sites were newspapers’.”

More could be added to Mr. Steiger’s description of the forces and trends. But the basic pieces are there. So, what are the lessons learned?

First, that profitable organizations have the wherewithal to spend to maintain and improve their products or services. I've written about this before. Some may take the money and run—a short term maximization philosophy. But many—probably most judging by Steiger’s list of newspaper cities—will look for longer term profit “optimizing” strategies. And for two or three decades that worked well for the newspaper publishers and their millions of stockholders.

Second, competition works. But critics and regulators must recognize the shifting boundaries of the market. Competition for newspapers was coming not necessarily from other newspapers, but from media that were partial substitutes: broadcast television, then cable networks, then online providers. They were and are competing for advertiser revenue, consumer personal consumption expenditures—and consumers’ time. Cumulatively they have taken a toll.

(Paul Steiger is now editor in chief of Pro Publica, “an independent, non-profit newsroom that will produce investigative journalism in the public interest.”)

Slate's Shafer "Defends" Murdoch. But it's Really About Encouraging Choice and Diversity

Jack Shafer, who authors the Pressbox column for Slate, wrote “In Defense of Rupert Murdoch” last Friday that Murdoch is “not as bad as some people make him out to be—people like Federal Communications Commission member Michael J. Copps.” In an open letter to the FCC Chairman Kevin Martin, Copps says that in buying Dow Jones, “For residents of the local New York metropolitan area, it will also mean that a single company operates two of the area's most popular television stations and two ofits most popular newspapers.”

Shafer reminds Copps—and the rest of his readership:

Copps—or the blockhead on his staff who wrote the letter—neglects to acknowledge Murdoch's never-ending role in increasing media competition and media diversity. For example, the main reason there are four big broadcast networks for Copps to complain about is somebody staked billions to establish and build the fourth network, Fox. That somebody would be Rupert Murdoch.

Shafer picks apart Copps' knee jerk and tired litany of presumed horrors of the combined News Corporation and Dow Jones. He concludes:

In the most laughable passage in his letter, Copps bemoans the damage to "localism" Murdoch poses. The last time I checked, the Wall Street Journal didn't have a metro section, so what the hell is he talking about?

I’m pleased to see a mainstream media critic demonstrating the hypocrisy, naiveté and frequent elitism in the media reformista (Shafer’s term) movement. I have been making many of the same points in articles and in this Blog here and here about the constructive role News Corp. has played in creating the very diversity of content that the self-styled reformers have called for. He risked his and his stockholder’s capital to start that fourth broadcast network in 1986—a challenge no other media company, union, cooperative, foundation or entrepreneur had been willing to try in over three decades. The Fox Network was not to everyone’s liking—but that’s exactly why it was important. It provided something different than other networks. The cable-based Fox News Network was the same: a competitor to the “monopoly” CNN that has succeeded by being different. We all benefit from the greater choice.

It’s not really about defending Murdoch. He’s a big boy and does not need my help or Shafer’s help. But News Corporation is a case study for how market forces and self interest—if given some space-- can create the variety of content that Copps and the self-styled reformistas think they can accomplish from tighter controls. It's a message that the elites don't understand-- the reality that the content is not culturally or ideologically to their liking is exactly the point. That's the essence of differentiation.

Murdoch has maintained an entrepreneur's mentality-- while having the resources of an enterprise that can supply the venture capital in-house.

News Corp. as an acquirer is limited by family ownership

While the outcome of News Corporation’s audacious bid to acquire Dows Jones continues to percolate, it might also be timely to look at News Corp. as an acquirer of media companies over time. Despite the image perpetrated by the company’s vocal detractors, News Corp is actually one of the few large media companies that has been much more of a creator and builder of media outlets than an acquirer. I’ll explain why.

Of the 20 largest media deals between 1981 and 2002, News Corporation was involved in exactly---one. That was its purchase of Gemstar-TV Guide for $6.5 billion, number 14 on that list. It also bought a controlling interest in DirecTV. In that period, however, the company started the broadcast Fox Network, with some smaller purchases of 20th Century Fox and some local TV stations; it started a satellite TV system for the UK (now BSkyB) and invested in a very early stage another for Asia (Star); it started from scratch the cable Fox News Network.

News Corporation’s recent high profile acquisition of MySpace for $580 million was impressive only because it was for a company less than three years old with maybe $20 million in revenue and no profit. But that price is small in media terms. When compared to McClatchy's acquisition of the Knight Ridder newspaper and broadcast group for $4.5 billion, the $5 billion offered for Dow Jones is modest. And it doesn't come within shouting distance of the $36 billion value of Viacom’s merger with CBS in 1999 (and since divested) or the Time Warner-AOL merger debacle.

News Corporation’s penchant for growing organically—as the strategic planners put it—is partly a reflection of its leader, Rupert Murdoch. It is also an outcome of the corporate structure and priorities that Mr. Murdoch has maintained throughout his career. News Corporation is a public company, which means that its ownership is shared among thousands of individuals, mutual funds and trust funds. The Murdoch family, however, controls about 30% of the voting stock, which gives it effective control over the company. This is essential to understanding its growth strategy.

But first some background. (MBAs can skip the next few paragraphs). There are two basic models for one firm to acquire another. One is by using cash. The other is by providing stock of an equivalent value.

A cash acquisition is easy to understand. The owners of the acquired company get a check when they send in their stock. The value of the deal rarely changes between the time it was announced and when it is completed.

