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The Winner’s Curse: Why Media Companies Really Underperform

2010 July 21

Oh, those poor moguls…

Media and entertainment companies, since the internet came on the scene, have been very poor investments.  New media advocates tell us that it’s because traditional media companies are old and slow.  The moguls themselves say it’s because people don’t want to pay for content.

Yet above  the din and mindless babble, the evidence supports only one conclusion: It is the moguls misplaced egos, more than anything else, that does them in.

A Dismal Record

On one point all can agree, media and entertainment has lagged behind the rest of the market.  The chart below shows a basket of media and entertainment stocks vs. the S&P 500.

Even a fairly superficial review will quickly reveal a few things that should be surprising in light of what is widely reported in mainstream media and blathered on about in blogs.

Firstly, the crash in 2000 was far worse for media companies than the recent one.  In fact, media stocks have gained a little ground this time (most probably due to the fact that financial companies have fared far worse). Secondly, the only time that media stocks over-performed was during the dot-com boom.

A Failed Narrative

What is striking about the stock performance is that it tells a story that is diametrically opposed to what the pundits would have us believe – that poor traditional media performance is due to the fact that they “just don’t get it” and are being plowed under by smarter and more nimble digital players.

If the pundits’ story was true, we would expect that media stocks would have gotten killed in the dot-com boom and done even worse now that it’s “all about the conversation.”  In fact, just the opposite happened.

The truth is that while most digital media companies are awash in red ink, traditional media has never been so lucrative.

A Profitable Business

Upon further examination, the real story emerges:  Traditional media companies actually run their business quite well, their problems stem not from ignoring the pundits, but from listening to them and Wall Street too much.

The chart below shows operating earnings (the money media companies make from running their businesses) vs. net earnings (after tax and other charges).

Operating margins for media companies have actually steadily increased since the dawn of the internet. They seem to be getting better at what they do, not worse.  Given what we generally hear reported, this seems almost incredible, but it’s true.

Net margins tell a different story.  Not only have they failed to improve, but every time a downturn comes along net earnings drop like a stone even as operating margins hold amazingly steady.

The Missing Link

So what is holding media companies back?  Is it the journalists that have failed to adapt to the web?  Or the ad sales people who can’t seem to grasp a new business model?  Possibly the programming executives who have a tin ear for what the public wants?

Nope.  As the positive operating earnings trend shows, these guys are doing their jobs and doing them well.  The real problem is the masterminds in the  C-Suite., who use the money their operations generate to go out on crackpot shopping sprees.

This can be clearly seen from impairment charges they have had to declare, which are listed under “non-recurring items” on financial statements.

Here, we see the real source of all the red ink that has made headlines.  Although media company operations have been earning money during the crises, their investments haven’t faired so well.  In CBS, News Corp and Time Warner alone have written off an astounding $48 billion in two years!

Many might say that this is normal in a downturn.  Companies make investments that inevitably go bad.  However, if that were true, we would see even bigger writedowns in technology companies than we see in media.  In fact, quite the opposite is true.

For comparison, here’s the write offs of  Microsoft, Cisco and Oracle; three companies with much bigger market caps than media companies as well as highly aggressive acquisition strategies:

How is it that these companies, who’ve made dozens of acquisitions in an industry of dizzying complexity have had to write off only a small fraction of what media companies have?

How it Happens

Media is a sexy business, with lots of glamorous people and cool parties.  It’s only natural for the people who run media companies to want to be glamorous and sexy themselves.  If you can’t sing or dance, then making risky acquisitions is the best way to get your name in the paper.

These investments are usually in new operating areas (e.g. digital) that are unproven, but seem like they could be the next big thing.  When moguls buy such companies they are hailed for their far reaching vision and strategic brilliance (i.e. Murdoch and MySpace).

Of course, in order to buy companies exciting enough to gain accolades from an adoring business press, they have to outbid other moguls who also want to think of themselves as forward looking visionaries.  Inevitably, they over-pay.

That’s the winner’s curse.

Don’t Seek Out the Unimaginably Brilliant – Avoid the Unbelievably Stupid

All of this could be avoided if instead of trying achieve the unimaginable brilliant, media executives simply avoided doing the incredibly stupid.  Clearly, media is a very profitable business when it’s not screwed up by people gullible enough to listen to investment bankers.

There is, of course, another way.  I previously wrote about unlikely digital heroes who’ve managed to conquer new media through operational strategies, rather than flashy acquisitions.

Time Warner’s in-house digital businesses have performed much better than the properties gained from their ill fated AOL acquisition.  Conde Nast has turned around its digital business without any major purchases (albeit two minor ones) and Naspers proves that an acquisition strategy can work if it’s well thought out and executed rather than ego driven.

Despite what pundits say, media companies are very profitable and will continue to be as long as the people who run them avoid listening to…er…the pundits.  Instead of trying to  become masters of the universe, they should focus on running their business.

As the old saying goes, “pigs get slaughtered.”

– Greg

Note:  A special thanks to the Matthew 25 Fund for helping with the research for this post.

20 Responses leave one →
  1. Bob permalink
    July 21, 2010

    Nice post Greg,

    When traditional agencies and clients adoption to new media – Media owners would focus more on New Media ( Investments included) – thoughts from India perspective.

    Regards,

    Bob

    [Reply]

    Greg Reply:

    Thanks, Bob.

    [Reply]

  2. July 21, 2010

    Thanks for putting it in letters! ;)
    I keep telling guys around me that “it`s just the different media channel, but the same business” and they are trying to find any reason why they should overpay for aquisition.
    But INVESTMENT BANKERS are the ultimate evil in this case. It`s them who constantly pitch top guys about “new media premiums” in valuations!!!

