B17 – From Frustration to Emulation: Moguls of Media

Politics combined with media creates a friction-filled phenomenon every few years during the election cycle.  It seems as though there is no end to the cycle anymore, just increasing coverage.  Is the news giving us what we need to know? Or what “they” want us to know? Or merely what we crave to know, like a bucket on bon-bons at the movies.

Are we being overtly manipulated by media titans bent on controlling the world?  How are they even running these companies despite horrible deals and financial returns?

In the book written and championed by Jonathon Knee et al, The Curse of the Media Mogul enters in the world of business history and data crunching to answer all these questions and more.

Immersed in the media industry myself these past few years, the succinctness and clarity of the past and current landscape of the media industry in this book helped me connect the dots that previously left me face-palming myself in frustration and questioning.  Now I merely do it out of jealousy.

Media scrutinizes the world, but it doesn’t receive scrutiny in return

• Media leaders get far more attention than they deserve by the public
  • Replace a CEO at a small media company versus billion dollar manufacturer and see who get more press
  • There’s a strong disconnect between interest of the public to actual economic value (it’s about more than just money when it comes to media)

The public in US is paranoid about media controlling the people

• But top 20 circulated newspaper in US has 15 different owners and only 1 of them owned by a media conglomerate
• Antiquated rules: cable operators can own a media outlet in an area, but a broadcaster and publisher are prohibited by law from owning each other
• Satellite and cable has no preset limit to what they can control, broadcasters can only own stations reaching 38% of the country because airwaves are governed by the government and handle the licensing to parties to use them
  • But more people are going online where rules limiting reach haven’t been set

3 signs of a media mogul sliding into the dark side

• They have actual or perceived power over both operations and governance of business
• They are being attributed with a variety of mythic attributes: visionary, brilliant, etc.
• They have an unhealthy and relentless interest in expanding their scope of domains with no corresponding decrease in their control (Which is done through acquisitions)

Old school: voice and opinion of the writer was reflected in the publication/product created (a specific aesthetic or political agenda)

• Now: “fair and balanced” is the overarching motto, but it is still controlled by families or closely held private groups who have agendas
• Of the 15 largest US media companies, only 4 are broadly held public companies without significant influence by a person or small group
• Private equity investor is emerging as a new breed of mogul
  • This overwhelming control gives them a certain swagger

Myth: Media industry requires different skills to run and as such their leaders are not subject to critique using traditional, strategic, financial, or management metrics

• Yes it requires different skills than other companies, but this attitude allows mogul to not be held accountable for poor performance
• Most damning evidence the moguls avoid: the data
  • Media average return is 2.5%, S&P average is 9.0% over past 10 years
• Great executives of S&P are not “visionary leaders” but they do use traditional business tactics tho generated higher than average returns by focusing on increasing revenues and decreasing cost

Curse of the mogul is that eventually all great media executives will fall prey to these tendencies

Write the content, sell against the content, pound the pavement in sales enables the writer to do (to write) anything

• There is no consistency or correlation among top 20 business segments operated by media conglomerates: no industry-wide approach to owning parts of the media landscape
• Only thing that ties them: they are all engaged in production and distribution of information and entertainment
• Media types: consumer media and business/professional markets–which has 2x more revenue than consumer media

Consumer market: product sold to or otherwise targeting individuals in their personal rather than professional lives

• General (mass media) and special interest (niche)
  • Can have hybrids and the same publication can switch from one type to another with generations
• Advertisers will pay substantially more for niche ads (personalized and sense of community) but media moguls prefer owning general media (which makes no economic sense)

Institutional markets (which moguls don’t want either despite 2x the revenue)

• Business and professional information services: data, software, scientific, technical and medial
• B2B: industry focused, trade shows, directories
• Despite what might think, little consistency in how industries run and operate in closely related sectors (ex. Higher vs. lower education publications are run and sold very differently)
• Dun and Bradstreet spun off while others acquired: DB made ROI, others lost it, missing their asset investments marks and significantly underperformed
• Moguls all sold their local and consumer publications to buy professional publications despite numbers showing little reason to do so (or even showing should do the opposite)
  • Only a handful try to publish consumer brands outside their own country because too tricky with advertisers, politicians, etc.
  • At home, moguls have antitrust issues, but can buy professional publications with global reach and large market, so clearly what you do to expand, but this is cursed

