Crunch Time for Time Warner
Jeffrey Bewkes seemed eager to unveil a brand-new business strategy for Time Warner Inc., the careworn media giant he’s been running for the past 22 months.
“Actually we’ve been hiding this, and you should be the one to break the news,” Bewkes told me in an exclusive interview with The Daily Beast. “We are going to buy and roll up all the railroads in the United States. Then we’re going to put flat screens in all of the freight boxcars, because we think that anybody in a recession like this, who’s actually hitching a ride on a boxcar, could become a very loyal viewer of some of our programming. And later, we might be able to sell them something. That’s our theory.”
“When you look at the media business, not only is it healthy and has a good future, but it’s not even recovering from a problem,” Bewkes said, a few hours after Time Warner posted slightly better-than-expected third-quarter earnings.
Time Warner’s 57-year-old chairman and chief executive was joking, of course—giving his facetious take on the supposed synergy that results from marrying content to distribution. Comcast’s quest to buy NBC Universal is only the latest example. In a wide-ranging conversation, Bewkes also:
- declared himself bullish on Big Media—especially (no surprise here) Time Warner’s prospects and the “branded multichannel cable networks” with distinct programming personalities, such as Fox News, MTV, and HBO.
- suggested that mass-audience broadcast networks such as ABC, CBS, and NBC have a business model that’s “increasingly becoming not viable.”
- reiterated his defense of Time Inc., the company’s troubled publishing unit, and stoutly denied rumors of plans to turn the magazines (with the exception of People and Sports Illustrated) into purely digital enterprises. “Absolutely not,” he said.
- predicted widespread paid content for news Web sites within the next two years. “I think what is not viable—literally not viable—is advertising-support-only free content in journalism.”
Bewkes predicted that people will soon become accustomed to using a variety of technologies, both paid and free, to view movies, read magazines and newspapers, watch television and otherwise consume their favorite media. “Now everyone has figured out this translation to the Internet, where you’re going take these highly demanded and successful brands like The Wall Street Journal, People magazine, HBO and MTV, using television, video on demand screens, Internet screens, across all methods of distribution, and the business model is paying for content and having advertisers,” Bewkes said. “Where the mistake has been is that everybody had thought that the Internet distribution platform somehow meant that the content had to be different, new and disconnected from the content everybody’s already using. That’s not true. And if you look at the most successful Internet company—which is Google—are they making new content? No. What are they doing? They are organizing and taking you to the content you want.”
Bewkes’ comments come at a time when media behemoths such as Time Warner, Viacom, and News Corp.—all of which were hammered during the recession and have been slashing expenses and personnel—appear poised to take advantage of next year’s hoped-for economic recovery. Each company has its particular problems and challenges. Rupert Murdoch’s News Corp., for instance, is hampered by a massive newspaper division suffering from plummeting ad revenue, to say nothing of the weight of a $5.8 billion acquisition of Dow Jones and The Wall Street Journal. Viacom’s Paramount Pictures is still recovering from a disappointing box office last year; and Time Warner made a bad bet two years ago in its $800 million purchase of the European online social network Bebo. The company is only now preparing to spin off the last vestige of its famously catastrophic merger with AOL, whose declining advertising and subscription revenues have been a drag on overall corporate earnings.
But Bewkes is buoyant about the future. “When you look at the media business, not only is it healthy and has a good future, but it’s not even recovering from a problem,” Bewkes said, a few hours after Time Warner posted slightly better-than-expected third-quarter earnings. “There’s been a huge success in the United States over the last 20 years that’s been copied all over the world. And it is multichannel—used to be called cable—TV. Think of all those great inventions of special interest programming networks—MTV, Fox News, CNN, HBO—the overall pile of what used to be called cable networks which now we would call ‘branded multichannel.’ They’re on cable, they’re on satellite, they’re on telephone, they’re on WiFi, they’re on broadband. And whatever they’re on, they are growing in viewership, they are growing in the length of time during the day that people watch them, they’re growing in carriage fees, affiliate fees, and consumer subscriber fees, and they’re growing in advertising revenue and cost per thousand pricing.”
One reason for Bewkes’ rosy scenario is that viewers are looking for “branded networks with a point of view,” he argued. “So TNT is drama, TBS is comedy, MTV is young lifestyle and music, Discovery is nonfiction, CNN is broad journalistic fact-based news, and Fox and MSNBC have their own points of view. Those channels not only have a way to attract audiences who know what they’re looking for, they’re also launching original shows where the success rate and therefore the economics of the shows are better. Because the network has a personality, it increases the likelihood that the show matches the network’s audience—as compared to broadcast networks which show multi-genre, broad mass-reach programs which more often than not don’t work.”
