U.S. Media Companies Confront Global Realities
At a time when traditional media growth is virtually static for many companies, and booming returns from digital are years away, an earnest run at globalization seems like a solution. But nothing is that simple.
The precipitous decline of the dollar, five years in the making, has become a curious life preserver of sorts for U.S. companies selling their goods and services abroad to foreign consumers. Indeed, strong demand for Western media and entertainment in the rest of the world, combined with a weak dollar, is a leading economic catalyst domestically. Dollar-denominated assets declining in value are being snatched up by foreign investors taking advantage of a credit crunch that severely limits homegrown funding. At the same time, it is more expensive for American companies and consumers to buy and build things abroad. Even at home, American consumers and corporations have become cautious spenders, feeling squeezed by economic uncertainties as well as the risk and high cost of borrowing.
The purveyors of media and entertainment, supposedly impervious to economic twists and turns (including a potential recession), will increasingly feel the heat everywhere in the world. Somewhere between slowed sales and mounting debt in the U.S., and the promise of increased sales and growth abroad, is a wild card for media-related companies.
Some strategists are willing to place their bets on universal platforms that could stand the test of time, place and currency fluctuations. For instance, News Corp. chairman and CEO Rupert Murdoch is preparing to make his newly acquired Wall Street Journal free online, on the bet that premium advertisers will make up for lost subscription fees. It is a simple, translatable business model hinged on the notion that there is an insatiable global appetite for financial information. Given all of News' other global businesses, the company's developing plans for its own advertising network makes sense in a marketplace in which profits often depend on working around traditional middlemen.
News Corp., which generates about half of its annual consolidated revenues outside the U.S., is the exception rather than the rule in media--although overall, about one-quarter of all U.S. corporate profits come from overseas. Still, investors and analysts remain riveted on U.S.-based content franchises, media operations, products and services, which are the growth engines for News Corp., Disney, Viacom and Time Warner. The challenge is to maintain the fragile balance between vacillating weakness (right now in broadcast networks and domestic markets) and vacillating strength (right now in film and some foreign markets). It wouldn't take more than a domestic recession to mess with U.S. media's equilibrium and levels of advertiser and consumer spending.
That seesaw can be as difficult to track as to forecast.
Bernstein Research already has projected that a U.S. recession could prompt a 30% decline in the theme-park business that contributes 20% of Disney's annual operating profits. It is uncertain how much would be offset by foreign spending spurred by favorable exchange rates. Consumers have an unprecedented number of ways to spend their media dollars. The economic shift across single-company businesses gets dissipated among increased vertical competition for the same global consumers and advertisers. On the other hand, online advertising-- which is expected to maintain an average annual compound growth of 17% through 2011--could fall back to the 11% growth level in the face of a recession, Bernstein said.
Of course, some U.S.-based media-related conglomerates, such as General Electric, Microsoft and Cisco (which is investing $16 billion on China's technical infrastructure alone), are uniquely positioned for global growth in almost any environment and circumstance. Others, such as Apple, are repositioning themselves abroad. Having quickly ramped through the early and the first adoption domestic market, Apple is actually bumping up the functionality and price of its iPhone and iTunes service in eager foreign markets, including the UK, Germany and parts of Asia.
However, foreign regulation will continue to be sometimes unpredictable and counterproductive, even to the biggest players. Google's rapid international growth, which now puts half of its annual revenues outside the U.S., was dealt a serious blow this week when the European Union singlehandedly halted its most important strategic acquisition of DoubleClick. The EU's prolonged scrutiny of the proposed $3.1 billion deal, which will not likely result in a conditional decision until spring 2008, gives rivals Microsoft, Yahoo and AOL more time to prepare their counter competitive moves in the lucrative display advertising arena. Nothing else has ever presented as big an obstacle to Google's steamrolling growth engine.
While there is wealth to be had for U.S.-based companies betting on foreign enterprises, the ultimate question may be--at what price? Yahoo's market cap has been boosted about 20% or about $8 billion by its 39% stake in Alibaba, which is running Yahoo's mainland China operations. Yahoo has suffered a black eye--but no lost revenues-- over its capitulation to Chinese censors, which has resulted in the jailing of a Chinese journalist prior to Alibaba taking over management. The lesson there: the decline of the dollar generally has been good for companies doing business abroad, as long as they play to win in the space in which they are comfortable and safe. However, some analysts are warning that anyone riding Alibaba's coattails could likewise be dragged down if the Chinese Internet company's new inflated public stock price turns out to be unrealistically ahead of its fundamentals.
That may account for some of the more carefully managed collaborative Open Source platform plays being made by Google, Yahoo and Facebook. Likewise, there will be more carefully measured pairings of American know-how and resources with local foreign partners in the adroit manner in which John Malone built his Liberty International. That unavoidably means creating strategies and structures tailored to the intricate economic, social and cultural differences among countries where they want to do more business.
The bottom line is that globalization isn't the panacea many media companies were hoping for or need just now. In fact, it is looking more like a double-edged sword with every new deal and headline. Just this week, the EU said the economic growth in its member countries will decline by half a percentage point in 2008 and 2009--based, in part, on the U.S. slowdown, rising oil prices and financial market turbulence. That sounds very much like code for "No safe haven here."