Dear Mr. Murdoch: Save yourself 80 billion bucks
The first time Rupert Murdoch tried to acquire Warner, Ronald Reagan was completing his first term as president, the Bell System break-up was nearly finished, and the first Macintosh had just gone on sale.
Murdoch’s aim was to construct an entertainment-information conglomerate on top of his existing newspaper properties. When Warner (or Warner Communications, as the parent company was called then) spurned his 1984 offer, he promptly went on to purchase 20th Century Fox as his bedrock and from that base built an international company that includes a American broadcast network, 28 terrestrial U.S. television stations, several satellite broadcasting entities, a profusion of cable television channels, an immensely profitable news network, and more.
Thirty years later, the 83-year-old Murdoch is throwing $80 billion at TimeWarner, which recently shed its print properties, for a new reason. Having exceeded his infotainment empire goals, Murdoch still needs to expand his business to compete with other jumbo-sized media conglomerates, such as the No. 1 revenue-generating conglomerate, Comcast — which owns NBC and Universal, and has a bid pending regulatory approval for Time Warner (no relation anymore) Cable — and No. 2 conglomerate Disney, which owns a line-up of properties similar to that of Murdoch. If Murdoch’s No. 4 conglomerate, 21st Century Fox, succeeded in swallowing No. 3, TimeWarner, it would become the new No. 2.
Getting bigger for bigness’s sake makes sense for a sumo wrestler. But does that apply to a media conglomerate?
Although Fox’s proposed purchase of TimeWarner sounds like a film-studio deal, the film units are secondary at both companies, with cable networks producing the greatest revenues at both — and Disney and Viacom as well. The screen at home eclipsed the screen at the multiplex long ago, and is still growing, which is a main reason Murdoch covets TimeWarner’s cable channels (HBO, TBS, TNT) which out-earn those of the other media conglomerates.
By combining his cable networks (Fox News, et al.) with TimeWarner’s, Murdoch will gain the bulk he needs for future negotiations with Comcast. Comcast currently dominates deliberations about which channels get piped to American home screens and how much they’re paid. Murdoch’s proposed deal could give him the sort of leverage Disney has with Comcast, thanks to its control of ESPN.
There’s a panic element to the Murdoch offer, too. At the age of 83, how many more deals can he possibly consummate? Of course, that’s what they all said when Murdoch was 73, and had not yet bought the Wall Street Journal for $5 billion. But 83 is not the new 73, as the actuarial life tables will tell you. The ambition of the deal reminds me of the last great wave of newspaper consolidation in the 1990s, when the illusion of permanent monopoly-level profits drove prices up. The New York Times bought the Boston Globe and its properties for $1.1 billion and the McClatchy Company chain purchased the Minneapolis Star Tribune for $1.2 billion. Both deals were heralded by all observers as shrewd, brilliant business moves. But by 2013, the Globe was marked down and sold for $70 million. Just this summer, the Star Tribune went for a crummy $100 million.
The value of the Globe, the Star Tribune, and every other American paper of note suffered because the moat that once insulated them from advertising competition was breached by the low-cost Web. Buyers found better, cheaper ways to publicize and sell their goods and services, deserted dailies, and continue to do so.
Similar moats protect the cable companies, such as Comcast, Time Warner Cable, Cox, Charter, and AT&T. The nastiest moat is regulatory, with few jurisdictions making it easy for cable newcomers to string line and sign up customers, although Google has made progress on that front recently, as has Verizon’s FIOS. This regulatory protection has given the cable companies a near stranglehold over distribution. As previously mentioned, the cable companies determine which channels gain carriage on their systems, and dictate economic terms to the existing channels, especially the smaller ones.
Murdoch once attempted to break the stranglehold with his investment in satellite broadcaster DirecTV, which was to beam his channels (and those of other programmers) directly into the cable operators’ markets. He later had to bail on DirecTV for financial reasons, but he has never wavered on his dream of gaining greater control over distribution. By rolling up TimeWarner’s into his own, he’d control about one-third of cable network revenues (before selling CNN, which is expected). The TimeWarner deal won’t make Murdoch the tail that wags the dog,
But from my corner, Murdoch looks a lot like the 1990s newspaper publishers who continued to buy other papers on the assumption that the moat (or the economic franchise, as Warren Buffett likes to call it) would support their near-monopoly profits infinitely. The moat has sprung a leak from which streaming-media programmers like Netflix, Amazon, Hulu, Redbox, iTunes, Google Play, Vudu, YouTube, and others are flowing content to viewers. Netflix, Amazon, and the rest don’t need cable company permission to establish a “channel” on your TV set as long as customers attach a cheap piece of hardware to it and to their Internet connection and click “connect.” Nor do they need viewers’ TV sets, as they’re happy to stream video to your tablet or phone. Nor do they really even need viewers’ Internet connections, if they can get viewers to pay for the mobile bandwidth.
Besides the obvious success of Netflix’s original content, another obvious marker of the streaming future is the $80 million deal the South Park guys made with Hulu recently, giving it three-year exclusive rights to hundreds of episodes.
I’m not predicting that Murdoch, his heirs, or 21st Century Fox shareholders can’t profit if its $80 billion deal for TimeWarner goes through — primarily because I never predict. (I’m always wrong.) Parts of the cable television market look impossible for the streamers to dislocate, especially live events like sports. Likewise, old media has a way of adapting to the onslaught of new media: AM radio survived both TV and FM radio; FM radio survived satellite radio; broadcast TV survived the VCR and the DVD and cable; the landline refuses to be buried by the mobile phone; and so on. But when given new choices, media consumers tend to defect in large numbers, weakening the incumbent media technologies.
If you could perform an actuarial assessment of the cable networks, it would probably say that they’ll enjoy good health long enough to outlive Murdoch. But beyond the 6.66 years of life expectancy the tables promise Murdoch, I’ll bet the offer will begin to resemble the can’t-lose proposition that caused the New York Times and McClatchy to each blow a billion buying a similar declining business.
Last time Rupert sought to buy Warner, he assigned three New York Post journalists to investigate its CEO to assist in a lawsuit he’d filed against the company. Sue me via email: Shafer.Reuters@gmail.com. My Twitter feed streams rye and honey. Sign up for email notifications of new Shafer columns (and other occasional announcements). Subscribe to this RSS feed for new Shafer columns.
PHOTOS: News Corporation CEO Rupert Murdoch waits to testify before the House Immigration, Citizenship, Refugees, Border Security and International Law Subcommittee on Capitol Hill in Washington September 30, 2010. REUTERS/Richard Clement
A woman walks past the Time Warner Center near Columbus Circle in Manhattan, New York July 16, 2014. REUTERS/Adrees Latif