The media industry – a behemoth that spreads over print, broadcasting, movies and now the Internet – attracts the attention of many great managers. Yet financial returns are poor. This book analyzes this paradox, and portrays fascinating media moguls along the way.

The media have always attracted undue attention. By being in the public eye and often at the center of power, media have also been magnets for business moguls. For co-authors Jonathan Knee, Bruce Greenwald and Ava Seave (professors at Columbia University; for profiles click here), involvement with the media scene is a long relationship. Their interests – cinematography, financial information services and print publishing provide oft-quoted examples throughout the book – may stem from the unusual mix of creative impulses and down-to-earth management efficiencies.

What intrigued the trio of authors was how an industry attracting such talent (both creative and managerial) could post such poor returns.

Add chart of industry returns

The media industry is a growth engine. The public has an increasing amount of time and, more importantly, an increasing amount of money to spend on entertainment and information, the two key drivers of media content. So why such poor returns?

For the trio of authors, the causes are numerous, but two leap out, and make for some juicy stories along the way of this 300-page book. Firstly, at the head of many of the large media companies sits – nay, reigns would be a better term – a mogul. Secondly, the competitive industry structure favors companies in some areas and hampers companies in other areas.

Which playing field?
Let us leave the first cause for later (Part 3 of this series), and focus on the basic industry structure. For the co-authors, the companies in the media industry are characterized by the playing field on which they act. Some activities are in the content creation area. Other activities are in the packaging area. Lastly, there are activities in the ‘retail’ arena, referring to the ‘last mile’ when the media goods actually reach the final consumer.

Add chart here

This classification of media activities is important for it can help explain the level of barriers to entry, which in turn can help determine the profitability of media companies. Indeed, content creation has very low barriers to entry, whereas ‘retail’ has higher barriers since it often includes costly infrastructure, namely for electronic delivery.

Castle with no moat
For all those who trumpet that ‘content is king’, the co-authors dedicate chapter 6, which promptly deflates that bubble. Indeed, although they will not argue with the revenue potential of series of Shrek films or Harry Potter books, they also warn that barriers to entry for new content producers are low.

One difficulty here is the revenue split between the content creator and the company in charge of production, marketing, distribution and other mundane back office tasks. And as you may guess, the balance quickly shifts in favor of the creator, thanks to good efforts of agents, lawyers and other reps who know how to load the negotiating dice…

Compared to content, the activities in the ‘packaging’ arena are typically better protected. By packaging, the authors refer to the tasks of taking the creative output (e.g. film, movie, book, etc.) and preparing it for wholesale distribution (e.g. cinemas, cable channels, newsstands, book distributors, etc.). Packaging may not be complex, but it does necessitate infrastructure that cannot be so easily duplicated. And, let’s face it, operating a printing press, a trucking division or handling the invoicing of thousands of retail outlets is not nearly as sexy as partying with the stars or traveling to the Frankfurt book fair!

The final link in the media value chain is the ‘last mile’, to the end customer. In terms of performance, this is a mixed bag. For the cable industry, access to homes that pay fat monthly subscription fees proves to be a gold mine. Book retailing is another story altogether: a graveyard of broken dreams, especially thanks to Amazon and other novelties of the digital age.

Another perspective
Another way of looking at the value chain in the media industry is to consider what are the real and the fictitious competitive advantages.

For the authors, true competitive advantages include four key considerations: scale, customer captivity, cost and government protection. Scale refers to the ability for media companies with high fixed cost structures (think theme parks or printing plants for newspapers) to spread these expenses over as many media activities as possible. Customer captivity refers to the loyalty of customers, be it because of habit, or high switching or searching costs (which make customers think twice before jumping ship to a competitor). Cost as a competitive advantage is less frequent, although it does occur in cases of patented technology (think digital video recorder or search algorithms). Lastly, government protection, namely in the case of ownership rules or local content requirements, can play a role.

As for the fictitious – yet oft quoted – sham competitive advantages, the authors identify deep pockets, brands, talent, and first mover. Let us dwell on the two most surprising ones: the lack of importance of brands and talent. Regarding brands, the authors do not quibble with the positive impact of some brands (how could the Wall Street Journal name not help its spin-off ventures?), but rather they point out that many top brands have lower-than-average performance. They also point out that the media boulevard is strewn with great brands by the wayside; Life magazine, just to quote one. And the media scene has developed new services (and brands) out of nothing – Bloomberg being a case in point.

As for talent, the co-authors distinguish between creative talent and managerial talent. But on both counts, talent proves a slippery competitive advantage, for talent is well-talented at maximizing its compensation, and this is in direct opposition to shareholder performance. The more Sylvester Stallone or Steven Spielberg get paid, the less remains in the pot for average Joe shareholder. Which leads the authors to the killer final line of the book: “In the end, shareholders get the moguls they deserve.”

Published September 2010.
The next instalment will appear on September 29 and will cover the scope of media activities.