Media Maneuvers: Less Bravado, All Math

The resolution of the writers' strike, Microsoft's attempted takeover of Yahoo, the power play between John Malone and Barry Diller--and virtually all media conflicts--have more to do with good old-fashioned math than fancy corporate maneuvers.

The end of the writers' strike not so coincidentally corresponds to the onset of strike-related economic hardship at the TV networks and studios this spring. As reported here earlier, the major broadcast networks actually profited from the early months of the 100-day strike by saving on original production costs and airing enough stockpiled new content to satisfy many upfront ad commitments. That's why their fourth-quarter earnings looked so good. Broadcast networks' first-quarter profits collectively could more than double to $300 million--even on a 46% decline in ad revenues to nearly $1 billion, with overall costs down 60%, says Bernstein analyst Michael Nathanson.

The networks could have seen their collective 17% decline in prime-time ratings during the strike accelerate to 45% declines by the second quarter, due to the estimated 30% difference between rerun and first-run episodes. With less stockpiled original fare, the networks must provide more ad makegoods, given that ratings guarantee shortfalls. Now, some of that squeeze can be abated as comedy series and dramas ramp into new production for an abbreviated season.



Some analysts estimate the networks could collectively have lost more than $600 million if the writers' strike stretched into the second quarter, due to disruption in the $9 billion advertising upfront, prime-time program development, and the economic downturn compounded by shifts in digital media spend. Among the cost offsets that remain are strike-related ratings and ad revenue gains by media conglomerates' cable network. These companies also save on producing fewer series pilots and orders, and canceling their $3 million upfront presentations.

It is likely that last fall, these media conglomerates knew how far they were willing to go in assigning residuals, with their nascent new media revenues already topping $1 billion annually. According to the new convoluted formulas, writers may net just over $7 million each year of their new three-year pact--a small reward considering that guild members collectively lost more than $270 million in wages during the four-month strike, according to the Silicon Alley Insider.

While establishing a baseline was important to the writers, it appears that their future residual gains will be predicated on two underestimated factors: how media companies define new media and the extent to which distributors' gross receipts include advertising revenues.

The only math that still doesn't make sense on the broadcast network side is resuming a business model that consistently renders an 80%-plus new series failure rate and deficit financing estimated at $3 million per episode for scripted drama and as much as $2 million for comedy episodes. So far, the only measurable gains are the strike-related increased users and revenues at cable networks, online gaming sites and ad-supported Internet portals providing streaming video of TV fare.

Doing the math for the current media takeover battles also can be enlightening.

Microsoft is not likely to raise its $31-a-share cash and stock bid for Yahoo by much, if at all, in the absence of counter-bidders. In fact, the longer it drags out, the more Microsoft might be justified in lowering its Feb. 1 bid. In the past several weeks, Yahoo stock has traded up, and Microsoft stock has traded down--placing both at around $29 per share, and eroding the 62% premium Microsoft is willing to pay.

To quell the concerns of shareholders at both companies, Microsoft will likely go no higher than the $35 a share it reportedly planned to offer before Yahoo reported lower-than-expected fourth-quarter earnings. That's still under the $36-a-share offer from Microsoft that Yahoo rejected a year ago. Yahoo has countered with $40 a share, which would be difficult for even a combination of public media and private equity to justify, given Yahoo's current deal-inflated price. Google has stepped away from discussing outsourcing search for Yahoo, for now.

News Corp.--seeking at least 20%, and some say as much as a one-third stake in Yahoo--would have to come up with $10 billion to $15 billion in cash and assets to swap for a combination of Internet assets that Yahoo previously dismissed. That would mean News Corp. contributes MySpace (estimated to be worth about $10 billion) and its new internally funded Sling Shot Labs, designed to cultivate new Internet enterprises. News Corp. still is digesting its recent $5 billion Dow Jones acquisition, so it is unclear how much it would compromise its strong balance or bring in private equity contributions to partner with Yahoo. News Corp. chairman and CEO Rupert Murdoch recently ruled out acquiring Yahoo outright.

Media's other big power play--the lawsuit-studded standoff between Malone and Diller--also has a mathematical solution. Malone's Liberty Media Holdings will likely settle for swapping its 30% percent stake in Diller's InterActiveCorp. in exchange for its Home Shopping Network. Other considerations, like IAC's Ticketmaster, could be thrown in for good measure as Diller is spinning off his assets into five public companies. Valued at about $2.5 billion (about the same as Malone's IAQC stake), HSN would be merged with its only rival, Liberty-owned QVC. The deal would have limited or no tax liability-just the way Malone likes it.

While there's always speculation about the high drama involved in media deal negotiations, in the end, it's all about which numbers deliver a settlement that is conducive to all sides.

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