Asset-Heavy Companies Need to Slim Down


The giant media companies that dominate the entertainment business today are, in the words of one longtime industry observer, a bit “like your garage.”

In their broad portfolios -- from music to movies to television programs and what not -- the companies possess a lot of stuff not usable at the moment but that may have some practical benefit down the road. But as we all know, there’s also a good chance that these holdings may simply sit and gather dust.

For all the discussion of “vision” and “synergy,” the truth is that media businesses are often an almost random collection of assets picked up in deal after deal. A badly slipping record operation here, a patchwork of cable systems there.


The question is: Is it time for the biggest media corporations to start holding garage sales?

The best argument for spinning off or selling some properties before picking up more costly assets lies just behind the EBITDA-ridden complexities found in one annual report after another. Simply put, the behemoths of the media world are not very profitable.

The average return on invested capital over the last five years of the four major media firms -- AOL Time Warner Inc., Walt Disney Co., News Corp. and Viacom Inc. -- is less than 4% annually. (Vivendi Universal is excluded because it has no profit.)

That is laughably far below the 13% average return on capital for all large U.S. companies in the same period, as measured by Forbes magazine.

No wonder the stock performance of the media giants over the last five years has lagged behind even the dismal record for all common stocks. The media moguls would have done a better job for their shareholders if they had invested in Treasury bonds.

Any other industry with the same record would face stern demands for downsizing and restructuring to free idle capital trapped in those “garages” full of assets.


Those cries should be all the louder when it comes to media concerns because they will need plenty of capital to meet a host of challenges in the years ahead. Among them: lower pricing for entertainment content and the piracy of films and videos.

Yet there is little talk about shrinkage, except possibly at Vivendi Universal, where entertainment properties may be sold. Instead, most of the giants want to add knick-knacks -- more TV stations and a cable network or two, if federal regulators loosen up ownership restrictions.

This continuing expansiveness is driven partly by a feeling among the conglomerates that they need to gain leverage against operations such as the new Comcast combination with AT&T;’s cable operations that reaches 35% of the U.S. cable audience, or satellite operators such as DirecTV and EchoStar, which control a vital distribution channel for films and video programming.

History fuels the media giants’ attitudes. Fear of the potential power of distributors is an age-old concern of movie studios, dating to the 1948 antitrust action that separated theater chains from studio ownership.

But it also may be that big companies and the people who run them simply like being hefty. Size is power.

Mario Gabelli, a major investor in media companies, looks forward to possible rule changes by the Federal Communications Commission that could foster even more acquisitions and mergers. “The FCC will set off an Oklahoma land rush,” he says.


The trouble is, what the industry needs is a “Texas lunch” -- skip the meal and cinch in the belt another notch.

The majority of U.S. homes receive anywhere from 70 to many hundreds of channels of television through cable or satellite networks. But of these channels, “only 10 or so attract sizable audiences,” says Jeffrey Logsdon, industry analyst at Gerard Klauer Mattison.

The upshot: Cable operators may well cut the amount they’re willing to pay for programming. In this sort of environment, media companies run the risk of getting trapped in expensive TV operations that depend on premium pricing.

And any corporation that doesn’t have a critical mass of cable channels would be wise to sell off what it does own.

One stand-alone company that anticipated the future, Cablevision Systems Corp., was smart enough to put most of its channels -- including Bravo and American Movie Classics -- on the block.

A conglomerate such as Sony Corp. might do well to follow suit and harvest what cash it can from its weak cable operation.


The money, after all, might come in handy on another front: to fight piracy, the scourge that has devastated the music industry and is threatening film.

Piracy costs the movie industry $3 billion a year in stolen revenue, Jack Valenti, head of the Motion Picture Assn. of America, has said. And the situation could worsen as advancing technology makes movie downloading faster and easier.

Companies will need a cash hoard to create pirate-proof digital distribution systems in the mold of the recently launched Movielink, a joint venture of five studios.

Meanwhile, the conglomerates still have capital tied up in music divisions that no longer earn an adequate return. Hanging on to such assets weakens the whole company.

And what of the media giants’ shareholders?

Many of the industrial conglomerates of the 1960s were dismantled some 20 years later. In turn, a lot of value was unlocked, recalls Edward Muller, who was chief financial officer of Whittaker Corp., a Los Angeles based firm that sold off its specialty chemical, aerospace parts and biotechnology research divisions in the mid-1980s.

“We had a stock price of about $19 a share when we started the process,” Muller says, “and when all was completed we had returned more than $60 a share to our stockholders.”


When today’s media moguls dream of getting even bigger, they are not doing what’s best for their shareholders. A little cleanup of the garage is just what’s in order.


James Flanigan can be reached at jim.flanigan