Displaying a rare degree of unanimity last week, the chief executives of the Walt Disney Company, AOL Time Warner, News Corporation and Viacom all cited recent events as the explanation for dramatic reductions in their previous “guidance” to Wall Street regarding their earnings in 2001 and 2002.
Each company fingered as the primary culprit a changed environment for ad spending, a category critical to Viacom and News Corp. and important to AOL and Disney. (Only Vivendi Universal bucked the trend, reiterating its belief that 2002 cash flow would be 20 percent higher than the preceding year.)
This situation had been obvious to most observers for months, and indeed, only a portion of the cited shortfalls could be reasonably attributed to lost revenues and increased costs stemming from the fallout of the terrorist attacks.
This fact neither escaped, nor particularly distressed, the financial analysts.
Only Disney-triple-whammied by sharp drops in advertising, reduced travel to its Anaheim and Orlando theme parks and the Sid Bass margin call-is off substantially (20 percent), with AOL and Viacom only slightly below where they were on Sept. 11.
Nearly as obvious was the absence of any signs of the upturn in ad spending that Mel Karmazin and others had been stead-ily predicting, first for this fall and then for early 2002. One respected analyst, Scott Davis of First Union, has now pegged the 2002 decline in total advertising at 5 to 10 percent, versus an earlier prediction of 0 to 5 percent growth. This revision-fully justified, in my opinion-is all the more dramatic given that 2002 will now be compared to a sharply lower projection for 2001 than earlier assumed.
If, as appears almost certain, we will have two back-to-back years of significant declines in advertising, the repercussions for nearly every area of media and entertainment are profound. Yet I believe there’s a more fundamental problem facing all media companies: the sheer number of media outlets-broadcast and cable networks and magazines in particular-fighting for that shrinking ad dollar.
Over the past 10 years, the steady creation of ever more channels, networks and publications has been fueled by binge spending on advertising by American industry-and not just the dot-coms of yesteryear, which accounted for only 5.7 percent of total spending in 2000. From 1995 to 2000, average annual growth in ad spending was 8.1 percent, double the rate of the previous five years-and this in a period of very low inflation.
Prior to this year, ad spending had grown through every recessionary period. American business regarded upping its ad spending as the way out of a recession-and thought those who cut ad budgets would become road kill for their competitors. Today, companies are slashing their marketing expenditures to meet self-imposed earnings targets-an inevitably unsuccessful attempt to feed Wall Street’s voracious, and misguided, demands for earnings predictability during what was a sea change for the economy before Sept. 11.
The entertainment-media complex, however, has an even greater problem to worry about than plummeting ad revenues: overcapacity. This term-usually reserved for such rust-belt industries as aluminum and paper-may seem odd when applied to movies, TV and magazines. How does one measure “capacity” in fields of endeavor traditionally viewed as having few barriers to entry and even fewer barriers to failure?
Actually, fairly easily. Simply compare-over, say, 10 years-the growth in the number of competitors in a given sector and, critically, in their capital base to the growth in real demand: ticket-buying, tele-vision households, total hours of viewing, numbers of subscribers, etc.
Doing so reveals a startling picture. Aided by a stock market that gave them ever more valuable currency with which to make those acquisitions, the five media behemoths already mentioned, plus Sony and Bertelsmann, have been on a tear since 1990 to stake their claims to most of the known media world.
In 1990, the Big Five of media (including their various predecessor companies) had a collective stock-market value of $60 billion; today, even after recent equity-price haircuts, that number is $340 billion. These enormous market capitalizations give these companies the firepower to acquire anything that looks even remotely appealing-and a size that renders the failure of any single venture immaterial.
From 1990 to 2000, the number of U.S. movie screens increased more than 50 percent to 36,000, leading to the current spate of bankruptcies in the exhibition trade. The actual number of films released annually in America went from 287 to 480, a 67 percent increase. These two figures are in contrast to the 28 percent growth in tickets sold in the same time frame. As a result, actual box-office revenue per film has fallen 8 percent over the past 10 years-this in the era of blockbuster negative costs and marketing budgets.
Partially accounting for this is the expansion in the number of entities trying to grab a share of the box office. Beyond biggest new-kid-on-the-block Dreamworks SKG and a revitalized MGM, there are a dozen would-be Miramaxes-some indie, some studio offspring-fighting for the moviegoer’s attention. While Disney and Sony have reduced their big-budget output, each has affiliates busy taking up the slack. Little of the “statesmanship” that occurs in Old Economy industries-i.e., tacit agreements to limit supply-will occur in an ego-driven business where you are what you spend.
How about broadcast networks? Has it occurred to anyone that, during the past decade, when the broadcast share of total TV viewing was savaged by the cable channels, we have gone from three networks to seven-all trying to fill every hour of prime and semi-prime time with their programming? The result has been fractionated audiences for all concerned, while the cost of the programming used to attract those shrinking audiences rises steadily.
As for cable: In 1990, there were 24 nationally distributed ad-supported cable-TV networks; today, there are 76. Those who have succumbed to Time Warner Cable’s blandishments and gone digital now can select from among seven different 24-hour local and national news channels, 27 sports channels, 10 kids’ offerings, three business channels and 14 general-entertainment networks, not counting Animal Planet and assorted other special-interest webs. I also counted 12 non-pay movie channels, 38(!) pay subscription channels and 35 pay-per-view channels before I got bored with the exercise.
In publishing, the Audit Bureau of Circulation surveyed 587 major consumer magazines in 1990. By 2000, this figure had risen to 836. Last year alone, some optimistic souls started 14 periodicals in the field of crafts, games and hobbies, eight in “epicurean” and five in “gay interest.” By contrast, total circulation revenues-the amount consumers pay-for the ABC universe grew only 6.5 percent over 10 years, to just under $10 billion, unadjusted for inflation. The proliferation of magazine titles was funded by a 162 percent rise in ad revenues-the source of $17 billion for consumer magazines in 2000. It is this source that is now hitting the wall with ferocity.
Remember, someone-actually, quite a few someones-is making the tsunami of programming and editorial content these outlets require. And that’s why all this barely rational activity (from an economic standpoint) exists. Fueling this explosion of creatively and financially marginal production is a fundamental social need: the absolute requirement to provide peer-group-acceptable forms of employment for the sons and daughters of the media, financial and political elites.
Those hordes of Brown and Stanford graduates used to go for their Ph.D.’s in English Lit, keeping us fully supplied with doctoral theses on the Romantic poets. Today, other than those who head to Wall Street, it’s the movie-music-TV-media-Internet biz or bust. Anything else would bring unspeakable shame on the family. (Am I the only one who found the identity of USA TV’s head honcho, David Kissinger-yes, son of-slightly odd, yet somehow utterly predictable?)
Perhaps those dear, seemingly dead old days of the paradigm shift will return, and those hand-held devices and other electronic gizmos will make us into 16-hour-a-day consumers of entertainment and information. But I doubt it. It’s been a long time since anyone I know experienced-voluntarily, at least-expanding leisure time.
The near-certain result will be a contraction in the number of media outlets. The demise, after 66 years, of Mademoiselle is just the beginning of the triage of the marketplace. Condé Nast will carry on unscathed, as its sister publications will gladly take up the slack.
While there could be some real corporate casualties among the weakly capitalized, such as Primedia, the larger companies will lumber on, reshuffling their media portfolios to reflect the changed conditions. It is the executives and staffs of all those movie-TV production companies, networks, channels and publications who will become the cannon fodder in the coming war of attrition.
The game of musical chairs has begun. The tempo has gone from stately waltz to quick march, with mazurka just around the corner.