Only sustainable competitive advantages can support sustainably outstanding performances

• Strategy is exclusively about establishing or reinforcing barriers to entry
  • Acquisitions and investments are not strategic plays
• When have no barriers to entry, it’s about operating as efficiently as possible
  • Efficiency means extracting the greatest possible profit that can be generated from the operations of a given collection of assets
• So if the company has no barriers to entry, it is delusional to think it can manage competitive entry and behavior
• Some media managers go so far as to think that talking about efficient operations is beneath them

Competitive advantage: owned outright or shared with a few

• Either peacefully co-exist without anti-trust or attack each other and ruin any form of it
  • That moat around business Buffet talks about
• Scale, customer captivity, cost, and government protection: the real forms of competitive advantages
  • Scale: characteristics to operate better than smaller ones (about relative size to others)
    • From a business with high fixed costs: strategy: keep spending more to make harder for others to compete with such new technology
    • Internet and network effect: number of customers increases value of services provided
      • Increase number of exchanges of buyers and sellers
      • Strategy is to grow its size as fast as possible
    • Customer captivity: habit switching costs and searching costs
      • Habit: “addiction”à go back to same brand despite potentially significant enticement of price or quality from competitors
        • Encourage high frequency of us fiercely
      • Switch: direct costs of ending a relationship
      • Search: pain of finding a satisfactory new one: greater complexity of product, greater the advantage
    • Cost: structure that can’t be duplicated by rivals: proprietary technology, learning and special resources
      • Proprietary: patent: media no use because can come up with others just as fast, so get customer hooked on what you created
      • Learning and experience: lack of complexity makes this difficult
      • Special resources: “talent” is not one, franchise is close, but it dies out/easily replaced
      • Growth is biggest enemy of fixed cost because have to ensure maintain market dominance
        • But scale allows cost to dominate new “virgin” users to be spread out over all customers which is why so much advertising
      • Government protection: kind of old school, local cable and airwave usage, towers, typically makes startup costs harder and provides additional protection for industry incumbent
    • Take a step back: high returns and stable market shares are signs of competitive advantage: can moguls demonstrate their companies do this? No…does this mean they are awful? No, just that they have no competitive advantages
      • This means they should focus on recognizing this and operating efficiently as possible

Sham competitive advantages (which often come up when discussing media companies): deep pockets, brand, talent, and first mover

• Deep pockets: advantage to manager, not shareholder because means no pressure to perform and can take wild risks
  • Tendency is to empty those pockets over time
• Brands: can support or reinforce a real competitive advantage, but often they don’t
  • And more often about structure of industry than in how strong a brand is, not by themselves are they a competitive advantage
• Talent: analogous to brands, not sustainable
  • Actors and producers, managers
  • Can only have “hits” or find winners for so long which creates a lose-lose situation for corporation: either pay talent more for being good or pay them for a flop: puts all risk on the corporation
  • When talented manager meets poor company, company’s poor performance stays and manager goes
  • Employee owned companies: has to be a majority or minority to align interests: middle ground will choose to pay themselves at cost to shareholders
  • Eventually talent always fades
• First mover: small number where this is true (when other barriers exist), most of time disadvantage and spend all this time and money to identify a market
  • Competitor can take this for free and develop based on the first’s trials and errors
    • So when minimal barriers, first mover is not wise

The business that attracts moguls the most is the one that has fewest competitive advantages

• “Content is king” ignores barriers (none) and isn’t actually king

Tool for assessing competitive advantage:

• Distribution: local/retail (last mile); aggregation, marketing and wholesale to distributors
• Content: discrete or continuous
• Packaging: electronic or physical
  • Number of cable/digital channels are high, but owned by a small number of companies to fill up the space to prevent others from coming in
• Retail: local or national

Retail channel is over-crowded but as you go from content to packaging to retail, competitors decrease and barriers to entry increase

Ted Turner made money by dominating local billboard ad market that grew and supported the other endeavors

• Really just an example of a niche geography versus broad base, which niche is easier to enforce barriers to entry
• Simple advice, but moguls typically pursue opposite: buy up the content producers and embrace internet to go global (both awful ideas for them)

Highly Destructive Myths: growth is good, go global, content is king, move towards convergence

