[Mb-hair] A VERY IMPORTANT ARTICLE

Thu Jan 26 10:13:41 PST 2006

Economist.com      

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Old media

King content
Jan 19th 2006
>From The Economist print edition

Don't write off Hollywood and the big media groups just yet

³PAIN is temporary, film is forever.² That hopeful thought, which found its
way into the original script of Peter Jackson's recent re-make of ³King
Kong², might be seized upon by today's beleaguered entertainment industry.
Media companies are suffering intense pain‹and it is starting to seem
worryingly permanent. In America shares of ³old² media firms such as News
Corporation, Comcast and other giants of television, film, radio and print,
have fallen 25% behind the S&P 500 in the past two years, despite some
heroic financial results. Meanwhile, the market value of Google, which made
its debut on the stockmarket in 2004, is now equal to the combined worth of
Walt Disney, News Corporation and Viacom, three beasts of the old media
jungle. One investor, who recently moved two-thirds of his $1 billion fund
out of American media and into emerging-market companies, moans that ³the
market thinks something's going to get them, whether it's piracy, personal
video recorders, or Google.²

Desperate to rescue its share price, Viacom broke itself in two on January
3rd. Time Warner, the biggest media group of all, is under attack from Carl
Icahn, a corporate predator perfectly adapted to sniff out the weak and
vulnerable. The big groups have seen their newspapers and magazines lose
readers and advertising to the internet; their music businesses suffer
piracy and falling sales; and someone else's video games captivate new
generations of consumers. Now come fears about film and TV, the bedrock of
their business.

Hollywood took 7% less at the box office in 2005 than in 2004 and growth in
sales of DVDs has slowed. Internet video threatens the satellite and cable
systems of companies such as News Corporation and Time Warner. Dozens of
advertisers are shifting budgets from television to such places as the
internet and billboards. Brand-owners hate it that people are using digital
video recorders to avoid their pitches. And if media firms move on to the
internet themselves, they risk losing their films and television programmes
to pirates.

Moguls still

No wonder that on media island they are downcast. Yet, if Hollywood teaches
one thing, it is that stories can be re-made and dreams can come true.
Rather as big retailers, including Wal-Mart and Tesco, have discovered
advantages online, so too will big media companies.

True, the internet and digital devices will eventually break those
companies' grip on distribution. But they gain something else: a digital
world in which what you supply matters far more than how you supply it. In
satellite radio, for example, Sirius has crept up on XM Satellite Radio
thanks chiefly to its content, in the controversial form of Howard Stern.
And this world holds another promise, too: an abundance of virtually
costless ways to supply consumers with what they want to watch, whenever
they want it‹things established media are ideally placed to provide.

The internet is still in the digital equivalent of the silent-film era. It
has been formidable for text, still images and music, but is only now, with
broadband access, entering an age of high-quality video. As it does so, Time
Warner, News Corporation, Disney and other media companies will be able to
cash in on their film and television archives. Selling video direct to
consumers, without distribution getting in the way, lets media firms, and
viewers, mine their vaults for old episodes of ³The Outer Limits², Johnny
Carson, or whatever: minority tastes, to be sure, but taken together, a vast
new market.

Moreover, old media will command audiences for many years yet. New media
understand this: Google has just bought dMarc, which sells old-fashioned
radio advertising. Websites, such as BabyCenter.com and AlwaysOn, have
recently launched print-magazine versions of themselves, to capture
advertising that was out of their reach online. As the best remaining source
of a mass audience, TV and film are the best places to create and promote
the next ³Simpsons² or ³Narnia².

Some people worry that new media companies may over time shunt old ones
aside as producers of content. Certainly, digital media will create new
stars and new businesses, but making high-quality video content will always
be a daunting and expensive task. Music or a blog can be composed from a
bedroom, but not an episode of ³Friends². Just last month DreamWorks,
Hollywood's youngest studio, sold itself to Viacom, despite its strong
financial backing and the talent of Hollywood luminaries. It made some
money, but could not afford a billion-dollar investment in films year-in,
year-out. Yahoo! has a media unit, but so far it hasn't had any hits.
Responding to the news this week that Yahoo! intends to spend up to $10m on
a reality-TV concept called ³The Runner², analysts complained that the
investment would damage its margins.

By contrast with Yahoo!'s dabbling, old media is now investing in digital
media in earnest. It all went terribly wrong before 2000 when bewitched
executives squandered money on the internet and Time Warner sold itself to
AOL in one of history's worst-ever deals. But now they are back. Rupert
Murdoch, chief executive of News Corporation, made a series of acquisitions
in 2005 (see article). Disney is supplying two hits, ³Desperate Housewives²
and ³Lost², using Apple's iTunes download service. Last summer Viacom bought
Neopets.com, a virtual-pets site. Old media is well placed to steer its huge
offline audiences to its websites.

Helpfully on cue, piracy now seems less of a threat. The music industry now
has a healthy business in legal downloads. Operators of peer-to-peer
networks, such as eDonkey, are going straight. And Hollywood is realising
that it has no equivalent to a big musical weakness‹that many albums consist
of a few decent tracks padded by dross.

Any media business has two products to sell: its content (to readers and
viewers); and its audience (to advertisers). The task for old media is first
to protect its advertising revenues by amassing audiences online and,
second, to offset their viewers' intolerance of mass-advertising by making
them pay more for content‹which they are increasingly willing to do. It will
not be easy, but then saving the heroine never was.