State of Media Corporations - A Special Report

Message From Michael                                 

                                                                                                                        April 13, 2009                                                                                                                                                                                                                                                                                                                                                                                  

 

    THE STATE OF THE MEDIA – ACCORDING TO MEDIA CORPORATIONS – A SPECIAL REPORT

 

 

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      OVERVIEW:  The state of the media is bleak, but not nearly as bleak as the report by the Project for Excellence in Journalism report summarized in a previous Message from Michael would indicate.  At least that’s my take after reading a dozen annual reports from a potpourri of American media corporations.  Yes, I actually did that and, yes, I need a life, but it is fascinating stuff and the subject of this special report created by yours truly.  I should note that some of the information comes from annual reports aimed at shareholders and some of it comes from the annual 10-K report required by the Securities and Exchange Commission. 

Now, admittedly, the corporate annual reports can be expected to paint a rosier picture, but even given that, the reports in total are less depressing.  And the reports are not Pollyanna pabulum.  They’re pretty blunt.  Words and phrases like – global economic downturn of epic proportion… global financial meltdown… most severe recession we have endured as a nation… this stinks – okay, I made that last one up.  But the others are from various corporations – Disney, General Electric, McClatchy, and the list goes on.  The Washington Post’s Donald Graham, in fact, opens up his letter to shareholders with, “Well, that was something… we could do without more years like 2008.”  But in the end, it is News Corp’s Rupert Murdoch (sounding more like President Barack Obama than he would probably like to admit) who sums it up as a problem that is more a “crisis of confidence” than a financial crisis.  In a similar vein, Disney’s Robert Iger talks about a “blend of realism and optimism” and the annual report talks about choosing either realistic optimism or optimistic realism.

That’s not to say that any of the groups dismiss or minimize the economic crisis.  In fact, one of the most consistent messages you hear in all these reports is that cost cutting has become part of the corporate culture.  It’s a statement that comes up often.  For example, The New York Times, like so many others says, “stringent expense management has become part of our corporate culture.”  Again, there is a touch of realism when the folks at Media General make the point that “cost reductions are successful for a short time but sustained shareholder value is created by generating revenues.”  Another phrase that comes up in several reports (Gannett, Disney, Bertelsmann) is “financial discipline” as in “we are committed to managing through this period with financial discipline.”  (Disney).

One of the more fascinating financial analyses comes from GE’s Jeffrey Immelt who says the global economy and capitalism will be “reset” by the financial crisis and that the interaction between government and business “will change forever.”  He argues that, “in a reset economy, the government will be a regulator; and also an industry policy champion, a financier and a key partner.”  It tells you something of the size of GE that he talks about its willingness to work with… he doesn’t quite say ‘other’ but it seems to be implied… other countries.  He makes it abundantly clear that while GE will always “invest to win globally” its strategy should always include a preeminent position in the U.S.  In an almost presidential-like statement he talks about how he “learned something about my country”  that while, “I run a global company… I am a citizen of the U.S.”  Immelt goes on to say that the 30-year-old notion that the U.S. can evolve from a technology and manufacturing leader to a service leader “is just wrong.”  In essence, he says, the problem is “real engineering was traded for financial engineering.”   As you can probably tell, I found his letter to shareholders a fascinating read, up there with the likes of Warren Buffett.        

      IMPAIRMENT.  Now, that’s a word you don’t hear often.  Unless you read these annual reports.  And it’s not physical impairment.  It’s financial impairment.  And the numbers are staggering.  AOL/Time Warner had an impairment reduction of $24.3 Billion.  CBS Corporation had a pre-tax non-cash impairment of $14.18 Billion.  Belo Corporation  -- $464,760,000.  Gannett -- $747,368,000.  McClatchy -- $59,799,000.  Media General -- $632 Million.  New York Times -- $197.9 Million.  Morris Communications -- $4.3 Million.  That last one doesn’t sound like much, but it is enough to put them in the position where their company value is “likely significantly less” than its total indebtedness.  Corporate financial expert and Georgia State University professor James Owers was kind enough to explain impairment:  when firms make acquisitions, the price paid is divided into ‘assets purchased’ as measured by an appraisal and the balance over that is ‘goodwill.’  When it is determined that the ‘goodwill’ is no longer worth what was paid, it is said to be ‘impaired’ and must be written down.  Now, this part doesn’t come from Owers but from me – in the case of television stations that means its broadcast license, for example.  In the case of newspapers, it literally can be the masthead.  Back to Owers (although I might have said this, too):  “it looks as if many media firms paid too much for their acquisitions and now must face reality.”  Lastly, the Washington Post’s Donald Graham basically reiterates much of Owers’ point that the impairment charge “points to acquisitions that haven’t worked out as planned.”  Of all the corporate reports, his is the only one that addresses the issue so clearly, saying he has “no quarrel” with the accountants using the impairment process and that, bluntly, media companies better just get used to it. Graham is also the one who candidly admits that it shouldn’t have taken the financial crisis of 2008 for him to tighten up his definition of “very compelling” when deciding on acquisitions, but it did.