• Growth is good: all things come with cost, what matters is does it produce a ROI > WACC, if less than WACC, then actually every dollar in growth damages company value
  • When company with no barriers to entry grows, it does so on unattractive terms or it attracts new entrants so there is no long-term advantage
  • And the 2 competitive advantages: scale and customer captivity are put under pressure by increasing growth
  • Track record: historically the faster the company’s revenue grew, worse the stock performed
    • Moguls, talent, etc. who do provide ROI, take more, expand company and don’t return any profit to shareholders
    • Stocks: usually growth or yield, media companies are neither
  • Going global: blind pursuit of global strategy with reduced barriers to entry
    • Open self up to niche players
    • Track record is miserable: rules for foreigners owning media
    • Growing trend of consumers wanting intensely local content
  • Content is king
    • Talent is not a sustainable advantage (value doesn’t pass to shareholders)
    • Discrete rather than continuous content business are “sexier” but much less profitable
    • Content that is “Must have” vs. “nice to have” still doesn’t matter because really about whether it’s generally available (with internet it is)
    • “Must have” info: even “must have” publication’s value is about aggregation and additional value beyond the “must have” content
  • “Convergence” cult
    • Companies abilities to get into new areas of business that had previously been beyond their reach: huge pyramid scheme, no efficiencies, huge integration costs, new entrants, you lose any competitive advantages (they can now enter your areas)
    • When anyone says that tearing down barriers to entry is good, your wallet will be gone because you facilitate new entrants

Focus is on barriers to entry, not this notion of “old” versus “new” media

• Now “new media” is the incumbent and “newer” media replaces it
  • Should be defined an “incumbent vs. entrant”
• Harming incumbent business doesn’t make itself profitable/sustainable
• You will always have new entrants if there are no barriers to entry and it become remotely profitable

Myth: internet is good because “it’s growing” and incumbent competitive advantage is transferable to internet, basic rules haven’t changed, so we can do what we were doing before but at higher margin because lower production and delivery cost

• All evidence points to the opposite: it is not profitable growth, much more about how other content besides yours is consumed that’s produced cheaper, like user generated content
  • This reduces economies of scale because no big infrastructure needed for the creation of that content
• Existing winner can buy the upstart, but another entrant will come in and dominate/threaten
  • Internet is friend of consumer, not the incumbent

Newspapers: simply not enough revenue to support all media outlets

• High fixed costs, so turned to whomever could get most readers would become most sustainable
  • Means offend as few people as possible
  • Created “objective” reporting: no historical context to realize it’s all about economics not “integrity”
• Classified advertising was where made margins because could charge premium because no real alternative came close to reasonable price
  • This brought in the money and allowed publishers and journalists to write whatever they wanted without regard to reader sentiment because any decline in subscription revenue was easily made up in display/classified advertising
• Internet killed because of its searching abilities for products and services
  • Newspapers could compete at start, but didn’t want to give up such high margins that were life blood of company in favor of low-priced classifieds: would have an impact on their ultimate share, but would not stop the industry’s structural dynamics
  • Still good business but smaller and less profitable: newspapers 28%–> 13.2% EBITDA
• Online revenue stays around 10% of total revenue and the readers of in-print and online are the same demographic: older people
  • Younger just not consuming newspaper of any kind regardless of “strategy”

With high fixed cost business, any decrease hits straight to bottom line: allowed many more competitors to enter the space with low/no barriers digitally

• With lower margins, look at what’s being covered/added to the “uniqueness” that’s not national news but supremely local news with many local perspectives and analysis that’s all local and unique, not just press releases
• See major publishers outsource printing and distribution because most efficient/effective
  • Many papers are angry, but really just about facing real competition for the first time
• Local newspapers will get their scale economies from sales forces, and news coverage that responds to local audience’s interest to secure allegiance
• National/regional newspapers have always had fewer competitive advantages

Making successful online business is harder than off-line and failure rate is consistent with this

Online “shopping experience” loses to “cheapest price”

Internet business is more likely to succeed with scale through the network effect and continuous tech improvements that others can’t match

• Always have to be adding to this so that you have another stage of competitive advantage
• Otherwise others will catch upà always have to be developing/defending/reinforcing competitive advantage

Making movies, publishing books, and producing music have been horrible businesses for a long time

