Commentary

Writers Strike Offers Opportunity To Devise New Business Models

The writers' strike could be the best thing that ever happened to the television and film industries. It will force the companies at the controls to make good on their promise to devise new media business models that serve all interests. One can only hope.

The worst-case scenario is corporate management and the WGA digging in their heels and losing an estimated $3 billion (from a prolonged strike impacting all dayparts in which other unions honor the picket lines). That would further exacerbate disenfranchised consumers, who are fleeing to the Internet and a myriad of interactive devices for their entertainment and information.

The long-term financial losses stemming from the latter is the most formidable risk of the writers' walkout because of trends and developments firmly in place. Television's generally stagnant ratings will be increasingly offset by online video viewing, which is only about 16% of all U.S. households now. But more than 90% of an estimated 200 million broadband Internet users will be viewing video online in less than five years, according to eMarketer.

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The ongoing sea change requires radical changes in business practices---not the Band-Aids on ineffective business models that we have been getting. While media conglomerates have been dabbling in new content distribution arrangements--from Apple's iTunes, to their own Web sites, to Hulu.com--they have resisted altering the economic foundations upon which most of their revenues and profits depend. Studios and television networks know there are less expensive ways to produce and cycle content for digital platforms such as mobile phones and the Internet, because they are already doing it. Some of these new ventures are even profitable. As a result, the television networks may find it easier and more lucrative to program streaming video on the Internet than on television during the strike. And that, in turn, may force the television networks to design more new cost models for producing content, which would allow them to generate more revenues and profits from these new venues.

NBC Universal CEO Jeff Zucker recently warned that the industry must be careful not to forfeit their analog dollars for digital pennies. (For instance, NBCU was making only about $15 million in revenues from its former distribution deal with Apple's iTunes. But that has as much to do with inflated program production costs as it does with consumers' gradual demand for alternative content distribution.) So there is a false sense of security in maintaining the status quo that is being challenged daily. At the very least, the strike will exacerbate television ratings and revenue declines, and other old-business-model weaknesses of media, resulting in thin television network profit margins and cyclical studio profits.

If television is hit the hardest by the writers' strike, it is because its business models are the farthest from what they should be. Relying on series reruns and reality shows won't cut it when the broadcast networks' new prime-time season has debuted to still-plummeting ratings. The sampling and traction of new network prime-time series this fall has been weak, according to analysis by Magna Global USA. The new live-plus-seven-day ratings data and other such derivations have been mostly confusing, and reveal more declines than gains. Unlike the last five-month writers' strike in 1988, there are many viable and interesting alternative means of entertaining and informing consumers--most of them free and advertising-supported. Consumers' attachment to television series or entrenched loyalty to television in general isn't what it used to be.

Although television network production costs dramatically subside during the strike, so do the ratings and the advertising revenues. The huge advertiser makegoods resulting from the ratings shortfall and from the strike's halt on original product underscores the bigger issue of needing to revamp an advertising sales system hamstrung between audience estimates and an old-line distribution system overwhelmed by an alternative options free-for-all. A protracted strike could force changes in the program development system--which could, among other things, make economic use of using Internet portals to test series pilots online. That could help rebalance the dangerously skewed profit/loss expectations of a television industry that blindly overinvests on creative product from which it generally solicits too little return.

There also is a general lack of appreciation for how deeply a WGA strike could bore into the media and entertainment industries' heart and soul. The WGA's more than 12,000 striking members occupy a pivotal point in the food chain of more than 200,000 at every level that will be adversely impacted by not having writers' scripts from which to work on television and film productions. The directors' and actors' guilds are among the industry unions whose pacts also are due for renegotiation within the next nine months.

So it behooves the likes of Time Warner and Viacom, News Corp. and NBC Universal, Sony and Walt Disney, CBS and others to seize the opportunity provided by the writers' strike to better manage their industries' future risks, maximize their rewards and devise new formulas for creating and sharing wealth. None of the potential new formulas have survived at the negotiating table. The studios and television networks argue that they don't want to assign value portions of fledgling digital businesses not fully defined. The writers' guild claims they need a designated share of the value they create independently or in partnership with other players.

Both sides are right, and have made concessions on DVD and other tepid existing businesses in order to focus squarely on more promising future digital growth engines. In the end, both sides will be humbled by the fact that the digital transformation of their businesses will be absolute, unlike anything they have ever experienced, and take hold with or without their cooperation. Digital creativity and value will find its way to empowered consumers.

That is both the stinging and remarkable reality of the digital revolution. Even as media companies and writers argue across the negotiating table, entrepreneurs at Google, Facebook, MySpace and elsewhere are launching new content platforms and reinventing the advertising business. They are creating billions of dollars of new value by being nimble and smart enough to play by the new rules they are helping to write.

This unprecedented change is forging ahead without the traditional media and entertainment industries. In fact, the first day that the writers' strike brought late-night talk and other TV shows to a halt, it was overshadowed by Google's confirmation of its open software package for mobile phones, InterActiveCorp.'s plans to split itself into five publicly traded companies, and Richard Parsons confirming plans to resign as Time Warner CEO by Jan. 1, 2008. The devil is in the details, since none of these moves are unexpected. At Time Warner, the big question is who succeeds Jeff Bewkes as second in command, and whether the former HBO chief will completely dismantle the media giant to create shareholder value beginning with a complete spinoff of Time Warner Cable, Time Inc. publishing and AOL. It is part of the deconsolidation move sweeping media and entertainment companies as well as financial conglomerates. At IAC, the focus is on whether Internet stand-alones can be spun off or sold for more than what they are worth in the IAC umbrella, and the extent to which IAC chairman Barry Diller can disengage his company from its largest shareholder, John Malone and his Liberty Media Corp.

Google's foray into mobile digital software stack partnering with 30 companies in 2008 represents the media future that is the catalyst of the writers' strike. While digital content and distribution is the central focus, Google's constant enterprise underscores the critical interactive dynamics missing from traditional media--such as collaboration, open sourcing, deep consumer profiling and transactions-that are central to digital wealth creation.

Indeed, these events on Monday provided a stark and troublesome contrast between the media-related companies creating wealth by reshuffling their languishing assets and new players such as Google exploding with new business designs and value. That carries a message that the striking writers and media management should carry back with them to the negotiating table posthaste.

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