- The absolute value of scale. In every field — from TV and movie production and to digital news creation, distribution and monetization — hyper-competition drives companies to reach levels of efficiency above their old standards. Where there was once wiggle room, there’s now only a tight squeeze. That drive for efficiency has become a drive for scale, which has been behind the remarkably number of mergers and acquisitions over the past few years. Three chains now own 25 percent of all daily newspapers. Verizon, AT&T, Comcast, and Charter have consolidated the pipes business. The magazine business is dominated by three companies. Sinclair, Nexstar, Gray, and Tegna have already rolled up much of the local TV business.
- The Google/Facebook duopoly and its collateral impact, producing what Josh Marshall has called the digital media crash. “Crash” may be a litle dramatic. The digital news media bubble hasn’t burst; it’s not 2000. But it is a reckoning. We can hear the air escaping from an over-inflated balloon, built too much on speculative venture investment and way too dependent on digital advertising. The fault lines in the BuzzFeed, Vice, and Huffington Post models have been visible for years; now they’re widening. The duopoly’s dominance is leaving only crumbs for everyone else in the digital ad market, from the highest-flying digital startups to newspaper sites to big players like ESPN. For the last full year, of 2016, Google and Facebook took 89 percent of all the digital ad growth in the market in the U.S.; the other 11 percent amounted to only $1.4 billion — and that stretches quite thinly across all the national and regional media in this country.
- The end of most strictures on who can own what, driven by the runaway train of Federal Communications Commission de-regulation. As these new rules — allowing fewer companies to dominate the regional TV business and allowing common ownership of daily newspapers and TV stations in the same market — settle in, everyone’s M&A calculus assumes new complexity.
Let’s look at the Meredith/Time Inc. case within that three-fault landscape. Meredith CEO Steve Lacy made scale the centerpiece of his deal logic, in part to compete better against Google and Facebook. Meredith, he says, will be able to reach 200 million people across all platforms. And, given cost efficiencies, he says it will be able to cut a half a billion in costs over a couple of years. Meredith’s own magazine business, though, is hardly roaring along. Meredith’s magazines ended their third quarter down 2 percent in revenues year-to-date. Why? As at all legacy publishers, print advertising continues to shrink away. And digital ad growth — and profit, given downward pricing pressures — gets tougher as Google and Facebook siphon off 90 percent of the growth. Then there’s the rolling deregulation of TV station ownership rules, and of cross-ownership (TV, radio, newspaper). Meredith, too, faces that reality. The company owns only 15 regional TV stations, but its TV (or “Local”) division has thrown off 60 percent of its profits. The magazine business produces 60 percent of the revenues, but only 40 percent of the profits. With just 25 percent of its pre-acquisition revenue coming from digital, Meredith must decide how much of a TV player it should be. Will it buy, and with what funding? Is their new partner the Koch brothers’ money available? Or will it sell and get out of the TV business? (In this era of ferocious M&A, there’s also the follow-on sales question: Who may buy Fortune, Sports Illustrated, and Time if and when Meredith likely puts them up for sale?) Scale, the duopoly, and FCC dereg — they all come together in that deal, and in the other contemplated deals of the day. Take the $60 billion whopper of a combined Disney and Fox combo, a deal apparently moving toward finalization. Disney’s desire for Netflix-competitive scale writes the headline. But then we have Disney, owner of once-high-flying (and now serial job shedder) ESPN and of ABC, aiming to reduce its reliance on ad revenue, given duopoly damage. And then there’s the big follow-on question: If the Murdochs sell most of their TV programming and distribution assets to Disney, they’ll keep the national Fox news, sports, and business channels. As I discussed with the Financial Times’ Shannon Bond this week, the potential next steps for a new Fox boggle the mind. As the FCC removes cross-ownership rules, might Rupert recombine the print-centric News Corp — with the global business franchise of The Wall Street Journal at its center — with Fox News, Fox Sports, and Fox Business? Might he take that new assemblage private? Such a company would balance its own reliance on the increasingly problematic ad business with reader-revenue-first news operation on three continents, anchored by the Journal, and significant retransmission fees flowing through the regional stations. Or would Murdoch buy more local stations to better