A second reason that “branded networks” are on the rise is “the dual revenue stream that comes from affiliate fees plus advertising,” Bewkes said.
He’s far less sanguine about free TV—a dinosaur awaiting a meteor strike.
“The broadcast networks have fewer people watching, for shorter times of day, lower and declining ratings; they have reducing revenue from advertising, they have declining programming budgets and lower earnings, so they have fewer of the scripted shows than they used to have. So therefore their business model is becoming increasingly not viable. If you look at broadcast networks, which are the only ones in TV that have ‘free’ aspect, if they don’t get some form of carriage fee, they may not survive.”
Bewkes has been toiling to transform Time Warner into a pure content company—spinning off its capital-intensive distribution arm, Time Warner Cable, to focus on strengthening a core business that includes Warner Bros. movie and television production studios, an array of profitable cable networks, especially HBO, and a troubled magazine publishing division. It’s not surprising that Bewkes casts a jaundiced eye at the efforts of Comcast (the nation’s largest cable system) to buy NBC Universal (a broadcast network, a couple of cable networks, a movie studio and a theme park). “We love to see our competitors taking risks,” Bewkes quipped at a media conference recently. In the last year he’s been at pains to dismiss press speculation that Time Warner would seriously consider taking NBC Universal off General Electric’s hands.
“There’s not a lot of synergy,” Bewkes said when I asked about a hypothetical merger between a major cable distributor and a collection of broadcast and cable outlets. (He wouldn't comment directly on Comcast/NBC Universal.) “Would the economics of either the cable distributor or of the networks—whether they’re broadcast networks or cable networks—be improved by the ownership of one together with the other? The answer is no.”
“Synergy,” the once-ubiquitous buzzword that was used to justify expensive and in some cases ruinous acquisitions—Time Warner’s notorious merger with AOL the most expensive and ruinous of them all—is apparently so over.
Next month Time Warner will spin off AOL for a tiny fraction of the estimated $125 billion in shareholder equity that was vaporized in the 2001 merger. Bewkes, who joined the company three decades ago as a $20,000-a-year subscription salesman for a fledgling movie channel called Home Box Office, was present at the destruction—hence his pained prudence. The other night during a media panel, Time Warner Chief Financial Officer John Martin quipped: “Sometimes abstinence is the best policy.” Never mind that the company enjoys low debt and $7 billion in ready cash.
“When we look at an acquisition, you usually have to pay a premium,” Bewkes explained. “If that’s all you did, you’d lose money, and the supposed answer to that is you’d have to have ‘synergy’ or earnings improvement that comes out of the purchase. Because you put the new things together with your other stuff, you cut costs, you raise earnings and therefore you have not paid a premium against the newly elevated earnings. That’s the theory, anyway. But we all know that most of the time media people have done that, they have used that argument while they didn’t actually succeed in delivering that result.”
Meanwhile, Bewkes has his fingers crossed that AOL’s new management team has finally hit upon a strategy for success, focusing on content and advertising sales—“the AOL experience,” as Bewkes calls it—to drive up revenue as the dial-up subscription business continues to fade out..
“I think the old management of AOL did not make that transition [from fees to free] soon enough,” Bewkes said. “AOL was first in social networking, and they should have invented MySpace and Facebook inside AOL, and if they had been free, they would have. But they didn’t. They were sidetracked trying to figure out how to make Time Warner media assets exclusive to AOL and hold up subscriptions. It’s not what Yahoo, Google, Twitter, and Facebook did, and it was not relevant. Now AOL is set up with the best management, the right strategy, and the right financial structure so it can be successful.”
Bewkes predicted that the push by Murdoch and others to charge consumers for news content will ultimately succeed, never mind that they are habituated to getting it for free. He pointed out that the online readers of the Journal and the Financial Times have long been forking over, while People magazine readers have shown themselves willing to pay for special content on their iPhones. “I think basically the viable thing for the future is a combination of paid-for content and advertising," Bewkes said. "What is not viable—literally not viable—is advertising-supported-only free content in journalism.”
Bewkes added: “The only newspapers that will survive are the ones that have a content fee plus advertising. The same is true for magazines. Now you might quibble and come up with an example of some online free thing that survives. Fine. But it will be a razor-thin, small thing… which essentially has very little readership and very little revenue, very little earnings, and very little effect on the world.”
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.