Transforming Media: Part 1 -- Financing Creative Destruction

The future of the news industry, both print and television, is online. That doesn’t mean that people will not consume news while sitting on the couch or at the breakfast table. But that news may be displayed on a TV-like display or a digital print device like Amazon’s Kindle - not on paper or broadcast TV.

Traditional print and broadcast television will soon be relegated to the past. The writing is on the wall. You need not look any further than the financial statements of the major newspapers to see that this transformation is underway. Subscription revenues are falling, and internet ad revenue is a growing percentage of total ad revenue.

There is also good news in those financial statements. Internet revenues are today only a small percentage of total newspaper revenues. The lion’s share of the “creative destruction” is still ahead of us - and local media companies are sitting in a perfect spot to take advantage of that fact. But how?

Online advertising is an immature industry and changes rapidly. Old line media companies, often saddled with debt, do not. That has to change, and there are two components to that change - corporate transformation, and technical focus.

Many major media companies have lots of debt. With hard assets like printing operations and broadcast infrastructure, this debt makes sense. It maximizes the return on investment, and traditional print and broadcast media have been stable enough to support fairly aggressive financial leverage. That is about to change.

The online world is laden with risk - it is rapidly changing and unstable. This is not a good time to build up debt. Flexibility is the key to success.

So what is a media company to do? One strategy would be to spin off Internet related assets into a debt-free company. This is great for the newly created Internet media company- you get a smaller, more risk tolerant organization that is primed for growth into the new Internet media industry.

But what of the other side? The old broadcast and print company, now stripped of it’s higher growth Internet components, will be left with all of the pre-split debt. Unfortunately, this company will have to be managed as if it were going to disappear (or at least shrink dramatically). That means aggressive payment of debt and reduction of workforce as the market shrinks. It will be painful, but it’s the only choice. The alternative is bankruptcy and eventual liquidation.

Fortunately, there is still time for this. Broadcast and print are still producing significant revenues. There is still hope for an orderly contraction of a traditional media company, debt and all. I do not believe this window will remain open for very long. The more traditional advertising revenues decrease, the less likely it will be that a split like this will be viable. Once that window closes, it will be gone for good. Keeping the businesses together would exact a toll on the online business unit as it would be forced to operate in a print-dominated world as the company would be forced to cling to a declining  print-heavy revenue stream just to survive. 

The important concept here is to take the small and growing piece of the media business and put it into an environment where it can thrive while the option is still on the table.

Coming up next - part two of the transformation: building a technical backbone.