Now, here’s an interesting side note.  Of the dozen or so companies I reviewed, guess which was the only one that had no impairment to report?  To quote the annual report:  the company determined that the goodwill and indefinite-lived intangible assets included in the balance sheet were not impaired.  Give up?  The answer – Rupert Murdoch’s News Corporation.  Of course, this is the same News Corp which describes itself in the annual report as:  the most global and most competitive media and entertainment company on earth. 

      INNOVATION.  Now, that’s a word you do hear often.  And if you read these annual reports, you’ll hear it even oftener.  (Okay, so that’s not such good English.)  The other word often paired with it is – creativity. It’s striking how often those two words come up.  In fact, mega-media corporation Bertelsmann, which is probably unfamiliar to many Americans, cites “creativity” as one of its core values, along with partnership, entrepreneurship and citizenship.  It is part of what the company calls “the spirit to create” and clearly part of its ‘entrepreneurial’ focus.  In a similar vein, Disney and Iger talk about a commitment to creativity and innovation, providing “high quality creative content and experiences… creative work… (that) differentiates us from our competitors (and makes people say) what will they think of next.”  Gannett’s Craig Dubow says innovation was applied to every process as part of their ‘innovative initiatives’ designed to complete their “transformation into a company that is innovative, nimble and intently focused on the customer” and able to “adjust quickly and creatively.”  Media General’s J. Stewart Bryan and Marshall Morton argue that the “challenging economic times also foster innovation and new solutions.”  Even semi-little Morris Communications affirms in their 10-K report that, “we have remained committed to innovation.”  In much more grandiose terms, News Corp’s Murdoch talks about his company as "women and men with a passion for innovation, an aversion to complacency and a belief that all consumers deserve quality and choice (by) creating choice where none exists.”  And if that isn’t enough for you, he goes on, “we’ve mastered the art of nurturing the creative process to harness this passion.”   Decidedly less hyperbolic, the New York Times Arthur Ochs Sulzberger and Janet Robinson talk about “creating innovative products.”   

Probably the strongest statement comes from GE’s Immelt who, in his fascinating critique of the economic problems, writes, “in the end our businesses, our government and many local leaders lost sight of what makes a nation great – a passion for innovation.  We need an educational system that inspires hard work, discipline, and creative thinking.  The ability to innovate must be valued again.”             

      EMPLOYEES.  Ah, yes, the employees.  Wonderful people.  Salt of the earth.  Can’t live with them; can’t live without them.  I’m sorry, but in the wake of the sometimes understandable and sometimes not understandable layoffs and cutbacks, it is interesting to note that virtually every report extols the values and virtues of their employees.  In some cases, the comments are clearly sincere; in others, it appears to be lip service.  I know I’m violating my rule of not commenting, but this is really more perspective than commentary. In any case, you be the judge.  Here are just some of the statements from the various companies:

Cox:  every employee is valued and every person is respected.  Gannett:  our employees are our greatest asset and the pressure on them has been intense… (they have) performed miracle after miracle.  McClatchy:  despite the difficult measures taken, our employees continue to be exemplary.  Media General:  credit for the progress and transformation goes directly to our 5,600 employees.  Belo:  despite resource constraints, employees have maintained their focus on strengthening the competitive position of our stations.  News Corp:  the 64,000 passionate individuals who make us the world’s most international media company are dedicated… Morris:  we believe that our relations with our employees are generally good… (and we have created an) environment for employees that motivates.  Washington Post:  staffed by talented reporters and editors.  New York Times:  extraordinary support of our employees (and the) collective strength, ingenuity and creativity of our people. Bertelsmann talks about its employees as “entrepreneurs” who show “the willingness to do without on the one hand and a commitment to take responsibility on the other.”  Disney talks about its “safe, inclusive workplaces (and its goal of employees being) positive and productive members of the community.”  Again, I should note that some of the language differences can be attributed to the fact that the more positive statements come from the annual reports and the more ‘down’ statements come from the much more mundane 10-k reports.  Mostly, by the way, I think the statements are sincere, but then again I still believe in the tooth fairy.       

      COMPLETELY EXTRANEOUS FOOTNOTE:  The two ‘coolest’ reports, IMHO (in my humble opinion) are from Disney and from Bertelsmann.  In part that’s because both are really well written.  Some of the CEO’s should have hired writers.  The letter to shareholders by Bertelsmann’s Hartmut Ostrowski is just brilliant.  It is reproduced to look like an actual letter with Ostrowski actually making hand-written notations in the margins and a hand written introduction to “dear friends of Bertelsmann.”  The Disney annual report just contains some fascinating visuals, including my favorite of Mickey and Minnie standing in front of the Taj Mahal.  What does that say about the company?  I also found it interesting that both CEO’s Iger and Ostrowski are shown tie-less and in other reports, GE CEO Immelt is shown tie-less.  I have no idea what that says about them or their company or anything.  As the headline says, an extraneous footnote.

      A NOT EXTRANEOUS FOOTNOTE:  As you can imagine, this is not a complete and comprehensive report on the annual reports.  And there will be more in a future MfM, including some oddities I found out about the companies.  In particular, we need to look further at the annual reports by the world’s five largest media corporations which are in order of size:  Time Warner, Disney, Bertelsmann, Viacom and News Corporation.  All of them in the double-digit Billion dollar range.  And all of them fascinating.       

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