compete with Sinclair and the other consolidators? Fox local stations reach about 37 percent of the country, and 39 percent is the current regulatory limit. But that rule is headed for the airwave archives. Today, Fox owns 28 stations in 17 large markets; in seven of the 10 largest metro markets, it’s reaching the (current) limit of two stations — a duopoly of a different kind. All counted, it already claims station duopolies in New York, Los Angeles, Chicago, Dallas, San Francisco, Washington, Houston, Minneapolis, Phoenix, Orlando and Charlotte. Would he put together a new national/regional TV play, around national and local Fox stations? That’s something Sinclair is clearly trying to figure out, buying the remains of Circa and turning it into a right-leaning national digital news play, connected to its regional stations and their websites. Finally, might he — as the elimination of cross-ownership rules would allow — pull a new page from his old playbook and buy big newspapers in metro markets, harkening back to his effort to buy the L.A. Times in 2012? Cross-ownership rules short-circuited that deal; they wouldn’t now. Murdoch, with his invention of Fox News, has shown already his colors. (It also takes no stretch of imagination to see how David D.Smith, chairman of Sinclair, intends to use his new empire. And haven’t the Kochs, who tried to buy Tribune Publishing four years ago, sent a new message about their desire to buy into media with the $650 million investment that made Meredith’s Time Inc. buy possible?) Finally, let’s consider a few of the other titles hitting the market in these rapid-fire M&A days. Almost lost in the big-dollar deals is something smaller but also important: the Cox Media Group selling its long-held dailies in Austin and Florida’s Palm Beach County. Why? Cox Media Group president Kim Guthrie lays out the company’s current strategic rationale:
After careful consideration, we have made the difficult but strategic decision to put our newspapers in Palm Beach and Austin up for sale. We have made the decision that we will be better equipped to operate our newspapers in Atlanta and Ohio, where we have the integrated opportunity with our TV and radio operations.Cox got FCC waivers long ago, giving it its unusual ability to own both newspaper and TV assets in the Atlanta and Ohio markets. Guthrie’s rationale is clear, and is serving as a template for other chains. “Everybody’s now looking at combinations,” one top news executive told me this week, as the full impact of the FCC changes sink in. Such combos feed into the other two of our fault lines: achieving scale within singular metro markets, and the ability to diversify somewhat away from reliance on print and digital advertising. How might that figure into the market for Palm Beach and Austin? The opportunities for local scale are the easiest to see. Tronc (owner of the neighboring Sun-Sentinel) and Gannett (owner of the Treasure Coast News) are the likeliest buyers — and would-be scale beneficiaries. Might a TV station buy fit in here as well? In Austin, the logical buyer — assuming it can get the price it wants — is Hearst. It already owning the Houston Chronicle, the San Antonio Express-News, the Laredo Morning Times, the Plainview Daily Herald and the Beaumont Enterprise; a buy in Austin offers good efficiencies, similar to what Hearst Newspapers president Mark Aldam has now assembled in Connecticut. Then, Hearst — owner of 32 TV stations — faces a question: Will it follow Cox’s example and begin putting together multimedia property investments in key cities, moving further away from reliance on print and digital ads? Hearst is making significant and smart investments in the digital sides of its business, and it may be one of the few newspaper/TV companies ready to scope out the new multimedia, multi-platform future. What’s the new theory of the case for this strategy? As companies plan for the near future, the potential business benefits of putting substantial investment into this sort of convergence are still profoundly uncertain. What kinds of new products for new audiences will yield new revenues and new profits? As a result, the first wave of these “new convergence” plays are more likely to move the needle through plain old cost savings — and job reduction. While that new convergence is still an early work in progress, the three fault lines show little sign of fading away. Together, they make the business logic here inescapable. Scale is essential. Finding ways around Google and Facebook is fundamental. The old divide between “TV” and “newspapers” looks like it could crumble. In the United States and other democracies struggling with civil discourse and basic questions of fact, our big question remains: Who will the shapers of the next digital age be, and what sense of community, national, or democratic mission will accompany their business strategies? On that question, we hear and see very little.