Tumult and Opportunity Ahead for Media

Renowned investor Warren Buffett, whose holding company is a major investor in the Washington Post and Capital Cities/ABC, has some rueful thoughts about the media business in his latest annual report. “Many media businesses,” Buffett writes, “will prove considerably less marvelous than I, the industry or lenders thought would be the case only a few years ago.”

Buffett and his investment partner Charles Munger, a prominent Los Angeles lawyer, say newspapers and network television will still be good businesses--but may not enjoy the extraordinary profit growth they have known for almost two decades.

Folks at Time Warner would disagree, at least about television. Last week the pay-per-view TV unit of the giant company racked up an estimated $75 million from the Holyfield-Foreman heavyweight title fight. Charging $35.95 per household, Time Warner took in $55 million from 1.5 million U.S. homes, and looks to get another $20 million from overseas viewers.

The money was no big deal to Time Warner, which gets $12 billion in annual revenues from magazines, cable TV, movies, records and book publishing. But the trend was encouraging. Holyfield-Foreman was the largest pay-per-view moneymaker yet, and undoubtedly inspired others. Look for the 1992 Olympics, first run movies and the Super Bowl to be on pay-per-view before long.

Time Warner will hurry the process. This year it will provide 150 channels to homes in Queens, New York in an experiment with fiber optic cable. Some of the 150 channels will be used for movies on demand--a Cineplex in the home, with a charge for each viewing added to the monthly cable bill.

John Malone, president of Denver-based Tele-Communications Inc., the largest company in cable TV, is even more expansive. His company is supporting a project that could expand the cable television offering to 600 channels within the next two years. In Malone’s vision, this decade will see an enormous profusion of business opportunities in media.

Who’s right, Buffett or Malone? Both are right--Malone’s vision and Buffett’s recognition of it. For what they see is change, which will benefit some businesses and cause trouble for others.

Men like Malone and Buffett see trends before they’re obvious. The current figures on newspaper and TV advertising revenues show business holding up fairly well considering the recession. Of $130 billion in total advertising expenditure last year, according to Robert Cohen of the McCann Erickson ad agency, newspapers got $32.8 billion and network and local television took in $27 billion, with only $1.8 billion for cable. (Cable companies get most of their money from monthly subscription payments.)

But newspaper and TV advertising declined slightly last year. And newspaper and television company earnings were down in 1990 and have continued weak in 1991.

A changing marketplace is as much to blame as the recession. Newspapers and TV have lost their exclusive hold on the advertiser, writes Buffett. Where newspapers used to get advertising from every merchant in town, now discounters such as Price Club and Wal-Mart scarcely advertise at all. And “the number of print and electronic advertising channels has substantially increased,” he says, referring to preprinted ad booklets stuffed in mailboxes or hung on doorknobs, local cable TV, shoppers, direct mail.

In television, cable and other outlets have reduced the networks’ audience share from 95% to 62%--and the outlook is for a further decline to 50%, say experts.

What has surprised everybody is the hyper-speed at which technology is moving. “It’s a monumental trend,” says George Gilder, author of the book “Microcosm.” Even the recently touted Japanese innovation, high-definition television, is out of date. More advanced forms--digital, two-way TV systems--are now vying for Federal Communications Commission approval.

And companies such as General Instrument and Scientific-Atlanta are working on a project with Boulder, Colo.’s CableLabs to compress TV signals so that more channels can be beamed down from satellites on the same wavelength. That compression will allow hundreds of channels on today’s TV sets--meaning there could be scores of first-run movie-on-demand channels within the next few years. The video store, a retailing innovation of the 1980s, is about to be obsolete.

The only real question, says Tele-Communications’ Malone, is: “How do I structure my business so at least I’m a survivor, if not a beneficiary?”

For newspapers, it means a combination of innovation and economy. “Newspapers will have to target readers and bring advertisers, especially small retailers, more specific information on whom they’re reaching,” says analyst Kenneth Berents of Baltimore’s Alex. Brown & Sons.

“And they’ll have to cut costs severely,” says Munger. He and Buffett have no intention of abandoning their media investments--on which they’ve earned at least $1.2 billion--but their new emphasis is on companies such as Coca-Cola and Gillette whose brand names benefited worldwide from television advertising.

Now broadcast television faces an avalanche of cable. It’s worth noting that the companies producing the avalanche are named General Instrument and Scientific-Atlanta, not CBS, NBC and ABC. The networks stopped financing technology decades ago, reasoning they had less need for technological capability because they were marketing companies.

Now technology threatens to steal their market.

All is change, but that is where fortunes are made, says Joan Lappin, president of Gramercy Capital, who manages $135 million for pension funds and individuals. Lappin holds a select few stocks in biotechnology, semiconductors, telecommunications and Time Warner--for its positions in cable. She reasons that just as cars and oil and steel provided investment values in the 20th Century, so today’s advanced technologies will provide value in the 21st Century.

Still, you may say, who’s asking for 150 or 600 channels? Nobody is asking for them, but when they come they’ll be used. Nobody asked for electricity or radio or television either, yet they have transformed every corner of the globe.