    [Reply]

    Greg Reply:

    Vitaly,

    I agree, many are willing to pay a premium even for failed management that has chased off the bulk of their talent:-)

    – Greg

    [Reply]

  3. Mark "The Hunk" Mulholland permalink
    July 21, 2010

    Good analysis and presentation – Thanks for the Matthew 25 Fund plug!
    Mark M
    P.S. The investment bankers are only the tempters. Media management and directors have free will and possess reason. Being disappointed in an investment banker for proposing deals is like being disappointed in a tiger for eating meat.

    [Reply]

    Greg Reply:

    Mark,

    It’s a very good point, but begs the question: Why are people in such lofty positions who are responsible for thousands and earn millions so easily taken in?

    – Greg

    [Reply]

  4. John Oleze permalink
    July 21, 2010

    Greg,

    Great post as always! You mentioned several companies that were forward thinking and visionaries but you failed to mention some of the best individuals in the industry that are leading the charge. Care to name a few?

    Thanks again

    [Reply]

    Greg Reply:

    John,

    Sorry, but no, and I think that’s the point. The people who create value are rarely the ones who make the headlines.

    – Greg

    [Reply]

  5. Matt permalink
    August 25, 2010

    This is great

    [Reply]

    Greg Reply:

    Thx:-)

    [Reply]

  6. Falk permalink
    September 5, 2010

    Greg,

    I am impressed by your approach. But could you be a bit more specific about the sources of your data. Why did you only choose 2009 and 2008 for comparison. And why did you not provide the Total revenues of the compared companies to give the reader an Idea of what size companies you are talking about. Maybe you can provide some more information. Apart from that very interesting research.

    Falk

    [Reply]

    Greg Reply:

    Falk,

    The sector data came from the Matthew 25 fund. The rest of the data came from the individual companies’ annual SEC filings. 2008 and 2009 data were used because those were the crises years in which net earnings were negative.

    Glad you like the post.

    – Greg

    [Reply]

  7. dana weissenberg permalink
    October 10, 2010

    regarding “the missing link” , let’s also consider that traditional media continues to have extremely large margins depsite the decline in traditional media consumption and usage and “new” media (not so new any more by the way) operates on very slim margins as they continue to be held to unreasonable expectations. i would love to see any form of traditional media step-up and share the cost per acquistion-they’re rarely held to this expectation.

    thanks for sharing the article.

    [Reply]

    Greg Reply:

    Good point, Dana!

    Thanks.

    – Greg

    [Reply]

  8. Pulkit permalink
    October 10, 2010

    Greg,

    A really intriguing analysis. The approach is wonderful, I however believe that some part of businesses of traditional media have actually moved on into the new age internet media. Although a big chunk of business revenues continue to be received from traditional media sources, we cannot discount their foray into to modern media sources. Would be wonderful if you could research into what part of these businesses come from new age acquisitions of non traditional media.

    Pulkit

    [Reply]

    Greg Reply:

    Pulkit,

    I think you’re absolutely right and many traditional media companies are doing a wonderful job in digital. I even wrote about some here: http://www.digitaltonto.com/2010/4-unlikely-digital-heroes/

    I think the big difference is that when companies focus on acquiring digital skills rather digital businesses they tend to do quite well. However, when they dream up some big strategy the tend to overpay and fail.

    – Greg

    [Reply]

  9. January 22, 2011

    Hi Greg —
    I agree with a lot of what your saying, mainly because it seems that many of the ideas come from a book I published with two co-authors last year: The Curse of the Mogul: What’s Wrong With the World’s Leading Media Companies. Here’s more information about the book in case any of the readers want to read the original. http://quantummedia.com/Links_Reviews/The_Curse_of_The_Mogul.
    Lucky for you, it is coming out in paperback in just a few weeks. The authors are academics, so we love our ideas to be discussed, but a little credit might be in order. Regards,
    Ava Seave

    [Reply]

    Greg Reply:

    Ava,

    Sorry never read or heard of your book. Certainly not a bestseller here in Kiev.

    As for credit, you’ll notice at the bottom that I did give credit to the Mathew 25 fund, which did actually assist me with my post and am careful to be scrupulous about linking to sources (as you can see throughout the site). The difference between operating losses and write-offs isn’t really that complicated and, I would submit, we’re probably not the only ones who noticed the problem.

    So sorry, I would give credit if any was due, but there isn’t. I’m sure, however, that your book is a fine publication and I wish you luck with it.

    – Greg

    [Reply]

    spotmagicsolis Reply:

    Hi Ava, I can see why you’d think that. Stuff happens like this to me too. I mean I’m no expert, just a smarty pants wise ass but when we are all such brilliant people in the same mind set, talking about a similar niche we are bound to cris-cross over in thoughts and when you write it down, well, you see how you could run into a situation like this.

    I went to your page and listened to your short interview. May I say you come across very knowledgeable and I believe assertive gals need more recognition. So there are your strokes from a chick in a boat, paddling like hell in the media/technology sea. My hubby and I invented DG Systems (DGIT on the NASDAQ) Whereas the portion we founded and launched just got sold off to Extreme Reach. Made Scott Ginsberg a lot of money, bless him. We cashed out long ago when stock was at 7.00. Check out the new company we are just getting launched where we finish page 2 and 3 of the business plan we left with DG but was probably tossed out after we left the company in the hands of Sierra Ventures.

    New company is very stealth but presenting in public for the first time @NABshow, Vegas in 2 weeks.
    http://www.synchronicity.co

    [Reply]

  10. March 24, 2014

    People cannot just go digital, a company / platform has to help them do it.
    spotmagicsolis´s last blog post ..New Features

    [Reply]

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