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From Olympic Exile on the splendid South Shore of Nova Scotia, I can observe that the banking crisis continues apace, and that the original Swedish solution – put all the smelly bits into a special container called a Bad Bank and cut it free from the Mother Ship – still holds great appeal. I can also see that the financial market analyst demand to cut media companies up into “high growth, strong margins” companies and “low growth, declining margin” companies also has great appeal. We have seen it with McGraw-Hill and now with News International. The equity market analyst’s view (and media markets are almost always at their most dangerous when those who lead companies feel forced to follow the views of those ultimate exemplars of power without responsibility – or experience) seems to be at the moment that the assets which have responded least well to the digital revolution, or have been slowest to react, should be cordoned off and cut free. Very strange: I thought the whole idea of “portfolio” in media ownership was that assets developed at different speeds, and the fast growth ones thus gave “cover” – time and capital – to allow low growth assets to become fast growth again – perhaps with the help of judicious bolt – on acquisition on the way.
And then there is the question of cycles. Some of us apparently work in mini-cycles – the turn of markets within an 18 month period according to an analyst friend – while others are “macro-cycle minded”, which is where I am apparently involved. So if I thought that the reason for McGrawHill to hold onto its Education division was that education, alongside Healthcare, is the most enduring long term growth market we have, and that the portfolio duty of Standard and Poor’s was to enable McGraw’s education unit to get back on its feet, challenge Pearson’s leadership and buy the right catalytic add-on, then I was clearly wrong. Yet it seems to me clear that the future of rating agencies is quite as murky, from both a regulatory as well as a digital standpoint, as any other market. And is McGraw’s B2B, despite some distinguished work, really in the forefront of digital services and solutions in its verticals? Yet these are Good Bank assets, and Education is Bad Bank.
I could write the same about News Corp, television and newspapers. I am certain that no broadcast media have really absorbed the meaning of a networked society, and this is as true of the world of TV stations and cable companies as it is true of newspapers. Of course, one way around the problem is to sell while the going is good, as DMGT so signally failed to do in 2008 when they refused an offer of £1 billion for Northcliffe (regional press), an asset worth around £250m today. Sentiment forbade such a move as it once did at News Corp, so are players like DMGT destined to split to please investors? Apart from my respect for the bravery and ability to change involved in creating new B2B orientated DMGT out of old newspaper DMGT. who is to say that here no digital local manifestation can be created which will not replace traditional local newspapers? And how valuable, since they have them, would those local brands and franchises become in the new local? Especially at helping bits of B2B2C in markets like property reach ultimate consumers.
And where does the splitting end? The arguments that apply here apply equally to the Guardian Media Group, and are complicated by the fact that one investment made to give cover for the newspapers, EMAP, has faded faster than the newspapers themselves. Hopefully selling its half share of this and Autotrader will adjust the losses, and digital revenues (now up to £14.7 m and growing by 26% this year) will do the rest. But here we hit another problem: digital businesses may be more profitable, but they are also smaller. Digital newspaper ad revenue (Mail Online now stands at a forecast of £327m, with a target of £45 m in 2013) models are small, as are paywall models (Times Online now reaches £27m pa after a price hike) And the story of digital books is “less revenue, more margin, cannibalising customers to create a slightly smaller, slightly more profitable company”. What happens when we finish that short cycle?
Maybe the answer to the scale problem is that scale is becoming less important anyway. In a digital world if you have 50% of the workflow and solutions business in agriculture, why should you be in the same group as a content provider to the oil industry? Certainly our current ideas of scale came directly from the print world – you needed to be big enough to finance print runs that took, a day, a week or a year to sell. The cash flow model demanded scale. This is not so today, though I can well imagine a world where deploying common (and very expensive) technologies and having sufficient internal know-how to do so becomes a scale argument. Few B2B players “re-platforming” these days can be doing so, at quite a modest scale, at less than $1.5 m, even if their content is already in good XML order. Larger players face bigger bills, and these will be ongoing as we all go semantic web and Big Data. Then again you may need to be big to finance this as well as investing in collaboration with third parties – content-sharing, delivery mechanism-sharing, solution-sharing. And you may need to be big and diversified to fight off the next round of investors in this sector – the enterprize software vendors who will want to add your B2B solutions to their architecture (or maybe you will need to be big enough to attract them: it can be hard to tell).
So settle back for summer and await the next wave of splits rumours. Back to splitting up Informa? EMAP is already, like Gaul, divided into three parts and ready for resale. Pearson should certainly, in the analysts view, sell Penguin and the FT (despite the fact that they are appreciating nicely now, and they will only be needed as a votive offering to the markets when their sale can finance the next big education push/acquisition). Surely Wolters Kluwer should be subject to this one too – financial analysts sought the sale of its education and its academic publishing assets, and, having succeeded, still hunger for the news that Health is being sold away from law and tax.
Or maybe we should say that it is customer markets that change the size and scale of assets, not investment analysts who have a key interest in the outcomes that they recommend. Maybe we would get richer listening to our customers than listening to these back seat drivers?