Managing Director & Partner
Value creation in the media industry depends on one’s perspective. In China, small-cap companies are the shooting stars, feeding that nation’s appetite for online activities and entertainment. At the same time, the US internet giants are driving massive value creation. In the traditional media space, however, companies are addressing declines in their legacy businesses and the need for transformation with varying levels of urgency.
Chinese companies hold six of the top ten spots in the media industry’s league table for the period from 2011 through 2015. (See Exhibit 1.) These predominantly small-cap stocks have benefited from the rapid rise in online penetration, mobile usage, and consumer adoption. Number one, Leshi Internet Information and Technology, has aggressively expanded into online content, applications, and devices, launching a brand of fast-selling smartphones in 2015. Number two, East Money, and number four, Hithink RoyalFlush Information Network, providers of online financial and trading information, have profited from the growth of the middle class and investor sophistication. For seven of the top ten companies, sales growth was the largest contributor to TSR.
These winners are at the tail end of the easygrowth era for Chinese internet companies. Companies such as Tencent and Baidu have generated tremendous shareholder value, but, as growth in internet penetration and mobile phone sales slows, they all need a new playbook.
Large-Cap Leaders. Despite the success of these smaller Asian companies, the epicenter of fundamental and disruptive value creation has been internet companies in mature markets. The four so-called FAAN stocks (Facebook, Amazon, Alphabet, and Netflix) collectively generated nearly 1.7 times the TSR of the 82 other media companies in our sample and created nearly as much absolute value.1 Notes: 1 The index was originally known as FANG—Facebook, Amazon, Netflix, and Google—before Google changed its name to Alphabet. Amazon is classified as a retail stock but could just as easily be a technology stock on the basis of its cloud business, or a media stock because of its streaming-video service. Facebook was ineligible for ranking because it had not been public for the full five years under analysis. (See Exhibit 2.)
In order to highlight the performance of larger media companies, we created a second league table consisting of companies with market capitalization of at least $20 billion. (See Exhibit 3.) Among large-cap companies, the performance of the FAAN stocks stands out.
Number four, Netflix, exemplifies the over-the-top (OTT) services that bring content directly to consumers, bypassing the broadcasting and cable gatekeepers. Tied for number ten, Google’s parent, Alphabet, has mastered automated advertising built around search terms. Along with Facebook, an honorary member of this top-ten group by virtue of its three-year TSR of nearly 60%, Alphabet essentially owns the US mobile advertising market. Amazon, a retailer by our definition, would have finished in the middle of the top ten—with an average annual TSR of 30% from 2011 through 2015—were it classified as a media company. All four companies are platforms that use global reach to create competitive advantage, making the media industry a global—rather than a national or regional—business.
Like the companies on the broader top-ten list, these companies generally created shareholder value through revenue growth and multiple expansion. Six of them made the top ten despite declining margins.
The New Normal. Most media companies are painfully aware of the massive shifts in content creation and consumption in their industry, yet few traditional players have fully adapted to them. In particular, their future will depend on how effectively they embrace six specific shifts that will continue to define value creation in the media industry:
Media companies have been transforming— or not transforming and failing—for up to two decades. But there is more to do. Here is what it takes.
A Cultural Shift. The core strength of media companies is storytelling. Media companies still know how to tell stories more successfully than most technology companies. But almost everything else about media companies needs to change.
The success of digital transformation ultimately rests with people and leaders: the willingness of current staff to embrace change and of executives to integrate fresh blood and insight into the organization.
The winning culture values speed, experimentation, calculated risk taking, adaptation, and learning from failure. The winners understand how to track, measure, and improve consumer engagement; develop content for mobile and even virtual channels; and create new distribution capabilities.
Regional players may need to go global or play outside their comfort zone. (See “Axel Springer Goes Digital” for an example of a regional media company that is undergoing a global and cultural transformation.)
Few traditional print publishers have made the transition to digital as successfully as Axel Springer, Germany’s largest newspaper publisher. With circulation and ad revenues of the print business declining, Axel Springer placed bets on online content, online classified and marketplaces, and digital marketing. The publisher, for example, bought Business Insider, a US online news outlet, and eMarketer, a media analytics firm, and acquired minority stakes in Thrillist Media, a lifestyle digital outlet for millennials, and in Airbnb. To help pay for these acquisitions, the company sold off regional newspapers and magazines and restructured. Also, it has relied on predictive analytics to control costs and manage sales risk.
