Digital “convergence” is back and it’s transforming the media sector. Many large companies are embracing the innovation supplied by smaller, new media companies. But old-school media players that refuse to play the game risk oblivion.
Technology and digitisation are rewriting the rulebook for the media sector. Coupled with significant changes in consumer behaviour, these drivers of change could prove crippling to “old” media players. Newspapers, magazines and terrestrial broadcasters are seeing advertising revenues hemorrhage away to new media rivals such as mobile phones, digital television and, above all, the internet.
In his 1995 best-selling book, Being Digital, Nicholas Negroponte wrote: “The mixing of audio, video and data is called multimedia. It sounds complicated but it’s nothing more than co-mingled bits.”
Early mega-deals in 2000 that sought to cash in on these developments included America Online’s $164bn acquisition of Time Warner and Telefonica’s €5.5bn purchase of production company Endemol (maker of reality television show Big Brother). But both are in the process of unravelling.
Seven years on and “digital convergence” is back only more forcefully. Traditional media companies are seeking to defend their revenues by buying up online players, including websites. Such deals include News Corp’s £580m acquisition of social networking site MySpace and ITV’s purchase of FriendsReunited.com.
Olivier Wolf, head of media at PricewaterhouseCoopers corporate finance, expects to see further deals along such lines. “Mainstream media businesses will continue to embrace the internet through online acquisitions to counteract the threat to their traditional advertising revenues,” he says. Similarly, mobile telecoms and internet-based businesses have sought to acquire some of the “content” that more traditional media companies provide.
Recent deals include Virgin Mobile’s merger with the Nasdaq-listed cable television company NTL to form Virgin Media. The merged entity has spent £25m on recent adverts promoting the fact it can offer the “quadruple play” of TV, broadband, fixed-line telecoms and mobile telecoms from a single supplier. But then it posted a first quarter operating loss of £15.3m in May.
Wolf, however, admits there is little evidence there will be a rash of subsequent deals where tech and telecoms companies will acquire media assets.
Tactical manoeuvres
By contrast, he expects the funkier end of the ad industry could become a hotspot for future deal-making activity — with technology companies particularly favouring acquisitions that demonstrate they have both advertising/sales skills and technological wizardry under one roof. Microsoft’s proposed $2bn acquisition of DoubleClick falls into this category, as does its recent purchase of French mobile phone advertising agency ScreenTonic.
David Fairfield, corporate partner at Rosenblatt, agrees, and points to WCRS and Digital Marketing Group (two of his firm’s UK clients) as recent examples of developments in the sector.
“WCRS, having bought itself out from the French group Havas, has assembled a marketing, advertising and integrated marketing (as it was known), really came into prominence ten years ago, but we’re now seeing a new version driven by digital technology.”
Consolidation looks set to accelerate, and is already trickling down into the UK’s mid- and small caps market. In a recent survey dubbed Converging Media Futures: Sector Strategies for Anytime, Anywhere Content, Informa Telecoms & Media said nearly half its respondents predicted media convergence will boost the number of alliances between industry players, while 36% believed it would lead to further M&A.
The companies surveyed — which included Channel 4, ITN, MTV, O2 and Virgin Radio — also agreed that small and medium-sized businesses are more likely to be the source of digital media innovation than larger companies.
Elsewhere, even though nearly half the respondents saw television as the “hottest convergence category”, only 9% thought broadcasters would be the beneficiaries. In other words, they are more likely to be prey than predators.
The troubles at ITV, which has been severely weakened by an exodus of viewers and advertisers, illustrate this. Even though it is still worth about £5bn-£6bn, the company has effectively been “in play” or over a year.
The free press
The independent production sector is also seen as ripe for consolidation following the emergence of a select band of “super indies”. These large production houses became possible as a result of the Communications Act 2003, which transferred programme ownership rights from broadcasters to independent producers.
The sector was further fuelled by an influx of private-equity houses, whose investments helped fund the management buy-outs of several of the broadcasters’ production arms. The investors then used these as kernels on which to build much larger production empires through bolt-on deals.
For example, All3Media, formerly part of Chrysalis, was acquired by private equity group Bridgepoint, bulked up through a string of nine deals, including the acquisition of Lion Television, and then sold to Permira for some £320m.
Facing saturation at home, the super indies — which also include RDF, Endemol and TV Corporation — are now increasingly fixing their eyes on buying up continental European production companies. Terry Back, head of media and entertainment at Grant Thornton, expects to see plenty of further deals. “If content is the key, there is a lot more growth and consolidation yet to happen,” he says.
There’s also the added danger that convergence might drive companies, caught up by the hype, to over-extend themselves, which could lead to a string of disposals following deals that turn sour.
Companies should also be aware of the potential for a consumer backlash, driven by people’s mistrust of having to deal with a single “Big Brother” supplier for all their media, entertainment and telecoms needs.
Writing in The Register, David Perry and Dale Vile of Freeform Dynamics put it simply enough: “The prospect of putting all your eggs in one service provider’s basket probably frightens the hell out of most people.”
This article was published in Impact, the magazine of law firm Rosenblatt Solicitors, on 4 June 2007