Last December, I posted excerpts of an IRA interview with Michael Whalen, an award winning composer and new media observer. In this week’s issue of The Institutional Risk Analyst, Michael reviews his predictions of last year and discusses how he sees the future of media. Long excerpts but very interesting and thought provoking. Full IRA interview is here.

  • It seems that about 100% of what we discussed has come to pass or is in process, and then some. We were talking about the eventual end of television networks, film companies and the continued radical upheaval of the music business. It is certainly the case that network television is ending as we know it. While we have not seen any of these media companies fall over and die – the erosion in all of television and broadcast media in general in just 10 months is alarming.
  • I think the biggest single factor that has changed since we spoke last year is that major media companies and especially the television and cable franchises are no longer pretending that things are “OK”. (…) the total number of people watching programmed broadcast television is less than half of what is was just 10 years ago. The level of desperation out there is amazing.
  • In the face of these actions, income streams everywhere are drying up. Look at how new ventures like Oprah’s OWN network (launched just a year ago) has been a financial disaster since day one. News Corp’s (“NWS”) failure in launching their digital magazine “The Daily” and the continued trouble for media institutions like the New York Times (“NYT”) are but single examples of an ocean of trouble for media. (…)

  • The new content streaming deals being discussed widely are not making things easier – nor are they making up for the lost revenues from the huge falloffs in YOY numbers for home video sales, foreign box office and the essential lifeblood statistic of network television: “homes using television” — the HUT numbers. In the last 12 months, the numbers of distinct users on Hulu.com (in the United States) have outpaced the metered Nielson ratings of all FOUR television networks combined.
  • I think there are three factors at work: first of all the economy is a HUGE mitigating presence behind everything that is going on in the media & entertainment space. Worldwide, consumers are broke and resigned about their short and long-term financial prospects.(…) Only companies like AAPL seem to have punched through the cynicism to create the “gotta’ have this” atmosphere for their products that supersedes any one local economy or financial circumstance. Other companies make short-term blips with price. For example, the success of the full featured Android phone platform is largely due to price slashing by multiple competitors in the US.
  • The second factor is the de-evolution of industries that have been long-established like music, television and film. Their income streams are changing radically. The ability to forecast grosses on releases, pre-sales in foreign markets or calculate streaming revenue is nonexistent right now. There is no visibility on earnings or revenue. (…)
  • (…) most consumers under the age of 25 have been reticent about spending ANY money on entertainment, media, tickets and the rest. They have grown up in the shadow of 9/11, two wars, two recessions and a digital media landscape where paying for content was indifferent at best. Very indifferent. So, why should media companies be depending on them to fund their growth or expansion? Answer: they’re not.
  • I think it’s VERY dangerous for anyone who wants to quantify the present or future of media with the numbers that are conjured by the “inside the box” analysts. The lack of clarity in the market effects things like the VALUE of copyrights and the vast libraries of music, movies, TV shows and other media that entertainment companies pride themselves on. Question: if you cannot even guess what these catalogs will generate in terms of cash flow – how can the libraries be valued? Answer: they cannot.
  • I think Goldman did everything they could to “sell” Facebook in a private/public orgy.  But, frankly, I think that people who work OUTSIDE of entertainment can be manipulated. They are still blinded by the “bright lights” of stars and the Hollywood experience. That fact makes them susceptible to the ‘advice’ of people they think are in the know. Frankly, having people jump in blind to these media companies with hundreds of millions in cash and no real data to support their moves is a childish way to invest.
  • The final factor is the technology itself. I recently did an interview where I described the “push – pull” in the technology space. Here’s the “push” — media industry professionals are pushing back on technology. They have cut their purchases to the absolute bare essentials. Many professional musicians, filmmakers and independent video people have cut their purchases by more than 50% over the last two years. Top-content creators throughout the entertainment space have hunkered down in a siege-like ‘wait and see’ game. (…)The vendors of new equipment and technology have no pricing power or leverage, zero. This is a reflection of the industry as a whole.
  • The “pull” for new products is from consumers. Consumers want their gadgets – however, they have put massive downward pressure on consumer companies on price and they have put even more pressure to give them MORE features at lower prices.
  • (…) the process will be drawn-out and might get really weird before we have a clear idea where things are going in the media world. By “weird” I mean you might see mergers and sales that were absolutely unimaginable even 5 years ago.
  • No one and nothing is immune from the complete shift in the media business model. (…) Even the “darlings” of the current media moment will be soon overboard. Yes, I am talking about Facebook, Google, Yahoo, Hulu and the rest or the media brands that have received so much attention. Some of these companies have piles of cash that might prolong the suffering – however, they don’t have a single answer to any of the questions I have posed here. There are no answers because in an earthquake you can’t find your footing until the tectonic plates stop moving.
