In The Curse of the Mogul, Jonathan Knee, Bruce Greenwald and Ava Seave say the biggest problem with media companies is the moguls, who have been seduced into believing that content is king, bigger is always better and talent especially their own is irreplaceable. So blinded are they, they have mismanaged their companies and shareholders have suffered. Co-author Knee, director of the media program at Columbia University and an investment banker with Evercore Partners, weighs in on the next big media deal, the treachery of the Internet and why the movie business sucks.
Is the future of the media smaller?
I hope the future of the media is smarter. The largest media companies are genuinely conglomerates in the old-fashioned sense of the word. They are made up of, in many cases, well over a dozen very different businesses that have nothing to do with each other, and many of those businesses are facing very serious and fundamental threats to their well-being that require significant management attention, and management attention is the most scarce resource at any company. I think the right answer is for these businesses to get more focused. That's generally the direction that they're going. Viacom and CBS split up. Time Warner spun off Time Warner Cable and will spin off AOL. This is clearly the trend.
So then, what do you think of the Comcast NBC-Universal Deal?
There are parts of the combination that seem to make obvious sense. Including a bunch of fixed costs that you can spread over a big cable company. However, it is, at a minimum, intriguing that the CEOs of the two leading cable companies in the United States [Comcast and Time Warner Cable] have taken diametrically opposite views on whether it is wise or strategic to invest capital into content businesses. [While Comcast considers merging with a content company,] Glenn Britt, CEO of Time Warner Cable, has said he will not under any circumstances invest any of the company's quite significant free cash flow into any content businesses. It seems highly unlikely they could both be right.
Your book suggests a lot of the mistakes the media have made are because of the moguls.
Media moguls are a little like investment bankers, and I say this with humility. Investment bankers always have No. 1 market share because they only count the deals that they do. Similarly media moguls look like geniuses because they only talk about the deals that went well. The best example of that is when [News Corp. CEO Rupert] Murdoch bought MySpace and it's rumored Tom Freston lost his job [as Viacom CEO] over not buying it everyone talked about MySpace and how smart that was. But several weeks apart from MySpace News Corp. spent even more money on an Internet game company called IGN that nobody's ever heard of since. If you only count the ones that look successful it's easy to be a genius. But unfortunately the shareholders are stuck with the unsuccessful ones as well.
Isn't the jury still out on MySpace?
Absolutely. Since the acquisition MySpace has lost significant share to Facebook, which reflects just how hard it is to maintain barriers to entry on the Internet and why it's such a tough environment to play in. Now a number of folks say "Well, look, Google gave them $900 million in an ad deal for something they only paid $580 million for. How can that be bad?" And the answer to that is: Given that Fox Interactive Media group, of which MySpace is a part, actually lost money this year even after the short-term Google ad-deal windfall, $580 million doesn't seem like such a bargain.
Recently Bob Iger, CEO of Disney, said the whole movie industry needed to radically rethink the way it was operating. What needs to be done?
The movie business has for a long time been a troubled business. Content has never been king. The reality is that, wonderful as it is, the value of it doesn't go to the shareholders. Movie moguls need to be smart about how to manage talent. The reason [longtime Universal Studios owner] Lew Wasserman was able to make more money than anyone was that he set the culture of the industry. In his day there was an unspoken understanding of how you did business, a culture of co-operation. Somewhere along the way it became cool to steal talent at a bigger price it made you a bigger mogul.
The culture of management at these companies needs to be rethought. They've got to stop catching the car with their teeth and overpaying for talent.
So was Paramount's saying no to Tom Cruise a shrewd business move?
Saying no publicly is unlikely to be a shrewd business move. Competitors exploit that. But an alternative is quietly saying no and making sure to let your competitors know you are saying no so they can pile onto the policy of fiscal discipline. There are lots of other things you can give talent besides money. For years Goldman Sachs convinced people that their highest value was their connection to Goldman Sachs. And people hardly ever left the firm.
Right. Money obviously means nothing to anyone at Goldman Sachs. A lot of people have sounded the death knell for print media, but you disagree. Why?
People don't realize how much better a business it was to start with. The worst kind of business is the hit-driven business. One celebrity can hold up your entire enterprise. People are forever tricked into believing that somebody has the magic sauce and must be paid whatever they ask. Businesses such as newspapers, where the content is continuous and you're relying on the value of a franchise rather than a star reporter, are better businesses. Newspapers had 30% or more margins for years. There's no question that the Internet has made the newspaper business tougher than it was before. But newspapers used to be so profitable, it made newspaper managers terribly lazy. Even today the margins at most small local newspapers are still 20%. McClatchy is 20%, Lee is 20% and Gannett, if you count out USA Today, is 20%. At some point this may all change, but it's much harder to kill that kind of franchise.
That's also why the folks who own the formats for game shows or soap operas are better off than those who make Friends. Because when it becomes a hit, all the money has to be handed over to the stars.