• Main job is to select and cultivate projects: unsustainable and no competitive advantage, no scale (can only manage so many projects at once)
• Backlog exploitation only good if keep producing hits: but can’t make hit after hit, need to fail but many believe “found the answer” through advanced data analytics
  • Even if yes, others would figure out and you lose any advantage
  • Not enough true data points to predict accurately and tastes shift unpredictably
  • Talent moves quickly to absorb any additional surplus
• Music: big 5 pretty close share stability but only because of mass acquisitions
  • Low returns ~4-5%, same story with movies (around savings bond returns)
• Books: under 10% margin
• Continuous much better than discrete content
  • Packaging advantage, high fixed cost, greater economies of scale and habit forming with potential switching cost
  • Not impervious by any means but something to hook customers, carefully track them and earn their loyalty

When don’t have competitive advantage, must operate as efficiently as possible

• But media industry looks at efficiency with such disdain
• “Efficiency” is as fun as “strategy”: how to get an actor to say “yes” for less
  • Big upside for manager because no one else is trying to be efficient
  • Even if company doesn’t have big upside in long term, does mean you can have a big cut of that in salary/compensation (but take it in cash)
• Cost management: of goods, marketing, and operations
  • Content is not a commodity, it’s the ultimate differentiated product

Goods: issue is that moves take 3 years so poor performance reflects prior leaders

• Create strategy for developing products and signing talent
  • Creative artists are notoriously insecure: money is reflection of studio’s belief in them
    • But other ways to show you care: by spending time and attention instead of money
    • Triple team talent: 3 executives to one star to deal with all their demands
  • If overpay star, word will spread and others will try to see if they can get more, so a little tough love and set boundaries can have strong ripple effect
• Granting perks to executives makes it not unique when give to talent, they get perk envy and you have an imperial CEO so busy with perks not there to focus on business which means producers will spend freely, the company’s money

Marketing: about half of cost of production

• Instead of controlling, moguls throw as much money as possible to try to differentiate
• Overinvestment: producer scared of shame of flop, do it to satisfy ego of talent or company (no financial sense)
• Budget made months before, but should be adjusted based on new info
  • If a flop, pre-sell and mass release before audience knows any better and cut losses with less marketing
  • If success, word of mouth and buzz will get people into seats and you don’t have to spend as much either

Operations: opinion that independent operations helps creativity: evidence supports quite the opposite

• Centralize operations with strong oversight to ensure consistency and efficiency and resist creative trying to take control
• Media benchmarks/metrics purely in terms of awards, market share: should be about costs and bottom line with serious attention spent on monthly meetings and reserves for bad years

Costs: hidden cost of art is diverted attention of executives to deal with troubles of a project

• Failure to account for cannibalization of new products on existing ones
  • May insist on a volume discount they would place order no matter what, so different sales people to handle different products
• People throw good money at bad instead of outsourcing, enter in high growth fields that know nothing about and aren’t leaders in it at all

Price discrimination and time windows: harder to maintain, but with advanced customization for individual needs, some opportunity, but erased with no barriers to entry

Organizational design: people, architecture, routines, and culture + manage distribution channels

• Media giants instead of agree to uniform ways, consistently compete to eliminate any advantage they may have

Top leaders have to be willing to change direction if research demonstrates they should (sexy or not) efficiency matters

Content is packaged: networks and databases

• Network business: manages a web of customer relationships through which it delivers content
  • Involves both physical infrastructure and/or a large sales force
  • Incumbent: if good job providing service, new entrant will have to offer cheaper or better product/service to gain share, but incumbent can match or outdo because lower average cost per user to spread advertising
• Database business: aggregate, integrate, and analyze large quantities of data and synthesize to most useful form
  • Value: from its timeliness, quality, comprehensiveness and ability to perform analysis consistently overtime
  • Can have significant fixed costs and high customer captivity
• Cable channel: packaging content of itself and mainly 3^rd party to create a voice or brand, relatively high fixed cost, but cost of adding additional homes or channels relatively low; also make sure saturates market so new channels are pushed out (why discovery has 114 channels)
  • It’s a market share/availability race (returns are 39% EBITDA)
• Technology: internet: reduces fixed cost element to switch between providers

Database: Reuters: many think are “content” providers, but value is in database (aka the packaging)

• Significant fixed cost, but tech biggest threat to competitive advantage, so continual investment in its tech products to maintain the competitive advantage
• Thomson and Bloomberg: 2 companies perfect to cooperate but media mogul mentality often means “attack no matter”

