media firms assault on the internet

Media Firms Dig Into War Chests for Latest Assault on the Internet

Submitted by editor4 on September 28, 2005 - 1:58pm.
By Julia Angwin
Source: Wall Street

Driven by fear of losing advertisers and audience to the Internet, large media conglomerates are spending billions in a spate of acquisitions and aggressive Internet initiatives, and are likely to keep on spending.

Companies like Viacom Inc., News Corp. and Time Warner Inc. worry that they will miss the rapid expansion of Internet advertising while their own, more-traditional sources of revenue growth are slowing. Some hope to directly challenge the giant portals like Yahoo Inc. and Google Inc. — Web sites that serve as gateways to the Internet. Others are transferring some of their most valuable content to online sites, even though that risks alienating their traditional distribution partners.

“There is an awakening occurring at the traditional media companies,” says Larry Kramer, president of Viacom unit CBS Digital Media.

Although it’s too soon to say whether the media industry’s latest approach will bear fruit, the companies are finding some areas more fertile than others. They have been investing heavily in youth-oriented Web sites, like gaming, and less in areas like prime-time entertainment programming that is still a cash cow for the television networks. They’re also mostly avoiding the pay-per-view model, which hasn’t yet gained traction online.

At the same time, media companies are treading a fine line. They want to extend their existing businesses onto the Web without cannibalizing their traditional audiences. So, for instance, Viacom’s Nickelodeon cable-TV channel is limiting the amount of television content it puts on its Web site so as not to undermine the TV channel.

Big media companies were badly burned by Internet misadventures in the past. They invested in a slew of Web sites, but failed to latch on to any of today’s highfliers. They made bold bets — including the disastrous $103.5 billion AOL Time Warner merger — on high concepts like convergence that were too early for their time. And they poured money into free Web content while the technology and medium were still too young and unproven to capture serious interest from advertisers.

In the past five years since the dot-com bust, the technology has improved. High-speed Internet access, or broadband, has attained critical mass, reaching 42 million U.S. households this year, says eMarketer Inc. That’s more than half the 73 million homes that have cable television, according to the National Cable Television Association — making the Internet a viable distribution platform for movies, TV and even TV-like full-motion video commercials for the first time.

Now, even Time Warner, after years of pondering whether to ditch its underperforming AOL division, is talking up the unit’s prospects and has made more than $500 million of Internet acquisitions. Last week, Chairman Richard Parsons said revitalizing AOL was his No. 1 priority because AOL is the “big growth opportunity for us.”

Although AOL is rapidly losing customers for its dial-up Internet-access business, the company is now pouring resources into a new Web portal that it hopes will compete with Yahoo for viewers and advertisers.

In the past few months, News Corp. has spent about $1.3 billion in cash for Web sites ranging from teen-oriented MySpace.com — where millions of users have created personal profiles featuring photos and links to their friends’ profiles — to the videogame chat rooms at GameSpy.com.

Viacom’s Mr. Kramer says the traditional media companies are waking up to the fact that “Internet advertising is real. It’s still a minuscule amount of revenue for this company, but we want it to grow and to grow fast and to make a lot of noise.”

Internet advertising sales rose 33% in 2004 to $9.6 billion, according to PricewaterhouseCoopers LLP. This is still a fraction of the $141 billion U.S. advertising market, which is directed primarily to television, newspapers and magazines, but what alarms the media companies is that it’s eroding their traditional ad-revenue sources, from broadcast TV and radio to magazines and billboards.

In an industry that measures success by the size of the audience it can deliver to advertisers, the online audiences are already large — and still growing. The broadcast-TV audiences have been declining for a decade, box-office sales for movies this year are lagging behind previous annual takes, the once-torrid sales of DVDs are leveling off, and circulation is falling at many newspapers and magazines.

And, so far, most of the online audience has been captured by the big Internet players, not the big media companies. In August, Yahoo attracted 122 million unique visitors to its network of Web sites, according to comScore Media Metrix. Last year Yahoo’s revenue was $3.6 billion, while Google’s was $3.2 billion.

By comparison, the entire range of News Corp. Web sites — like Foxnews.com and Foxsports.com — attracted just 12 million visitors in August, according to comScore Media Metrix. Walt Disney Co.’s sites attracted 30.7 million visitors and Viacom’s drew 39.8 million.

