CNET también está disponible en español.

Ir a español

Don't show this again

Christmas Gift Guide
Internet

Media conglomerates go global

Big fish have been gobbling up smaller fish in the media world for the past decade. And the trend shows no sign of ending.

Big fish have been gobbling up smaller fish in the media world for the past decade. And the trend shows no sign of ending. Right now, says Joel Klein, half a dozen conglomerates are battling to be global media and entertainment companies: Disney, Viacom, News Corp., Vivendi Universal, AOL Time Warner and Bertelsmann. In the end, he expects only three or four to succeed on the world stage.

This wouldn't be a noteworthy prediction from just anybody. But Klein, chairman and CEO of Bertelsmann Inc., and a key strategist for Bertelsmann AG, the German media conglomerate, headed the U.S. Department of Justice's Antitrust Division under President Clinton. In that job he spearheaded the government's cases against Microsoft, Visa/MasterCard and others.

Now rooted in the private sector, Klein argues that technology is altering the way media companies with global ambitions must think about themselves. It's opening up new means of distribution that allow companies to cater to the entertainment and information interests of individuals, even as distribution is becoming increasingly global. For "content" and media companies, he says, "creativity is not enough anymore." Those with truly global ambitions must embrace the "transforming" changes wrought by technology by making acquisitions and adapting their business plans accordingly.

Klein delivered these remarks at Media in Motion, a conference focused on the business of media and entertainment, held Feb. 8 at New York University. Organized for business school students and sponsored by Wharton and the business schools at Columbia, Duke, MIT and NYU, the conference included talks by industry executives and panels on globalization, sports, publishing, changes in the music industry, film financing and entrepreneurship.

At the end of the Clinton administration, Klein noted, two mergers offered a sign of things to come. One was the AOL and Time Warner union, which hitched an Internet company with a new distribution platform to an old-world media company. The other was the Vivendi-Universal merger, which brought together a French media company and a big U.S. operation--an "unimaginable" event, he said, given the traditional insularity of French companies.

Technology is altering the way media companies with global ambitions must think about themselves.
But large media marriages aren't in themselves the answers, Klein said. "Finding the synergies that will really flow money to the bottom line" is the main challenge global conglomerates now face, he noted. "The second is to get buy-in from the various business units." AOL Time Warner has had a hard time finding the right synergies, in his view. Sony, which many see as a global contender in the media industry, is still a "device company," and "must decide how much of a full-time media company they want to be."

Bertelsmann has also had to make alterations to its structure. Referring to an early February reorganization of the locally held German company, Klein pointed out that "this is a halfway step in Bertelsmann's evolution from a highly decentralized German company to a more centralized company" that can make decisions more effectively. He added that Bertelsmann must also "play in the visual media space" to be more competitive globally.

Changes in technology and consumer behavior have clearly altered business-as-usual decisions in the media world. But it's the downturn in the economy that has underscored existing uncertainty. Ad revenues, a critical source of income for many companies, dropped dramatically in 2001, noted Geoffrey Sands, a principal in the media and entertainment practice of McKinsey, who spoke at the conference's industry overview.

AOL Time Warner's stock dropped 50 percent in the last year, he pointed out, and there is fierce pressure on earnings growth at the larger media companies. Brill's Content, Inside.com, Talk and Mademoiselle all dried up in the last 12 months. In addition, global competitiveness and the increasing cost of talent have taken a toll on traditional broadcasting. It is becoming harder for the networks to make shows pay. Indeed, prime-time hits no longer drive the business model, said Sands, although popular reality-TV shows like "Survivor," which are cheaper to make than dramas and sitcoms, are likely to be only a "temporary Band-Aid."

In the future, technology and regulatory change will lead to more consolidation in the media landscape, Sands added. There will be more industry alliances and cross-promotion intended to drive consumers from one product to another. Pricing issues will also become more important. Digital music companies in the post-Napster era will have to think up new pricing models, he said. Book publishers will have to become more sophisticated about how books are priced and discounted, while TV broadcasting must beef up the management of conventional licensing agreements. Newspapers, for their part, will have to think about how to migrate subscribers from print to online editions. In general, demand for information about "customer segments and their associated price sensitivity" will rise.

Local voices
The conference's panel on the globalization of media addressed some of these issues from up close. Kenneth Jautz, executive vice president and general manager at CNN Business News Operations, pointed out that the opportunities in globalization lay not in blanketing the world with U.S.-generated news and entertainment. On the contrary, globalization means more localization.

A parallel trend to localization, Jautz continued, is the realization among global media companies that they have to partner with local companies in order to penetrate new markets. CNN, for instance, can't indefinitely maintain the number of foreign news bureaus it had in the fall. It now has close to 700 video-content broadcasting exchanges set up around the world to provide broader, locally based coverage, including the famous addition of Al Jazeera Television to its stable of content providers last fall.

Changes in technology and consumer behavior have clearly altered business-as-usual decisions in the media world.
Jim Friedlich, a general partner at ZelnickMedia, a financing and financial advisory firm for entertainment companies, stressed that the larger global media operations shouldn't write off local media for either their content or their distribution. Similarly, companies with their eyes on ever-expanding foreign markets can't afford not to cooperate with local companies that already have name recognition, status and proven local expertise in the relevant market. Global media companies can't simply blow into a new town or market and expect to succeed.

Among the various entertainment disciplines, music is different. It has always been more international than other media, noted Craig Bamsey, a senior vice president in strategic planning and business development at Universal Music Group. But since 1996, he said, growth rates have been flat to down around the world, forcing music companies to be more cost-conscious about the artists they take on and what they promise. In addition, of course, a digital-music tsunami has been building. Companies are realizing, Bamsey said, that they can't set up an impenetrable envelope around digital music, along with a watertight rights system, but that listeners will pay to download music from the Internet if the price is right.

Universal now operates in 65 countries, with India "probably the most promising market right now," he noted. Its cassette market is enormous, and the demand for CDs from the "upmarket segment of the population" is increasing. Universal steers clear of piracy sinkholes, such as Brazil's cassette market. The company also pulled out of China recently--even though the nation entered the World Trade Organization--adopting a wait-and-see policy to the tremendous problem of piracy there.

Virgin Entertainment Group takes a somewhat different tack in new markets. Melanie Bell, the firm's director of business development, said that the company works with local firms to enter new markets and regions. Of Virgin Group, the firm's parent company, she noted: "We're not one behemoth company with a grand plan for the 20 or so businesses we're in. We built the brand on the back of a few companies and give local operators the charge to come in with their own business plan and ideas." After a year or two, the firm assesses the success of the local partner and gives it more or less rope.

This approach can't work for all companies. Bell implicitly acknowledged as much when asked how much her company could diversify and extend its business operations. The "real answer," she said, is that "we have a lot of runway as long as Richard (Branson) is active with the brand." People simply like the energetic head of the Virgin empire. When Virgin Cola failed--Branson had splashily introduced the soft drink in the United States with a presentation in Times Square that involved Pamela Anderson and crushing a Coke can--it was chalked up to Branson merely trying his hand at something different.

However, the "party line," admitted Bell, is that "we can extend into many businesses in many countries for a very long time."

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2002 of the Wharton School of the University of Pennsylvania.