New entrant: wait for incumbent to expand far beyond it’s core competency, find area its not strong in, obsessively focus on customer needs is the winning strategy

• Incumbent should react by spinning off non-core areas, reducing number of products and reinforce core/barriers
• Value comes from doing hard things no one else want to or can do, easier and faster

Packaging business: handful of competitors with shared competitive advantages

• 2 optimal strategies that revolve around cooperation without incarceration with
  • Revenue
  • Cost
  • Risk Management
• Revenue: how each serve various niches without redundancies and a pricing structure
• Cost: who should serve which geographic segments, R&D, and Standards & Protocols
• Risks: financing and related mitigated by each other’s agreed product/pricing mix
  • Can’t collude, but can publicly announce which territories, products, and pricing so others can react/do the same
    • But prisoner’s dilemma draws to renege on the deal
  • Can change rules of the game for better payoffs for cooperation vs. not
    • “most favored nation clause” pay same for 1 movie as another
  • Multiple interactions, not one-time affairs so long term vs. short term strategy difference
    • Best thing is to demonstrate responding quickly to competitor’s moves
      • “Match any price” and creating industry trade associations to make standard practices/best practices
    • But mogul-minded, many even in same company compete to “get a deal done,” for the same actor, etc.
      • Even when setup good cooperating ideas they ruin them in media industry: ex. Sony reducing CDs to singles and Disney messing with release windows

Networks: have competitive advantages with high fixed costs and government regulated licenses had great returns until recently

• Advertisers would pay “up front” before knowing how successful a show would be, could wait but then have a “rate card” much higher priced and even have a premium on it if a hit
  • Forced all purchasing at same time, reduces advertiser’s bargaining, also “limited number of ad minutes” to protect viewers really limited TV stations so they all had same number of ads
• Programming: all selected shows at same time, networks wouldn’t compete for existing shows unless dropped and would spread nights out for which station “to go to” on a given night
  • Football: new night (Monday), new league (AFC/NFC), so added value rather than competed
• Tech ruined: new competitors (especially Fox): gave minor discount on ad, but played “by the rules” mostly until bid for sports shows and bought other’s programming
  • Since 90s, no major leader of networks
• Co-operation: benefits equally spread and much greater than non-cooperative behavior
  • Andy changes/new technology requires re-alignment
• When no barriers to entry, focus should be on efficiency, cooperating is a waste of time
  • But there’s a difference between zero barriers and low barriers and media networks have some
• Focus on improving niches and avoid destructive conflict

Local media is better media

• Myths
  • Look at failures
  • Should be inconsistent with economies of scale
  • Most successful brands resonate beyond local
  • Internet has rendered local useless
  • Not fun and uncool
• Local has been resilient even since the 1960s when people first said they would die, they out performed stock market
  • And performance was because they earned the valuation not because of a glamorous multiple, done through cutting costs and increasing revenue (right now we are at 1995 levels)
• Scale doesn’t mean globalization: ex. Movie theaters, regional and rural generated much higher margins than national because hard to defend all areas, need local dominance
• Massive market: with digital, gatekeeper is gone, wrong, digital and physical infrastructure needed to deliver via wire or cell: high fixed and really low variable so much easier to get new customers setup means can use money to advertise more, provide better customer service, etc.
  • New entrant is under a large customer captivity barrier
  • Telephone providers: local dominate where national has been barely profitable
• Internet: local applies to geographic, psychographic and demographic as well
  • Niche beats mass: kinship (customer captivity), regular updates, tools on daily basis and amass a lot of services and info
• Straight up: local media is better

Many market leaders aren’t ignoring their competitive advantages, it’s just that they refuse to share some of the spoils equitably with competitors as the barriers are reduced with internet

• Nintendo: not about how to enforce it’s dominance, but how to manage its relations with game makers and distributors (those it held power over but ultimately relied upon)
  • It flexed its muscle so much that they tried usurping any chance they could
• EA: global sales force and operations to simultaneously ship massive volumes around the world and dominated the industry
  • But video game industry is dominated by platform cycles and massive online with free to play, ad supported which changed the landscape
  • Further: EA missed Wii explosion and lost market share there

Playing nice/sharing would not stop industry trends, but would slow them

Any device, no matter how brilliant will become outdated and like a toaster if not constantly improved

