For years, U.S.-based media companies have expressed their intent to make overseas markets a much bigger source of revenues and profits. However, a robust economy and growth curve for digital technology at home, coupled with political and economic unrest in emerging markets, made that goal less urgent.
With domestic subscriber and adoption rates reaching plateaus, and ad spending slowing on the Internet while it is stagnant for TV and other traditional media, there is a renewed focus in expanding business overseas. Despite a generally driven international economy, there are a myriad of obstacles and challenges.
So far, many infrastructure and distribution network companies--including the telcos and telephone and other infrastructure companies, as well as Internet service providers, such as Google, Yahoo, and AOL--continue to capitalize on the utility-like adoption of broadband, fostering what should continue to be a healthy demand for content and services.
UBS reports that the growth of global broadband, which encompasses some 280 million subscribers in 50 countries, is decelerating from an estimated 24% in 2007 to 17% in 2008. Emerging markets, including China, Russia and Latin American countries, are the core sources for both new and traditional media.
In many countries where more advanced 3G mobile technology is commonplace, there also is a growing demand for U.S.-based social networking, viral marketing, search and e-commerce services. E-commerce is one of the few business segments that grows a predictable 20% to 25% annually. Clearly, Internet advertising will continue to be a major source of revenue, with global search advertising alone expected to nearly double to more than $37 billion by 2010, according to JP Morgan. That is a key consideration for many traditional media sectors facing stagnant or declining core domestic growth.
But there is a hitch in the exploding global Internet access market--it will become more difficult for distributors, services and content providers to measure, with a growing portion of incremental users coming from a bevy of WiFi, WiMax, 3G and 4G cell phone networks, according to UBS.
The rollout of Apple's iPhone overseas, in markets like Germany, France and the United Kingdom--at higher than the domestic sticker price--will test a new round of U.S.-based digital broadband devices overseas, where they will compete head-on with commonplace 3G-enabled phones, mobile TVs and other wireless gadgets. Consumer resistance could run a tepid second to heavy-handed regulators in light of the European Union's smackdown of Microsoft Corp. this month, with an appeals court upholding a $1 billion anti-competitive fine against the software leader in the kind of unhappy encounter that may be experienced by Apple, Google and Intel.
Search, social network, and other aggregators like Google and Yahoo continue to wrestle with serious censoring issues in countries as diverse as China, Brazil and Turkey. Even MySpace, which launched in 18 countries this year and plans 10 more global launches in 2008, has been unable to dodge the cultural and protocol buzz saw in markets outside the U.S.
The long-discussed need to make international a much larger part of the revenue pie is even more critical for more traditional content-related media companies, which will be reaching a critical do-or-die financial juncture. They must find ways to increasingly capitalize on what UBS says is more than a 40% annual growth in global broadband networks' capacity through 2010 to offset slow or stagnant growth of core domestic revenues. The newspaper business, while beleaguered in the U.S., is thriving in India, China and other countries, where paid circulation is up 6% the past five years, according to the World Association of Newspapers.
However, quickly changing economics can quickly dash growth, as inflation continues to be a concern in Asia Pacific, India, and Europe. China--on target to become the world's largest market and always the world's fastest-growing market--will increasingly set the pace for many forms of broadband media adoption, pricing and advertising in what generally is referred to as a "shifting power equation," the experts say.
But the key for many media concerns will be to seize on the cost-effectiveness and speed with which they can generate revenues. Providing homogenized content and services across diverse global platforms--including cable, telephone and wireless--will become increasingly important to all U.S. players, regardless of size or profitability. The explosion of the Internet and digital interactive applications worldwide is forcing media content and service providers to quickly adopt new business models, although pricing power--which is fundamental to all--can be a challenge given rampant piracy and aggressive competition.
Content companies also stand to make good from localizing and restyling some of their product to regional tastes abroad, as well as mining new wireless distribution platforms for content that universally translates. There also is increasing savvy about ways to acquire the rights to international content that can be a sure hot sale. For instance, News Corp.'s SkyItalia has achieved meteoric growth, partly driven by its acquired rights to Italian sports.
For media and Internet service companies playing catch-up--such as AOL, which plans to roll out local portals in 30 territories by the end of 2009--it is difficult to project ROI, even with the use of more aggressive advertising platforms and tools.
That is why interactive components, such as e-commerce and cross-platform promotion, are more important and already aggressively embraced by major media brands from Disney to QVC. The economic momentum in overseas markets will make all the difference. The digital extension of media and entertainment brands and businesses with regional partners--particularly in Latin America, China, India, Japan and Europe--will be a profit engine for most companies within five years, analysts say.
Disney has learned valuable lessons about regional equity partnerships for the rollout and sale of everything from theme parks to consumer products, which provide templates for other media players seeking to expand their fortunes abroad. Despite its rigorous franchise sales abroad, international business comprises only 23% of Disney's total revenues.
News Corp. and DreamWorks lead the U.S.-based media pack with international business generating 44% of their overall revenues, according to Goldman Sachs. CBS Corp. has the least amount of international revenue (11% of its total), compared to 19% for Time Warner and 24% for Viacom. Warner Music is the only domestic-content company relying on overseas markets for more than half (or 52%) of its total revenues. That means there is plenty of room and impetus for international growth.
On the media deal front, Goldman Sachs said in July it anticipates nearly $135 billion in leveraged buyout financing needs from media, telecom and related technology over the next six months. Pending industry deals involving Tribune Co., First Data, Intelsat and Clear Channel will likely proceed, despite financing structure alterations. They are among the more than $300 billion in deals announced this year that still need to be closed.
Deals will be impacted by more stringent conditions that likely will accompany the slowed flow of funds from financial institutions, private equity and individual investors. The increased value of the Euro and other foreign currencies, against a plummeting dollar, is ushering a stream of foreign buyers for domestic companies and partnerships, and will make U.S. investments or acquisitions abroad more expensive. Investors generally say they are seeking media companies that can capitalize on the strength of overseas economies and currencies.
More challenging credit conditions and reduced private equity activity places more pressure on companies to drive revenue growth in order to achieve profit growth. At the same time, economic uncertainty in the U.S. makes media companies and investors uneasy and risk-averse. All that combined may make for some mixed results--as media companies push themselves to expand into unknown and often unstable, but potentially lucrative, foreign territory.