The digital portion of Axel Springer’s revenues climbed to 62% in 2015, and its stock price has risen by around 40% since 2013.
Culturally, Axel Springer has eliminated the operational distinction between digital and print and encouraged executives to take more risks—and be willing to fail. In 2012, Mathias Döpfner, chief executive, sent three senior executives to live in Silicon Valley for nine months to learn from its startup culture.
End-to-End Value Chain Transformation. In today's era of platforms, high-quality content remains important, but the entire value chain matters more than ever. Media executives, however, tend not to speak about value chains. In the newspaper business, it has long been understood that editorial “did its own thing” while the business side managed revenues. A similar divide has existed in movie studios, broadcasters, and other creative companies. This separation prevents organizations from working closely together.
Many media companies have started to digitize parts of their value chain. (See Exhibit 4.) But few have digitized comprehensively. Yet this is their best hope for providing their audiences, viewers, and readers with the most enjoyable creative and commercial experience— and, ultimately the best hope for their own survival. As Mark Thompson, the CEO of the New York Times Company, wrote in the Reuters Institute publication, “Newsrooms and commercial divisions of news organizations must become far closer strategic partners than is generally the case today.”
Although he was referring specifically to news organizations, Thompson’s advice applies broadly: “Editorial and commercial leaders need to work together on integrated strategies which combine editorial mission and standards, user experience, innovations in data, technology and creative design, and radically new approaches to monetization. Not five different strategies, not even ‘aligned’ editorial and commercial strategies, but a single shared way forward.”
These new approaches require new skills. Media companies need executives with strong quantitative skills, akin to the pricing experts so critical to the success of airlines. They also need sophisticated sales executives who understand advertisers’ strategic needs and can work with digital and content teams to create compelling mobile and online experiences.
The Digital-Disruption Opportunity. In this new era of platforms, OTT content, and digital targeting, traditional media companies cannot rely solely on their historical bases of advantage, such as scale and relationships, to remain relevant. To avoid becoming victims, they need to be the creators of disruption.
With their revenues at risk, most traditional media companies need to be much bolder and ambitious. Of course, they should aggressively pursue organic growth in adjacent areas. But to make changes in their growth trajectories and business portfolios, they need to engage in M&A, partnering, and other external moves that integrate them into a wider innovation ecosystem. In video, for example, new studios such as New Form Digital and All Def Digital are creating online stories that resonate with younger generations and niche audiences.
As the incumbent social media player, Facebook has not taken its perch for granted. It has expanded into hot areas by acquiring Instagram, WhatsApp, and Oculus. Meanwhile, the flash popularity of Pokémon Go suggests the existence of pent-up demand for AR and VR.
Amazon has more than 1,000 people working on its Alexa and Echo voice-enabled ecosystems. It acquired Twitch, an online social video channel for game players. Facebook is building DeepText, an AI-based technology that can understand the intended meaning of a user’s post—not just recognize keywords— and can make recommendations or take actions as a result. Google’s commitment to AI, for example with its acquisition of DeepMind Technologies, is well-known. Few traditional media companies have made similar bold moves into these fields.
It’s too early to tell how these developments will affect the business models of traditional media companies. But these companies have already proved that they know how to disrupt the media industry. Media executives need to counterpunch with something radical and far-reaching.
This is a high-stakes assignment. Traditional media companies are competing against digital attackers that are focused on user growth first and monetization later—a strategy that investors tend to reward. Most traditional media companies, however, are evaluated on the basis of their cash flow. They don’t get credit for expanding their user base unless that also brings in cash. Even when they build new businesses, a dollar of digital revenues is not equivalent to a dollar of analog revenues. Margins are lower even if multiples are higher. Most digital revenues are from advertising rather than recurring subscriptions or revenue streams such as retransmission fees. Therefore, in addition to preserving legacy cash flows through cost cutting and building new businesses, executives need to create carefully crafted portfolio, TSR, and investor relations strategies. They need to tell a better story about their reinvention. (See “Creating Shareholder Value at Media Companies,” BCG article, October 2012.)
Some companies get the challenge. Early on, South Africa’s Naspers recognized that its print business was lagging behind, so it bought stakes in digital companies—such as Tencent in China and Mail.Ru in Russia—and expanded into pay television. In the US, Gannett split its publishing and broadcast assets into separate companies, providing Gannett: A TSR Turnaround in the Making.
It’s too early to declare winners. But the losers will certainly be those companies that treat reinvention as an option rather than an imperative.