Riding The Tiger – A Year After The Lehman Collapse

Michael Hedges September 14, 2009 (follow on Twitter)

The collapse of investment bank Lehman Brothers a year ago this week spawned panic across much of the media world. The jolt that rattled global finance tore into broadcasters and publishers, advertisers and consumers. Everything changed, or so it seemed.

The focus on finance is only one effect of the suitably named credit crunch. Revenues are lower and their sources have changed. Debt and cash-flow are more difficult to manage. Costs have been cut, slashed and cut again. The business model, they say, is broken.

Most of the pain felt in the media sector has been a long time coming. Windows rattling as Lehman tumbled provided a noisy background to structural changes inching forward since the 1980’s. When the windows finally broke, the oxygen of easy credit sucked out, the glass shards tinkling on the streets below scared everybody.

Deregulated financial markets and easy credit fueled the good times at the end of the 20th century. Money flowed, and flowed, and flowed. Risk was ‘managed’ by ever more complicated – and strange -  financial instruments. The geniuses at Enron were touted as cutting edge financial wizards. Now they’re doing jail time. Banks, we discovered, were doing the same clever things. Then came Bernie Madoff.

The degree to which media – the business/financial media in particular – was complicit in the bubble preceding the market collapse will be debated by scholars and pundits for years. Some – not all – appeared to relish in ginning up a fever for deals and debt. How can we forget Jim Glassman’s book Dow 36,000? Deregulation and unrestrained free-markets have been discredited by all but the frothy fringe who, inexplicably, keep pounding the desks on cable business news channels.

Lehman’s collapse resonated far beyond North America. Suddenly all short term credit was at risk. Governments, companies and other banks were faced with a liquidity crisis, the most highly leveraged quaking most. Survival meant selling assets, like Mecom, even as asset values plunged. Many sucked it in, promising grinning bankers and investors deeper cost cutting. Bertelsmann and RTL have aimed for 20%. 

Several governments found themselves struggling with collapsing credit markets (the UK and Iceland), net foreign investment (most of Eastern Europe) and consumer markets (Ireland and Spain). Tax revenues faltered. Again, those governments with some remaining borrowing power have been able to pump money into the system. Others have found the well very dry, indeed.

Latvia may be the canary in the mineshaft. Its government – only twenty years independent – has gone from boom to bust. All government services have been cut. Recently, proposals have been circulated to sell off part of its public broadcaster.  

Consumers noticed and, predictably, changed spending habits. When cheap credit dried up they had no choice.  Advertisers, already shifting to more accountable spending, cut budgets. Traditional media felt that burden first, though it had been coming for several years. New media collected much of the difference until advertisers noticed that banner ads on websites weren’t working any better than banner ads in newspapers.

Consumers, not so suddenly, were noticed as change agents. Music players (iPod, et.al.) rose as people discovered they could get their favorite tunes all the time, any time. The Web rose as the information and entertainment source of choice, at least where broadband access is widely available. The mobile phone morphed into a portable communication and information access point, all very personal. Traditional media found itself out of the loop.

The culture of ‘free’ is blamed on the Web. In fact, it has been an economic and business reality all along. The Web only facilitated consumers search for a value relationship with media products and services. That free newspapers and free news on the Web are popular only underlines the shift in that value relationship. That media providers can’t make these ‘free’ services into wildly successful businesses says more about business skill than business models.

Public broadcasters - tax supported, more or less – were for a nano-second thought to be recession resistant. And those with multi-year funding mechanisms, like the BBC, have been able to continue providing services and withstand critics’ charges of overspending. Others have not been so lucky. The governments of Spain and France have bailed out their public broadcasting systems. Others are cutting services or, at least, no longer expanding. Few governments are willing to go to taxpayers asking for increases in the license fee to support public broadcasting even though, euro for euro, public broadcasting is less expensive than pay-TV.

Commercial, private sector broadcasters have been squeezed by competing dilemmas. Since the last quarter of the last century, commercial broadcasting, starting in the United States, became a transaction business. The ‘real’ money has been in buying and selling assets or publicly traded shares. Mergers and acquisitions would more quickly and efficiently impact total profit, as would sales of assets. All that was necessary was a clever investment banker. The ProSiebenSat.1 deal is probably the last of that scale in the media sector for another decade. There are still clever investment bankers: there are no ‘greater fools’.

The other side of the financial vice is operating revenues. Commercial media – not limited to broadcasting – sells advertising, subscriptions and content. Advertising people are squeezing cost per thousand (CPM) to the average of internet rates, roughly a quarter of traditional media ad rates. At the same time, digital television has created hundreds of new channels. Contrary to the forecast given by one famous American, you cannot “make the pie higher.”

The pay-model also seems recession proof. That, too, may prove to be an illusion. Big broadcasters from News Corp to MTG are investing mightily in specialty content for pay TV channels. BSkyB and Sky Italia, both under the wing of News Corp, are holding subscriptions steady. Sky Deutschland (formerly Premiere) is, however, struggling. Sports and movies are the main content game, both getting more and more expensive. With consumers anxious about household expenses, a choice will be made between pay TV and the mobile phone, particularly with broadband access. When faced with a choice between the €50 per month premium pay TV subscription and keeping the family dog, the dog stays. Cinema tickets could be the big media winner of this decade; big screen, popcorn, cheap night out.

The consumers’ quest for value reaches deeply into the news business. Advertising has supported generous offerings of news content across every platform. General interest newspapers are seeing ad revenues plummet faster than circulations. Subscriptions, such as they are, merely pay for the paper. The Web is taking a toll as people choose price and convenience but plans to turn the Web into a tollbooth will fail. Specialty information will always find financial support. General interest news has value but consumers, not Mr. Murdoch, will determine what that is.

The biggest winners in the credit crunch aftermath are the content creators. Most have learned significant lessons by following the flailings of the music industry.  With 500 channels of television available, one way or another, program producers have a huge and hungry market. Hollywood and Bollywood benefit, as do FreeMantle, Endemol and every independent producer.

The good, old days are gone, perhaps forever. The collapse of Lehman Brothers and the ensuing global financial misery didn’t cause the shifts affecting the media world. Advertising has been shifting for two decades, consumers for at least that long. Any management consultant – or military commander, for that matter – knows that people tend to focus on what they face at the moment. So long as economics remain dismal consumers will focus on their insecurities. Media can either rise to the occasion or fall with it.