What's it worth?
That is a fundamental question dogging credit markets, banks, businesses, homeowners, Congress and the federal government in this vortex of economic uncertainty.
The inability to assign firm values to assets--to the satisfaction of all concerned--is not only a challenge for lenders and consumers with flex mortgages and sinking home values. It is a
problem for businesses that need or want to sell, buy and leverage assets to raise money for expansion as well as routine bill-paying. It is a problem for media players caught between assessing their
worth on challenged traditional revenue flows and shifting to nebulous digital business models in a troubled global economy.
The flow of money through entertainment, media and Internet companies
is not only a function of advertising dollars, which generally will contract and be redistributed among traditional and new media platforms through this recession. Funding also comes from
shareholders, private investors, banks, venture capitalists and other financial outlets-some of which are retreating in a big way. They want assurances about the value of assets and companies they are
betting on. They need confidence in quarterly and annual earnings, for which expectations are being ratcheted downward.
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For some media players, heavily leveraged corporate balance sheets and the
slow process of creating new digital and international markets make this an especially complicated and risky time. Many traditional print and broadcast media companies have borrowed against their
assets, the values of which are in flux. With revenues slowing and costs rising, many companies seek extended credit lines and new cash infusions in a tight credit market. The dilemma for many media
companies is that the historical value of their core assets and operations are under siege as their value in a digital market has yet to be established. Companies with deteriorating valuations and
earnings will have less leverage to meet or renegotiate lending covenants.
Any government bailout plan that Congress eventually approves may loosen credit markets, but will likely do little to
guarantee restored lending or to provide transparency in the government's selection, valuation, acquisition and disposal of distressed assets-dashing any hope of taxpayer ROI. It is an important part
of the process by which markets, financial institutions and industries will reestablish values and the flow of money that goes with it. To that point, government agencies are looking to revise the
definition and use of "fair value" and "mark-to-market" accounting rules to unlock liquidity and bring stability to a highly overleveraged financial market.
Still, many media-related
companies--like individual consumers--clearly are on their own, struggling for ways to close their financial gap with sustainable cash flow and to reestablish their worth. Some will fail.
Especially vulnerable are newspaper and television station groups that have borrowed money against historical revenue and cash flow now threatened by a weak economy, a challenged business model, and
ad-spending shifts to online and other digital platforms. Many stations and newspapers have unique resources and local connections to consumers and advertisers that can be profitably leveraged into a
digital market with enough bold conversion moves to radically alter their legacy operations and forge more interactive business models.
Many broadcast TV and newspaper companies have been slow
to make these changes. Now their traditional ad revenues will be stunted by consolidation and collapse in financial, auto, retail and other business categories. Fewer businesses ARE spending less on
advertising, and a pullback in consumer consumption, which drives 70% of the economy, will mean lower or slower-growing revenues. A disruption in revenues and earnings will make it more difficult to
accurately value existing assets on a historical--much less emerging--digital basis, since both are in a state of flux.
Against this problematic backdrop, there are ways that media-related
companies can constructively proceed:
1. Establish and support value with what you have
Although consumer spending went negative in the third quarter for the for the first time since 1991,
discretionary buying of in-home entertainment (such as video games, pay movies and events, music) will likely continue at a moderate pace. Distinctive content, however it is delivered, is a good
investment. Continue to fund creativity and innovation at all levels, and create cost-effective ways to give consumers what they want and are willing to pay for on various platforms and devices. The
returns on digital investments can be immediate, and will help to strengthen free cash flow from operations.
2. Create more accountable metrics to secure value
Despite all the nifty
tinkering of late, television ratings generally remain an example of archaic metrics restraining more robust revenue growth for television-related content across all platforms and devices. Until home
television becomes truly interactive, broadcast networks will strain to retain flat revenues with estimates of limited audience samples being delivered to tenuous advertisers. An especially weak 2009
ad outlook and the February analog-to-digital conversion may force the matter.
3. Create new value in the developing digital market
Digital transformation needs time to establish new values
and to revalue traditional assets. Stick to what you know and do best, and reinvent it for digital. For instance, assist advertisers to connect and transact with target consumers by creating and
monetizing a golden interactive loop. Challenge content producers to reach beyond their contracted series to provide creative offshoots that have immediate mobile and interactive applications.
4. Pragmatically identify and deal with risk to assure value
Share risk and rewards in strategic partnerships with other companies and among your own work force. Other companies need what you
have. Make sure that next year's budget reflects hard choices about phasing out legacy operations and structures. Restructure the way employees interact, innovate and bring their best ideas to market
to increase individual productivity. Empowering a skilled, creative work force can help ameliorate a soft ad market. There is more risk in not trying.
5. Continue to de-lever
Debt is an
albatross that can be reduced with proceeds from asset sales. If overall prices cannot be established, certain key processes and operations can be leveraged into strategic equity partnerships and
joint ventures to generate income in new creative ways. That appears to be one of the scenarios being considered between Time Warner's AOL and suitors Yahoo and Microsoft. Media-related companies are
at a loss to solve the dominant leverage issues of U.S. households and financial markets. But they can swiftly embark on more enterprising ways to create and protect their own value for better days.