• Apple: yes music bullied way in to industry, but that’s not where their revenue is, it’s from finally allowing/using Intel chips and being compatible with PC that they are so profitable

Companies must remain vigilant and reinforce key competitive advantages

• With tech that means innovation and R&D

Bad acquisitions are single biggest, most consistent reason for media companies maintaining poor performance

• They don’t create value

Granularity of growth; argue that sustained positive revenue growth regardless of its nature is needed to achieve superior performance regardless if from acquisitions, sector growth or organic through market share gains

• Just grow regardless and be top in one of these areas
• So grow aggressively, sell off slow growth parts of business in favor of rapidly growing ones
• But PE as a group actually underperforms the market significantly

Media: there is a strong correlation of revenue growth and total shareholder returns: but it’s a negative one

• If didn’t go through with these mergers, stock prices for major companies would be double what they are now
  • Only exception is Disney which with ESPN’s one off huge success but not with “synergies” thought
• Good investment: one in which ROI > WACC and media ROI has always been lower

Financial engineering: blame the victim, aka stockholders, confuse them and slowly educate them by “tracking” stocks and sell off underappreciated parts to VC’s

AT&T and Comcast: delay and torture the sales process with drawn out negotiations and bid dates that forced impatient to overpay significantly more

• Old fashioned way of ensnaring rival: over paying, is such a thing as wanting something too badly
• Unfortunately with any possible synergies, others will have it too and as such will drive up the buying price to reflect this and so all synergy is lost and transferred to seller’s benefit
  • Exception: mergers of equals

Moguls: with small economic interest and large controlling interest, incentivized to lose a little profitability to gain more control over more things, leads to desire to overestimate economic benefits of acquisition

• But shares in company represent a sizable amount to person, but if sell off some shares, will be under tight scrutiny that will face huge negative signaling effects for company
  • So instead they pursue other assets through acquisitions of companies versus selling some of their share and buying share of others

Synergy: a financial benefit to the top or bottom line attainable only through a particular corporate combination

• Performance improvements that could be taken on its own is not
• Economies of scale: high fixed cost over more user base, but existing user base in different segments doesn’t increase economies of scale
  • Corporate overhead reductions: yes but have to decide who goes and who stays, but in different segments, the HR, lawyers, etc. can’t be combined because so different people needed
  • If allows new cross-promotion opportunities that are profitable, why not enter contract before the acquisition? If new technology why not license the software? Before you overpay for it
  • Will lose other opportunities like ad revenue: forces company to pursue sub-optimal performance: can’t have another advertiser of a competitor in there
• Customer captivity: they buy the product, not the company, not going to buy it and if did, or do already, will seek to get a bulk discount now
• Regulatory: often more of a cost because have to selloff/abide by antitrust issues
• Only thing can predict is cost cutting, revenue synergies are just a guess and often overstated because of revenue dis-synergy (i.e. bulk discounts)

Moguls: create strategy and come up with potential “synergies” to justify their desires

• Synergies (like strategy) aren’t possible without any competitive advantages and so aren’t really strategic
• Almost impossible to combo 2 companies without any competitive advantages to create one as a result of the combination
• When all stock: two way deal, both are buyers and sellers of stock: is one already overvalued? Rising temporarily due to market trends?
  • CBS and Viacom: CBS riding excessive growth in ad revenue
    • It’s a function rather of assets sold for assets received and how they perform after rather than stock price value
  • These mega deals: didn’t consider management issues
    • What boosts revenue: winning every dollar from a hit through release windows, platforms and leveraging off the goodwill
    • Cut costs: not overpaying for talent, cut losses quickly, using ad dollars effectively

Illusion/delusion: moguls and companies use own money to buyback shares of stock, even as they decline

• People who are hurt are ones who can’t sell when prices are high, the moguls actions demonstrate delusion by holding onto it when high and putting in more money when losing

Acquisitions: successful because: strategy eliminates duplicative infrastructure in a sector with economies of scale

• Problem: many competitors bring same possible synergies which results in a bidding war that shifts all potential value to seller
  • Even so, it only takes 1 irrational buyer or a seller with unrealistic expectations to ruin it
• Opportunistic situations arise: seller may have non-financial reasons to take the deal
  • Very rare and may get in legal trouble if not accepting highest bidder
  • The other possible buyer are tied up without capital to make offer or maximize the offer they do make
• Smart/lucky: identify undervalued assets
  • Not expected of moguls, but PE gains lower cost of capital advantage or just being more aggressive on sector

