YEARENDER: We’ll probably remember 2011 as a lost year for Big Media. Tech companies continued their drive to harness the Web in ways that could topple existing infotainment businesses. But most traditional media execs just smiled and said that their industry has nothing to fear but fear itself. You’ll go blind looking for major new initiatives, with one exception: Dish Network’s Charlie Ergen bought airwave spectrum and took Blockbuster out of bankruptcy as part of a plan to create a national video streaming service. Other companies didn’t even try to cut transformative deals although Comcast had its hands full trying to fix NBCUniversal, which the cable giant formally took over in January.
News Corp exemplified the sense of rudderlessness with its handling of the year’s most engrossing media story: the News Of The World phone hacking scandal. After years of confidently and indignantly denying that lawbreaking had become pervasive at the UK tabloid, Rupert Murdoch’s company was humiliated in July. The Guardian disclosed that in 2001 the paper hacked the phone of a missing school girl, Milly Dowler, and deleted voice messages – giving her parents and police false hope that she was still alive. Murdoch apologized, and accepted resignations from several close execs including News International’s Rebekah Brooks and Dow Jones’ Les Hinton. But Murdoch wouldn’t take responsibility for creating the anything-goes corporate culture that tolerated phone hacking. He couldn’t be expected to know everything that goes on at his global conglomerate, he told Parliament. His son, Deputy COO James Murdoch – who oversees the UK properties – looked even more foolish and incompetent as the year wore on. He says he wasn’t criminally culpable for covering up crimes. To make that credible, he portrayed himself as a hands-off manager who naively accepted information that confirmed what he wanted to hear, and couldn’t be bothered to even read at least one urgent message that tried to tell him otherwise. The tawdry story disgusted the public and News Corp shareholders, likely destroying Rupert’s plan to eventually turn News Corp over to James.
That fed into another growing concern in 2011: Who will run Big Media in a few years? In addition to the question about News Corp’s succession plans, Disney announced that Bob Iger will step down in 2015 with a replacement yet to be named. We also still don’t know who will eventually call the shots at Viacom and CBS as the actuarial tables catch up with Sumner Redstone, who controls both companies. The four jobs shouldn’t be hard to fill. The current occupants collectively received $194.6M in compensation in 2010, a 58% raise from the previous year.
Last year it seemed that Netflix might shake execs out of their complacency. The home video company appeared to be evolving into a gatekeeper for the most important new business opportunity in media: Web delivered video. But few still felt intimidated by the spring as Amazon joined Hulu Plus in the digital subscription video market – and others including Apple, Google, and Dish’s Blockbuster indicated that they wanted in. Relieved media execs gladly cashed Netflix’s checks to syndicate TV series that were gathering dust in the vault or that would have been hard to sell to cable channels and TV stations. Netflix raised some eyebrows in March when it cut an exclusive deal to license an original drama series, House Of Cards. But Netflix’s aura of power – and its stock price – collapsed in July after it raised consumer prices 60% for those who wanted to continue to stream videos and rent DVDs. Subscribers fled, Investors questioned whether Netflix had overspent on content. As the year ended, Netflix CEO Reed Hastings joked that he had become an object of pity as he pleaded with consumers and investors to give his company a second chance.
With cash flowing in from Netflix and other digital services as well as improving ad sales – and little going out for new projects – Big Media companies faced an unusual problem: What should they do with all that dough? The answer simply reinforced the sense of industry drift. They gave startling amounts back to investors through stock repurchases and dividends. Companies returned $18.7B — up about 146% from 2010 and 455% from 2009, Barclays Capital estimates. That’s a tacit admission that execs can’t generate more profit from the money than shareholders might collect by investing it elsewhere. Even after these repayments, major media companies will end this year sitting on $21.2B, up 20.5% from 2010,
Media companies may be able to coast a little longer. They’re counting on the economy to continue to improve in 2012 while the industry enjoys its quadrennial jolt of advertising for the election campaign and the Olympics.
Meanwhile the giants are grappling with unique concerns. For example: CBS may find it has nowhere to go but down following its recent success in ratings and ad sales. Comcast has the opposite problem at NBC; hits have eluded the network as its ratings continued to fall. Disney’s also struggling to boost ABC’s audience while its cash cow, ESPN, could face growing competition – including from Comcast, which hopes to turn its cable channel Versus into a sports power after January when it will be renamed NBC Sports Network. News Corp has to fend off investors calling for the company to ditch its declining newspapers, which include The Wall Street Journal. Time Warner has to prove that it can develop a film franchise strong enough to replace Harry Potter. And Viacom faces new questions about whether Nickelodeon can recover from its declining ratings, and Paramount can repeat this year’s strong performance at the box office with fewer releases to distribute from DreamWorks Animation and Marvel.
At some point, though, they’ll all have to deal with the fact that consumers are becoming more cost-conscious.
Home entertainment spending fell 2.1% in the first nine months of the year as DVD sales and rentals continued to fall faster than video downloading and streaming grew. Studios hope the numbers will improve in 2012 as they accelerate their UltraViolet initiative: People who buy discs of certain movies also can stream them to Web-enabled devices. But that effort still has to work out some kinks, including the fact that Disney and Apple aren’t participating. Meanwhile, the industry lost faith in 2011 that consumers will gladly spend a few extra bucks for tickets to 3D films. Box office sales are expected to fall 3.1% in 2011, with total attendance down 4.2%, even though the number of 3D films increased to 35 from 24. That has set the stage for several battles between studios and exhibition companies in 2012. Sony says it will stop subsidizing 3D glasses, possibly forcing theater owners to sell them at the concession stands. In addition, studios continue to experiment with premium VOD, which exhibition companies say could hurt ticket sales.
Consumers may create even bigger problems for pay TV providers and channels – the ecosystem that generates most of Big Media’s revenues and profits. Subscriptions were flat in 2011, continuing the ongoing debate over whether millions of people are ready to cut the cord – or, for young people, not sign up in the first place — and just watch programming they can receive over the air or from the Web. Cable and satellite operators want to offer lower priced options, including packages with fewer channels than people typically receive from the popular expanded basic service. But programming costs will continue to rise as broadcasters demand additional retransmission consent payments. ABC, CBS, Fox, and NBC just added to the pressure by committing to spend $27.9B on NFL games from 2013 to 2022, a 63% increase from the previous contract.
While that’s happening, tech companies are nearly ready to offer consumers more personalized – and potentially appealing – infotainment alternatives. Apple’s Steve Jobs said just before he died in October that he had figured out how to make it easy for TV viewers to sort through viewing options from the Web as well as conventional sources. Apple’s said to be preparing to introduce a TV set in 2012 based on his insight. Google bought Motorola Mobility, the leading manufacturer of cable set top boxes. It also launched an intriguing initiative to turn YouTube into a hub for professionally produced Web video – in effect a platform that can take viewers away from conventional TV. And Verizon says that it’s interested in launching a video streaming service – it even looked at Hulu before this year’s auction effort collapsed.
If that isn’t enough to shake Big Media from its complacency, perhaps this will: Major tech companies are sitting on $200B in cash, and the 10 largest private equity funds have another $140B. “There’s an awful lot of powder dry right now—perhaps too much—just waiting for a spark,” says Aryeh Bourkoff head of investment banking in the Americas for UBS.