I've been spending most of my time blogging about First Amendment-related issues in recent months and have failed to cover media marketplace / ownership developments. Specifically, I haven't kept up with my ongoing "Media DE-consolidation series," which has highlighted downsizing or spin-offs at several companies, including: Knight-Ridder, Viacom, Disney, Clear Channel, and many others.
As part of this series, I've previously written about Time Warner's potential coming crack-up, but now it appears imminent. In an amazing front page story in Friday's Wall Street Journal, Time Warner President Jeff Bewkes declares the death of "synergy." More poignantly, Bewkes goes so far as to call synergy "bull---t"!
And so it appears that the biggest media mega-merger of all-time--and a deal that had hoards of Chicken Little critics declaring it represented "Big Brother," "the end of the independent press," and a harbinger of a "new totalitarianism"--is set to unravel.
What are we to make of this?
"Synergy," of course, was a hot buzzword in many business schools and boardrooms throughout the 1990s and it led to a wave of major media mergers and acquisitions. The idea was simple: bring diverse media outfits and operations together under one roof and then find ways to build relationships between them. In turn, this would expand audience share, value and profitability. At least that was the theory. The problem was that the synergy crowd ignored the lessons taught by another school of business strategy which focused on the importance of corporate "core competencies." Sometimes, this crowd said, it's better to just stick to what you do best and not try to over-extend yourself. If you focus on building value using your company's core competency, you can sometime do (a lot) more with less.
But the synergy crowd decided that it made more sense to try to just combine as many core competencies from as many different companies as possible. And that's how AOL-Time Warner was born. It was an ambitious combination of diverse media interests: Warner Brothers, Turner Broadcasting, HBO, Time Inc (which alone contains over 140 publications), Time Warner Cable, and AOL, of course. These companies were market leaders in their individual media sectors and produced a great deal of popular content and market value. But would a combination of all those interests make sense? Would it produce those magical synergies everyone kept talking about?
Unfortunately for AOL-TW, it was a rough ride from the start and synergies were nowhere to be found. By April of 2002, just two years after the marriage took place, the firm had reported a staggering $54 billion loss. Losses grew to $99 billion by January of 2003. And then in September of 2003, Time Warner decided to drop AOL from its name altogether. It would be an understatement to say that the merger failed to create the sort of synergies (and profits) that were originally hoped for. The title of Kara Swisher and Lisa Dickey's 2003 book really said it all: "There Must Be a Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for a Digital Future."
Friday's WSJ front-page article by Matthew Karnitschnig reveals that TM itself now realizes the synergy has been a failure--or, "bull---" in the words of Jeff Bewkes--and that downsizing is probably inevitable. Here are some of the key excerpts from Karnitschnig's piece:
* "...the media industry has thrown off the conventional wisdom of only a few years ago. Other media companies such as Viacom and Liberty Media have already broken themselves up. Time Warner... has stopped requiring that its units cooperate--instead of 'synergies,' managers speak of 'adjacencies.' It's also selling businesses that don't make enough money."
* "[A]fter the takeover was consummated... friction between the two cultures gnawed away at the plan."
* "These days, as Time Warner's division pull in different directions, it's not clear what, if any, corporate solidarity remains."
* "Now divisions are encouraged to cooperate only if they can't get a better deal on the open market."
Worse yet, as Karnitschnig points out, "Time Warner and its peers were also caught flat-footed by the emergence of new players such as Yahoo and Google." So, it's not just that synergy didn't develop for TW, it's that there has been an unprecedented explosion of new media players, outlets and technologies in recent years that have lured customers away. (I documented these developments last year in my book. "Media Myths: Making Sense of the Debate over Media Ownership.")
The point here is simple: Markets work. When "synergy" doesn't develop, markets punish companies and those combinations typically unravel. It's not to say the Time Warner is going to crumble overnight. Far from it. It will likely start gradually shedding a few assets here and there to see how markets and customers react. We see this happening already. Beyond dropping AOL from its name, Time Warner has spun off its once mighty music division and is taking a portion of its cable division public later this year. It's only a matter of time before other divisions are downsized or divested. I suspect AOL will be sold to someone very soon.
So, next time you hear those cranky media critics spinning Chicken Little tales about the sky falling on our heads because of media mergers, remind them of this story about how demanding customers, fickle shareholders and new competition have once again checked the power of one of the biggest corporations in America.