Dow Jones & CBS Marketwatch: downplayed the potential revenue synergies and didn’t use them for valuation, instead used just cost saving synergies

• Ultimately made sense: because trying to convince advertisers and readers that the markets were same was not a good use of energy (i.e. trying to claim revenue synergies)

Problem of good deals is that means clear overlap of costs that provide synergies which means buying company chooses who to let go and selling company doesn’t like/want that so will stall/tank the deal

• In mergers, require two to play nicely, hard to expect from moguls

Eisner in 90’s and Murdoch eschewed as great moguls, but when look, not mogul-like actions that made them but rather management-like actions

• Eisner: “synergy boot camp” of 16 hour days for 6 day executive training to do everything including sweep the trash, synergy talks and gong show
  • Did outperform in time period but later on in end didn’t: early on replicated successful strategy of brining things in house, lowest cost products
  • Greatest value from increasing price and capacity of the theme park, not closed 1 day a week for maintenance
  • Later a bust with Disney Stores and Euro Disney which are mogul-like expansions
• Murdoch: unprecedented acquisition binge with all debt but won with BskyB as first mover that had decent service but 1,000 salespeople which created a monopoly on pay TV in UK
  • Structured deals with studios staggered renegotiation deals which forced a rival to out bid on minimum 2 of 4 studios for deals, which meant 2 years
  • Tried to repeat in Asian markets but too diverse, no market saturation, overpaid, gave DirecTV to partner for shares in news corp to keep job/company
  • Newspapers: local booming in 90s key to his economic success but 2000 News was just so big, almost no acquisitions were newspapers that it hurt the overall return
    • Then bought Dow Jones and WSJ paid 18x EBITDA vs. 4-7x typical
  • Fox: got NFL but at huge price, bidding war, stations all lost value and went to station owners, talent
    • NFL talks doubled in cost from one contract year to next
  • But then did a great job to make regional sports networks and Fox News underserved markets
  • WSJ: 1.1M subscribers made $60 million in 2007

The new successful mogul: operating excellence, relentless vigilance, and profound humility

Future: content creation has always been a low barrier, low return business and internet continues to make more losers than winners

• Losers will be talent who typically suck up the excess in the market and with hits: journalists and actors
• Winners will be those who focus on efficiency, not high prized acquisitions (internet or otherwise who think is growth is the answer to create questionable synergies)
• Even with acquisitions that seem good: implementing them and integrating takes so much time that distracts key senior leaders which takes away from focusing on efficient operations
• With those few with competitive advantages, key is to cooperate with others that do too, but many don’t have them and need to give up growing like they do

Good moguls

• Dare to dream: about efficiency and how to make it happen versus expanding to take over the world
  • Put aside short term demands and find how can steer properly in LT and make decisions that support that
• Keep local, keep focused: ignore hype of “globalization,” defend barriers to entry and market dominance
  • Means niche focused product or narrow geographic territories
  • Those with truly superior returns over time have a competitive advantage and do everything to protect it
  • When think not working and growth appeals, double down on existing products and make them stronger
  • Focus on maximizing most precious asset: key leader’s time on core business
• Efficiency is cool: go for that over idealized, what is best for society because with no competitive advantage, you have to have efficiency
• Don’t be such a big shot: cooperating doesn’t make you a wimp, most “wins” are such because you pay too much (when you have competitive advantage)
  • Most don’t though so little upside in cooperating
• Watch your back: reinforce competitive advantage, great media businesses don’t stay that way
  • Launch additional niche stations adjacent to your core, invest more proprietary software to integrate and customer captivate
  • Use established market base to launch social network or establish a marketplace
• There is much to be said about dying with dignity: if decline, milk profit for all worth versus jumping into some acquisition of “synergy” where none exists: no shame in giving money back to shareholders

Curse of mogul: while careers begin with great insight that creates value for shareholders, they somehow lose the thread of what the actual source of that initial value creation was

Public enables the mogul to act this way: sell the shares, otherwise you’re encouraging them to continue to act this way

*Please note these figures were as of book’s publication in 2011.  Things may have varied slightly since then.