Message From Michael
May 18, 2011
A SPECIAL REPORT – MEDIA CEO'S LETTERS TO SHAREHOLDERS
The after shocks of the 2009 recession can be seen running as a sub-theme through virtually all of the annual reports of the country's largest media companies. Clearly, 2010 was a rebuilding year. Every year about this time I do a semi-random review of ten media company CEO's letters to shareholders, looking for, and usually finding, interesting insights. This year was no different. Despite the financial struggles, virtually all of the letters, with one or two odd exceptions, were upbeat and positive. Of course you would expect that from such letters. That's part of their purpose, but, maybe my naivety, but the upbeat tone seemed genuine. One example: It's a somewhat unscientific analysis on my part, but the word "growth" may have been the most popular word in all of the letters. News Corporation's Rupert Murdoch used it 16 times in his letter; AT&T's Randall Stephenson also 16 times; Viacom's Sumner Redstone 'only' used growth 6 times but the word 'grow' 16 times (coincidentally). Similar instances can be found in the letters from the various other CEO's. The point is that the worst is behind them and the future (another popular word) looks brighter. Charter Communication's Mike Lovett even puts the two together when he talks about "being prepared for future growth"— the main theme throughout the letters.
Another recurring theme throughout these letters is the massive changes that have taken place in the media world. Here again, the tone was upbeat. One might even say giddy. In the proverbial – do you see the changes as a half full or half empty cup -- virtually every CEO sees it as not just half full, but overflowing. AT&T's Stephenson says, "the amount of innovation taking place in our industry is unprecedented; it's more comprehensive and moving more quickly than anything I've seen in my lifetime." Interestingly Disney's Iger and News Corporation's Murdoch both made statements about technologythat are eerily similar. Iger says, "new technology can make entertainment even more compelling," while Murdoch says, "audiences everywhere are still hungry for good storytelling, particularly when it's merged with the new technology." Pretty close to the same point was made by Redstone in his role as chairman of Viacom along with Philippe Dauman (President and CEO). They argue that because of the new technology consumers today "spend more time engaging in entertainment than ever before." The new technologies are creating a "seemingly endless supply of opportunities." Redstone echoes that sentiment in his other role as CBS chairman, (actually his title is Executive Chairman and Founder of both Viacom and CBS). Along with Leslie Moonves (President and CEO), they say that even in a world where consumers have more choices, prime time programs along with hard-hitting investigative journalism and big television events "remain more popular and more relevant than ever."
Of course, the quote-meister in all this is Rupert Murdoch who, when you read his letter, you really do believe him when he says that he personally sat down "to write this letter to you" and not some public relations or marketing underling. In typical Murdoch fashion he makes the very valid point that media companies must partner their media talent with their engineering talent to "create new consumer experiences", and he draws a simple equation that disruption equals long-term opportunity. He warns though that this era of innovation, as he calls it, is "asymmetric" meaning that "the winners will be rewarded handsomely and the laggards will be left languishing far behind.". But then, in typical Murdoch fashion, he can't stop there. He says this disruptive technology is the "prelude to a new golden era" for companies like News Corporation and that "innovation accelerates as human freedom advances." The result, he says, is "a digital renaissance that is bringing us closer to a global meritocracy than at any time in human history." Whew, no fear of understatement here.
The other word and recurring theme is 'mobile' and 'anytime, anywhere.' AT&T's Stephenson, who carries the titles Chairman, Chief Executive Officer and President, goes so far as to say, "mobile broadband forever changed how the world does business." That is why he says they are "beginning to mobilize everything" as well as "layering on the power of the cloud." Stephenson calls wireless spectrum the "invisible lifeblood of sustained innovation and growth." He predicts that when media historians look back on this time, they will see it as "an inflection point." What exactly an inflection point is, I don't know. But in a very similar vein, Gannett's Craig Dubow says 2010 "was a breakout year for mobile content consumption" led by what he calls the "smart phone revolution." But he reserves his hyperbole for the growing use of Apps, calling them "the greatest game changers we have seen." Comcast's Brian Roberts, talking about the takeover of NBCUniversal, says putting together content and distribution was necessary to meet the "anytime anywhere digital future consumers demand." Media General's J. Stewart Bryan (chairman) and Marshall Morton (President and CEO) also talk about that multi-platform access but put it in much more down to earth terms when they talking about "engaging with communities on their own terms." They also note their involvement in the Mobile Digital TV consortium, as does Gannett's Dubow.
But, back to the financial issues. A new term has come into vogue for the CEO's, or at least it's a term I haven't noticed in the five years I've been reviewing such letters. It's "free cash flow" which is not a term I recall from my college accounting courses. It is defined as operating cash flow minus capital expenditures. My presumption is that it has gained significance because companies have become sensitive to having a 'cushion' in case of another economic downtown. It's also there to allow companies to buy up other companies. Cox Enterprises' Jim Kennedy (chairman) and Jimmy Hayes (President and CEO) make the point that, "free cash flow is the fuel for our growth." Charter Communication's Mike Lovett makes a point of having $704 Million in FCF. CBS's Redstone and Moonves have twice that much -- $1.45 Billion. Interestingly, Redstone in his Viacom, with Dauman, say they have less than that -- $1 Billion. News Corp's Murdoch talks instead about the company's cash balance which is a whopping $8.7 Billion, and that appears to be after its bid for the remaining shares of BskyB. As a side note, another term that probably wasn't in the accounting lexicon comes from Sumner Redstone who talks about the need to diversify and "de-risk our business model," such as the steps they took to "de-risk" CBS's "exposure" related to the broadcast of the NCAA Division 1 Men's Basketball Game.
Another noticeable difference in this year's various media group letters is that the CEO's and presidents engage in a lot more tech talk in their missives. For example, Charter's Lovett and Comcast's Roberts talking about investment in DOCSIS 3.0. It stands for Date Over Cable Service Interface Specification. Basically it is technology that provides for additional high speed data transfer. Along with IPv6, it is one of the major technological changes. Humorously, Roberts makes a point about the need to "rapidly deploy" DOCSIS 3.0. I say humorously because DOCSIS 3.0 was introduced in August 2006, according to Wikipedia. When Gannett's Dubow talks about making on demand video "scalable," he is talking tech talk.
One of the other key words that came out was the word "content." More of the companies talked about the importance of combining content and distribution – most notably Comcast. But you could see a difference between companies that are content focused versus distribution focused. Again, it's a somewhat unscientific analysis, but still interesting, that, for example, the word 'content' appeared 32 times in the Media General report, 21 times in the Gannett report and 18 times in the CBS report. In the CBS letter, after noting it was the most watched network seven out of the last 8 years, Redstone and Moonves say it has been winning because it is delivering the content "today's discerning audience demands" and better yet, "increasingly being paid a premium for it." As the saying goes, it's not bragging if it's true, and for CBS it's true with the CSI and NCIS series consistently ranked as the top programs in world markets. In fact, Redstone and Moonves talk about selling more shows overseas. Although Sumner's Viacom letter only used the word half as many times (9) as in his CBS letter, the Viacom letter is much more effusive. Talking about all the new devices, Redstone and Dauman write, "all of these innovative devices share one thing in common: they all need content. That makes this the best time ever to be in the content business."
And on that note, we will stop. For now. Consider this to be Part One of a two part series on the CEO letters. In the next part we'll look at some interesting factoids from the companies, along with some visionary projections for the future.
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