November 27, 2009 / 6:39 PM / 11 years ago

Media business at crossroads as deals pick up

NEW YORK (Reuters) - The growing influence of the Web to distribute news, video and other content, combined with the lingering economic malaise, have left many media executives and investors uncertain about where to make their next bets.

German Chancellor Angela Merkel is seen on a television camera screen during her speech at the annual meeting of the German City Council (Deutscher Staedtetag DST) in Bochum May 13, 2009. REUTERS/Ina Fassbender

The dilemma boils down to whether a modern media company should focus on building content at scale, or if it also needs to own the pipes to deliver that content.

What worries media companies is that Wall Street will rethink their stock valuations if content becomes widely available on the Internet for free, or close to free.

Media executives have reacted differently to this threat: News Corp (NWSA.O) chief Rupert Murdoch wants to remove his newspapers’ articles from Google Inc’s (GOOG.O) search engine crawlers; and cable networks are rolling out a “TV Everywhere” initiative next month to make their programs available on the Web to paying cable subscribers.

Meanwhile, Comcast Corp (CMCSA.O), the top U.S. cable service provider, is in talks with General Electric Co (GE.N) to buy a majority stake in NBC Universal, owner of broadcast stations, cable TV networks, theme parks and a movie studio.

“The media companies want to take control again of how people access their content,” said Todd Dagres, a partner at Spark Capital, a venture capital firm that has backed companies like Twitter and Boxee. “They want to be the toll-takers for content on the Web in the 21st Century.”

U.S. advertising sales are forecast to fall another 4.4 percent in 2010, after a brutal 12.9 percent drop in 2009, according to ad agency Zenith Optimedia. Global ad sales are forecast to increase a modest 0.5 percent next year, led by Asia Pacific and the emerging markets.

Against this backdrop, most media companies have sat on the sidelines or made only small deals, with one exception: Comcast. If Comcast pulls off its risky gambit, the $30 billion deal will be the prism through which major investments in the media business will be viewed over the next 12 to 18 months.

Comcast Chief Executive Brian Roberts seems to be saying: pipes are great, but content is king.

AGAINST TREND

The marrying of content and delivery is far from a new idea but the industry had been heading in the opposite direction. Time Warner Inc TWX.N this year spun off its cable service Time Warner Cable Inc TWC.N, and News Corp gave up its stake in satellite TV provider DirecTV Group Inc DTV.O last year.

Now, News Corp and Time Warner Inc are interested in bulking up on content, and both companies are considering bids for Metro-Goldwyn-Mayer, the famed Hollywood studio behind such classics as the James Bond franchise.

“The conglomerates are really looking to invest in content that has the potential to be distributed worldwide,” said Stephen Prough, co-founder of Salem Partners, a boutique investment bank with many Hollywood clients.

Prough estimates MGM is worth around $2.5 billion, assuming the company produces a Bond movie every other year.

“There is also a greater focus on producing big budget event movies that can be extended into other areas like merchandising and theme parks,” he said.

Despite the crippling downturn in ad spending and uncertainty about future media business models, content libraries and cable networks still attract investors. Shares of Discovery Communications Inc (DISCA.O), parent of the Discovery Channel, have more than doubled this year, for example.

“The strongest assets in recent memory have been the cable programing networks,” Liberty Media Chairman John Malone told Reuters this month. “The Street seems to put a substantially higher multiple on them. They generate more free cash flow as judged by the Travel Channel deal.

But owning content, even a lot of it, is not a solution in itself. The challenge is to design new revenue-generating deals with distributors and technology partners.

“More content will be consumed on the Web and on various devices. The problem is people don’t want to pay for anything online,” said Paul Levinson, media professor at Fordham University in New York.

CONTENT PREMIUM

The paid versus free debate will be one of the topics of discussion for media industry chiefs attending the Reuters Media Summit in New York and London next week.

Will Murdoch succeed in talks to get Microsoft Corp (MSFT.O) to pay for News Corp’s news? What about the initiative led by Time Warner’s Time Inc to develop a digital newsstand to deliver magazine titles to mobile devices?

Such partnerships, and new technologies, are blurring the lines between content and distribution. Web companies like AOL, Yahoo Inc YHOO.O and IAC/InterActiveCorp IACI.O have also been developing original content against which they sell ads.

IAC, run by media mogul Barry Diller, bought Collegehumor.com last year and is partnering with ex-NBC executive Ben Silverman to create Web content that can be easily transferable across other platforms including TV.

“In the future a lot of the programing is going to be ideas-driven,” said Ricky Van Veen, chief executive of IAC’s Notional production company and co-founder of Collegehumor.

“We used to think of distribution as how many affiliates you can get. That’s increasingly irrelevant, it’s now in the hands of the masses,” he said.

Reporting by Yinka Adegoke; Editing by Tiffany Wu and Richard Chang

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