Increasing the threat to the media industry, Yahoo is trying to transform itself into a media company. Late last year, it hired former Disney executive Lloyd Braun to build a media unit that would create content for the Web site. Recent initiatives have included hiring a journalist to cover war zones exclusively for the Web site and nine personal-finance reporters to write columns, as well as commissioning MTV to create short-form videos for the Web site. Google has jumped into the game, offering exclusive access to the video streaming of the premiere of the UPN TV comedy “Everybody Hates Chris”

News Corp. President Peter Chernin says Yahoo’s actions last year were a wake-up call for him and his boss, Rupert Murdoch. “We’d been reading all these comments from Yahoo about getting into the content business,” Mr. Chernin recalls.

News Corp.’s response, like that of other big media companies, has been to build up the size of its online audience. Mr. Chernin says the company’s recent buying binge has boosted its audience to nearly 70 million from 12 million.

There’s a certain logic to amassing a large collection of viewers because the bigger Web properties tend to attract bigger advertisers. The top 10 Internet properties have consistently raked in about 71% of the advertising revenues in the industry, according to PricewaterhouseCoopers.

But it isn’t clear that advertisers will pay the same premium for ads that are spread among several Web properties, as is the case with News Corp., that they will pay to reach the masses Yahoo attracts to its home page.

“We can deal with several independent properties, but we’d rather work within the confines of a portal than track users piecemeal through several properties,” says Sean Finnegan, U.S. director of OMD Digital, a media buying and services agency.

That’s one reason why AOL has collected all of its content onto a new free Web portal at AOL.com. News Corp.’s Mr. Murdoch has said he is considering building a portal that would link to all the Web sites he has purchased.

But Viacom and Disney say they aren’t pursuing the portal strategy. Disney, which took a roughly $1 billion charge related to the closure of its Go.com portal, has said there’s no reason to revisit those failures. “I don’t see us playing catch-up to the Googles of the world,” Disney President Robert Iger said recently at a Goldman Sachs investors conference.

Disney, for instance, focuses on males 18 to 35 years old on its ESPN.com site, and on mothers at Disney.com and FamilyFun.com. News Corp.’s Mr. Chernin says he hopes the company will be the No. 1 Internet aggregator of young people between 15 and 35 years old, after its acquisitions are completed.

Viacom Co-President Tom Freston argues that building up a collection of the premium brands can yield premium ad prices. Already, media buyers say that MTV’s popular Overdrive Web site fetches ad rates that are higher than those paid during some of MTV’s non-prime-time TV programming. The reason: Web sites can track visitors more accurately than TV networks can track viewers, and advertisers are willing to pay a premium for the greater certainty that their ads were viewed. Viacom is now hoping to extend that success to younger children through the Nickelodeon cable-TV channel’s TurboNick.com Web site, which shows TV-show episodes, and by buying the popular kids’ Web site Neopets.com, where viewers adopt and care for virtual pets.

Viacom’s CBS News division, which is due to be split into a separate company from the MTV and Nickelodeon divisions, is also aggressively posting on the Internet portions of the video footage that it gathers each day, as well as segments of its 22-minute evening broadcast. General Electric Co.’s NBC Universal unit is also working on launching an Internet-based entertainment network, say people close to the situation.

Still, brands can wax and wane in the fast-changing world of the Internet. Consider Friendster.com, which was the hot so-called social-networking destination for teens last year. This year, the hot teen-networking site is MySpace.com, which added lots of cool features like blogging and attracted 17.7 million visitors in June, up from just one million visitors a year earlier.

“Last year’s MySpace was Friendster. Now it’s about as cool as yesterday’s newspapers,” says Mike Dolan, chief financial officer of Viacom’s MTV Networks, which was interested in MySpace but was outbid by News Corp. “You have to be really careful and you don’t really want to plunk down blank checks, and new things are always coming down the pipe.”

News Corp. has twice outmaneuvered Viacom for Web properties in recent months. After a week’s frantic negotiations in July, while Viacom was also in discussions, News Corp. agreed to acquire MySpace’s parent company, Intermix Media Inc., for $580 million plus a $69 million loan. Considering that Intermix had net income of just $4.5 million in the year ended March 31, News Corp.’s price gave the Web site a value of nearly 150 times earnings.

A few weeks later, News Corp. outbid Viacom to buy IGN Entertainment Co., a tiny, unprofitable Internet company, for $650 million. IGN had sales of just $42.9 million in 2004 — meaning that News Corp. paid 15 times the revenue for the company that operates Web sites ranging from GameSpy.com to Rottentomatoes.com.

http://mediachannel.org/blog/node/1195

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LC