  • Last month’s implosion of Netflix should be proof enough of how dangerous the market is right now. Netflix went upside down because they did not have the leverage in their own streaming negotiations. They waited much too long to start the process and they were so arrogant. When Netflix was done, they thought that they could pass on their own ineffective deals to their unwitting customers in the form of a 60% hike in monthly service fees. Their customers left in droves.
  • Price is everything right now. Remember what they teach you at business school: in the absence of value, price matters. There is no value here. Investors need to know that the public is starting with ZERO dollars as a their price point for all digital content.
  • (…) the old models must be abandoned. What is NOT so obvious is how producers of TV and film content will present their work so a broad audience finds it and watches it. From there, how is this content monetized? One might say advertising immediately as one possible income stream — then what, subscription? Certainly, subscription is all the rage right now. But no one’s math in reality works in terms of how streaming will be paid for in a way that content holders get SOMETHING for the use and performance of their work. The point here is that network television has already collapsed into faceless platforms with SHOWS – not a network identity or even a brand.
  • The shows themselves are “brands” and they are far bigger than the company producing them or broadcasting them. Based on the “old” model, CBS is no longer CBS the brand. They are “NCIS”, “Hawaii Five-O”, “CSI” and “Survivor”. What’s even more amazing is that HALF of all views of network prime time programming are NOT watched at its original broadcast time – – it is viewed on demand, on Hulu or some other content website.
  • As an audience we watch what we want when want to – period. It will be interesting when the producers of NCIS, or CSI or any major show see that they could leave network TV and turn their show into an app. It just takes one show to say goodbye to the network entirely and the model that was prime time television will be forever shattered. (…) If I am an advertiser, I am going with the app because the metric and demographic my message is going to lives in a mathematical reality of sales and an audience being in action downloading the show. Welcome to the new face of “value” in media. Smaller numbers – more valuable per eyeball by a factor of 20.
  • In general terms, the losers in this conversation are the people betting on the future of network and cable television. The further losers are the film companies whose fortunes have reversed with the disappearance of home video money and who have committed to making expensive “tent pole” movies 2 years ago while they have watched their reliable income streams disappear. The last set of losers are stockholders and board members who sit in meetings, powerless, hoping that maybe a little more ad revenue with solve the problem. It won’t. The traditional answers will only prolong the status quo for another year or so. This is an industry in search of a business model.
  • AAPL has created a compelling answer for many of the questions I have posed. But they may not come out of the next 18 months without a scar or two. (…) there is a new posture by companies like Nintendo, Sony (“SNE”) gaming and even Microsoft (“MSFT”) that represents a huge new stance in what I would call the “post-AAPL” media space. For example, Microsoft owns the automotive technology space. Have you driven a Ford automobile lately? You would have seen that Microsoft’s stereos and navigation systems are installed as standard equipment. Look at what they are doing with the X-Box and turning it into a low-cost media center. Very compelling. Microsoft has adapted out of their old posture into a leaner one and frankly, a healthier one.
  • After all the huff and puff in the media over them, I see Facebook as an “also ran” in this race. Facebook wants to ride the media content wave without any real risk and cutting any deals themselves. They want to innovate as a passive streaming facilitator. Zuckerberg & Company just don’t have the leverage and operational smarts, in my view. It took Steve Jobs to create a whole new type of licensing agreement called “Cloud Rights.” The AAPL terms are brilliant – – a fusion of streaming and mechanical licenses – – I am not sure it’s legal under current Federal Copyright Law – but it is Jobs’ final visionary statement in the form of an elegant solution to how streaming content can be paid for without bankrupting the company offering the service. AAPL’s math with the about-to-launched iCloud can work. They need a huge number of subscribers – but it’s possible.
  • look at how industry darling Spotify decided to give away equity in their company to the four existing major record companies in lieu of the cash they knew they could NOT raise from subscriptions. I am sure you heard at how Facebook and Spotify will be tied together soon. Does anyone remember Facebook video? They launched it last year. The marriage with Spotify will go the same direction unless Zuckerberg does something really drastic and BUYS the company. If you work for Goldman and you’re reading this, please call him and say “no”. Do you see how desperate and tenuous the whole space is? Spotify is a great idea, but even at $10 per month, the price point may be too high for the indifferent teenager who will drive their growth and the ability to get content over the slow cellular networks (4G?) in the United States may obliterate all the big talk and promises of streaming content for years. The age of the entertainment industry pretending and smiling through the fear and grinding declines in revenue is over. The new age has begun…


Leave a Reply

Your email address will not be published. Required fields are marked *