Few can argue new media’s impact on the Fourth Estate. The New York Times has turned to blogs, News Corp. is a MySpace junkie and NBC Radio now shares content with its satellite brethren. Despite these efforts, though, advertising dollars are still being siphoned away from traditional media’s coffers to new areas as wide ranging as viral media campaigns to commercial placements in video games. The dislocation has been swift.
“The media industry has always been one of the most consolidated sectors in America, and relative to the rest of the world, it’s a mature industry at this point. What’s happening now, at the macro level, is that value is moving around from one category to another and trying to find stability,” describes
Hindery sees the media universe as existing in three buckets, with divisions occurring between the distributors, the content providers and the portals, such as Yahoo or Google. “There’s been a lot of shifts between the three,” he says, describing the value migration. “It’s all pretty fungible. The investment opportunity for us is to figure out where it’s going and where it’s coming from.”
A market in motion
Technology has a way of keeping the incumbents on their toes. Take print media. In July, Information Today ran a story detailing that the percentage of adults who read newspapers daily has fallen from as high as 80% in the mid Sixties to 54% in 2003. It’s no secret where those eyeballs are relocating, and some reports have estimated that roughly a third of all Americans now get their news online.
And it’s not just the newspapers getting whacked. The Associated Press reported last month that in the first week of July, the four major broadcast networks (ABC, CBS, Fox and NBC) set a new record for irrelevance, logging the lowest ever combined ratings for prime-time viewership. Radio too, has felt the squeeze. While it’s tougher to quantify how much of an impact new media has had on the dials, what is known is that performance among radio broadcasters is way down. Westwood One, in August, reported a 43% decline in second-quarter net income, while a day earlier Clear Channel Communications, the nation’s largest radio station operator, said its quarterly earnings fell by more than 10 percent year over year.
“The traditional media model has been disrupted,”
Despite the uncertainty this new era has created, private equity groups continue to pump money into media. Earlier this year, a large buyout consortium, including
“The media space is always changing and evolving. That creates dislocation in the marketplace and presents opportunities to put money to work,” cites Sean White, a partner at media specialist
As firms seek to capitalize on the metamorphosis, it can be debated whether their roles are as contrarians seeking to profit on the industry’s current out-of-favor status or, alternatively, looking to bridge the gap between the traditional media outlets and their new media peers. In most cases, there are likely components of both, as demonstrated by the recent investment in Forbes Media by Elevation Partners (see box, page 26).
To exploit the market’s dislocation firms have taken a number of different tacks. One popular avenue is to invest in areas that can be considered relative safe-havens, such as business-to-business publications or local news outlets. The idea is that the information being provided appeals to such a niche audience, that competition will remain minimal.
This trend was illustrated in May when Gatehouse Media (with backing from
“We’ve got an investment in a community newspaper,” Spire’s White says. “It’s content that can’t be replicated by Yahoo or other online aggregators. It’s got a local police blotter, school events and news specific to local communities—it can be powerful content.”
Large urban papers, in contrast, try to reach a mass audience, which puts them in the middle of a mounting battle for readership. The Boston Herald must cope with competition from inter-city rival the Boston Globe, the ever-growing Internet threat, the aggressive entry of free dailies into the market—such as Metro Boston, as well as competition from the community papers, such as those sold by Herald Media to Gatehouse.
Charles McCurdy, who runs the
“I think the value and utility of using digital media in niche segments is just as compelling as it is with mass media, but there’s protection, because there are fewer participants.”
Content is another area that has seen a rush of private equity buyers in recent years. While Napster snuck up on the music industry back in 2000, today investors are prepared to exploit digital distribution as a way to get more content out the door. With consumer’s on-demand mentality, there’s a new market for lost “classics,” such as Hogan’s Heroes or Nash Bridges.
“The introduction of the video recorder was met with considerable opposition by the movie business, but the end result was that it enabled people to see content that otherwise would have been unavailable. Digital content is the continued evolution of that, and opens up the same kind of opportunity,” he said.
Qualia, earlier this year, acquired the film libraries of Gaylord Films and Rysher Entertainment, while Spectrum Equity, last year, took over Classic Media, which owns the rights to Rocky & Bullwinkle, Mr. Magoo and Richie Rich, among other iconic characters.
The thirst for content doesn’t stop there. Reuters is reporting that a cadre of European firms, including
While the proliferation of technology is forcing the entire industry to remap its strategy, few buyout firms are actually getting involved directly in the new media space. For one, the strategics are so ardent in accumulating new media properties that valuations can get high. Witness Viacom’s $200 million deal to buy online games company Atom Entertainment for its MTV Networks unit.
Moreover, while new media businesses hold the promise for growth, too many investors remember past broken promises. During the late Nineties tech bubble, private equity’s embrace of the Internet left a bad stink on a number of firms. With that in mind, YouTube may be a go-to site today, but without consistent cash flows and a track record of stable growth, it’s best left in the hands of the venture community.
“The trick is to be a half step ahead of the market,” McCurdy says. “Not a full step. You may be creating something that’s effective or useful, but the consumers may not have gotten there yet.”
Nobody ever said media deals were easy.