However, the most common structure that acquisitions take with large public companies is through stock swap. That is, the acquiring company issues shares of its stock in exchange for the stock in the company being acquired. So, if the acquiring firm, Company A, has stock currently trading for about $10 per share and has agreed to acquire Company D for $500 million, it would need to issue 50 million of its shares and parcel those out to the stockholders of Company D, who would trade them for their own shares in Company D. Thus, Company A now has all the stock – hence ownership--of Company D.

The stock swap has some advantages and disadvantages, but the former tend to win out. The advantage for many stockholders of the acquired company is that the transaction does not typically involve any capital gains tax liability. The sellers are simply swapping ownership shares. They have not realized any gain (or loss) until and if they sell that stock. In a cash transaction, owners are simply selling their shares, so there are immediate tax consequences.

One disadvantage of a stock acquisition is that the values of the transaction can change if the value of the stock of the acquiring company fluctuates substantially before the deal is completed. For example, in the above example the parties had agreed on a $500 million value. Should the stock market in its collective opinion feel that this is not a good deal for Company A, the price of the stock may be driven down, let’s say to $9 per share. If the stockholders of Company D still get 50 million shares, then the value of that stock is down to $450 million. Depending on what was negotiated, the acquiring company may have to pony up more shares, in this example 5.5 million more shares, to keep the value the same.

What does all this have to do with News Corporation? It’s crucial. When a company issues stock, it may dilute the ownership of current stockholders. For example, say there are 100 million shares outstanding and one stockholder owns 30 million of those. It then has 30% control. If the company issues 50 million shares to make an acquisition, that stockholder still has 30 million shares, but now only 20% of the total.

Why would such a stockholder approve a deal that would dilute their ownership interest? In making the acquisition, the company becomes larger, hopefully more profitable. So 20% (or .02% or whatever for a smaller stockholder) ) of a bigger pie may be better in the long term than 30% (or .03%) of a smaller company.

But if maintaining control is paramount, then dilution by issuing stock is off the table. This has been the case with News Corporation, where the Murdoch family places a high priority on maintaining control. The result is that it must make the bulk of its acquisition by cash or grow by reinvesting profits in organic development. When it makes an acquisition for cash, it may need to offer a higher price than a stock alternative, as it must accommodate the tax liability of those stockholders who had not planned on selling. This is a problem in the Dow Jones offer that has not received much attention. The tax consequences could be substantial, especially for long term owners, such as the Bancroft and Ottaway families that have had their Dow Jones stock for many years.

This self imposed constraint on News Corporation has kept the company out of the major acquisition business. When it does make a large acquisition, such as the bid for Dow Jones, it must pick its spots. If it succeeds with this bid, it will likely be out of the major acquisition business for awhile, especially given its cash-gobbling plan for starting a financial news network for cable. At the end of March, News Corporation had about $7 billion in cash, more than enough to cover its $5 billion bid for Dow Jones, but not much left over when working capital needs are considered. And, given its near death experience in the early 1990s when it took on too much debt to finance its growth into television and satellite, it is not likely to want to load up much further on its current $15 billion in debt.

Although News Corporation has made media acquisitions over the years, they have tended to be relatively small by big media standards. They have been made with the intent on growing them by further investment and good management. To a far greater extent than most of its major media company competitors, it has added to media competition by its new ventures and added resources provided for smaller acquired ventures. And it has pursued this strategy in large measure due to its priority to maintain the company as a family run enterprise.

(Full disclosure: As a result of some divestitures and spins offs I find myself with ownership of some News Corporation shares with current value of under $400.)

Flow chart and new ad data reinforces competition and fragmentation in the media industry

I posted an entry today at the Rebuilding Media site which was primarily focused on media strategy.

Figure 1

However, I can use much the same data to further bolster the point that the media industry today is far more open and competitive than ever. Although Figures 1 and 2, originally created by Winnipeg-based Ken Goldstein of Communications Management, repurposed here, illustrate how the television business has opened up and fragmented, similar charts for other legacy media industries would be quite similar.

Figure 2

















The number of players has proliferated exponentially. Indeed, considering peer-to-peer and aggregators such as YouTube that provide easy access to materials from content creators that range from the highly professionals to the rank duffer, the close circle of content providers is blown apart. And this is possible because the gate keeping function of the broadcasters and then cable providers has been undermined by satellite and the Internet, not to mention offline conduits such as DVDs.

Meanwhile, advertising expenditures, the primary funding sources of our subsidized media, are quickly being transferred to Internet-based outlets. I graphed that trend last month here. The latest data on this front shows that 65% of online advertising is accounted for by four providers: Google accounts for 25%, Yahoo, 15%, AOL, 8% and MSN, 7%. Note that only one of these, AOL—-part of Time Warner--is associated with a traditional media company.

(There may be some legitimate difference of opinion whether all these companies should be classified as “media” in the sense of newspapers, magazines, radio, etc. But I have never seen a widely accepted definition of who can be included within the media rubric. I would argue that Yahoo certainly qualifies, with its original content in finance, news and sports. Google, on the other hand, may be the weakest candidate, though I could make the case that Google News performs a legitimate media function (Reader’s Digest qualified as a condenser of articles from other magazines and the original Time magazine was a compilation as well.)

Whatever the case, these players, along with Apple’s iTunes, Netflix, Wal-Mart, among the literally countless others, are playing a critical role in providing outlets for content, much of which continues to come from traditional players. But central to my theme of media competition is that the avenues illustrated in Figure 2 are providing all of us with more options than ever to be creators of content, with an option of finding an audience (Exhibit 1: you are reading this post. How large an audience could I have reached—and how—before the Internet?) And for anyone who so desires we have the tools to cheaply and readily find this content.

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