Time Warner and Major Media Properties Are In Strong Position

Financial Analysts Reconsider Valuation of Traditional Media

On a recent broadcast of the radio show On the Media co-host and Ad Age columnist Bob Garfield said new technologies had led to "blood on the streets" for major media companies. "The market value of mainstream media properties has been cut in half" over the last decade, he said to illustrate his point. But while the picture he painted may be literally true -- major media companies like Time Warner, Clear Channel and Tribune Company have seen their valuations drop significantly in the past decade – the full truth is a lot more nuanced.

I'd be the first to cry that the current media environment has caused huge disruptions that will tip some media giants (Knight Ridder; Tribune) toward the path of the Mutual of Omaha radio network. Google and its many arms, as well as Yahoo!, Facebook, MySpace and others have brought fundamental change that will continue. All the big mainstream media players are confronting the realities of booming growth in search and Internet advertising while they glean single-digit growth at best in their more traditional spaces. Yet, the picture for the big players is anything but uniform or universally dire.

For one thing, we're in a more rational financial market than we were ten, or even five years ago. In the late '90s and early 2000s, media properties' valuations were blown way out of proportion, with prices for shares way above what they could get today with similar levels of earnings. Time-Warner may regret letting AOL buy them, but they shouldn't regret the direction they've taken since. To the company's credit, it has been working to change AOL and been trying different models. They have recruited heavily in Washington and New York, looking for executives with ad sales experience who can move the company beyond its previous subscription-heavy model. They have introduced networks of blogs, been trying new ad models and buying assets that can help them do sophisticated ad serving across their network. They've been promoting free services, improving their coverage of celebrities, finance, and other choice niches, and promoting free email to bring in users. (Pali Research media analyst Richard Greenfield wrote recently that TW's senior management team should be shaken up and more of its assets sold. He believes Time Warner has not yet confronted the need to further shake up and restructure AOL. He's entitled to his analysis.)

Compared to 1997, Time Warner may have a lower valuation, at least on a basis of commonly used market multiples. But in '97 the company had huge losses compared to its respectable earnings these days. Its growth is above the sector's general yearly rate of 13-15 percent. And while its sales of some properties like Time4 Media have gotten a lot of press, not only was that sale a small fraction of the company's billions in revenue, but such sales can also help the company focus. "In the late '90s the market gave you a pretty good premium" for being bigger, said David Acharya of private equity firm Apprise Media. "In the 2000s, they want you to focus on your core competency."

Acharya and financial analysts who spoke exclusively to Jack Myers Media Business Report, most on condition they not be named, all said the major media players are not going away any time soon. Those companies, from Time Warner to Disney to News Corp. to NBC Universal, still control vast shares of ad dollars, and have strong balance sheets, large amounts of assets, and the ability to control their destinies. They make good content that audiences want and have ways of getting ad dollars to support it. The Web is here, but it's not like people have stopped watching TV or buying magazines.

While private equity has gotten a lot of attention recently for buying and selling assets, that flow is surely going to slow. The tightening of the credit markets means there is much less cash around to finance deals. The major players with large assets should be in stronger position than the startups to both launch new properties and attract ad dollars. Today's relative market sanity also means analysts are again paying attention to cash flows – the best measure of whether a business has a sustainable model – than oddly jiggered valuation and asset ratios.

None of this is to say that it's easy or simple for any major media company to eat its own lunch – to throw out its old models and bring on new technologies in an attempt to create new business that's a danger to its entrenched products. But they are trying. "If you look at the Time Warners of the world, they're really going aggressively after their new audience by going after new media technologies," Acharya says. If they can combine that new audience with the old, they'll be in position to keep earning significant revenues and continue their cash flows for many years to come.

Apprise Media's David Acharya can be reached at dachary@apprisemedia.com.

Dorian Benkoil, a regular contributor toJack Myers Media Business Reportis a principal at Teeming Media, a digital media business consultancy. He can be reached at Dorian@JackMyers.com.