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Extra Baggage: Older Content Companies
Weigh the Growing Earnings Gap |
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25 July 2005 |
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O, to be a content company without content ownership and
licensing issues. Then our financial reports would boast
the operating margins of companies like Google, which has
perfected ad revenue generation from just about everybody's
content quite effectively while owning or licensing hardly
a stitch of the stuff. Owning content can be great but when
you're competing for revenues and margins with monetizers
that can take or leave the ownership game rather casually
it can make you feel like you've been left holding the bag.
There's lots of hope yet for publishers and aggregators
working to sort out this equation to their satisfaction but
it will require traveling far lighter than many in the
content industry are used to. |
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While some
of you have already packed your baggage for your vacation
destinations us folks still in work mode are looking at content
company earnings reports, some of which are downright
spectacular and some of which are...more wanting. While Google was
quadrupling its earnings over last year's quarterly results and
online classifieds service Craigslist doubled their net
performance, many stalwarts found their earnings carrying
the heavy load of costly legacy investments. Dow Jones' strong
online performance was weighed down by a nearly ten percent
drop in print ad revenues compared to last year, while its
Factiva venture edged out a fraction of a percent earnings
growth. Similar stories of strong online growth for content
companies weighed down by soft print sales or standalone legacy
databases are easily found throughout the content industry.
Google now has per-share earnings comparable to many
well-established media companies, but also enjoys many stronger
fundamental indicators of financial health. I like to look at
operating margin, since it's a good indication of how sales
from core operations transfer to the bottom line, factoring out
revenue sources such as investments in other businesses. Using
this as a measuring stick you come up with some interesting
comparisons using recent operating margin data (used for
general comparisons, not adjusted for same-period comparison):
We could play this game from any number
of angles, but the point is this: at this point the companies
that try to make money by licensing other people's content
don't seem to do as well as those that try to sell their own
content and all of them don't seem to do as well as those who
don't bother too much at all with content ownership as a basis
for revenue generation. Publishers and aggregators are learning
how to make their way in this environment, but as long as their
operating margins are weighed down by costs of sales from
legacy operations required to sustain existing revenue streams
it's not going to be a pretty future for them. With such hefty
operating margins Google enjoys the opportunity to invest with
care in advanced revenue sources that avoid many of these
traps, placing enormous pressure on publishers and aggregators
to invest in or acquire sources that will keep up with them.
This of course is an expensive proposition, which would tend to
hurt operating margins substantially in the short run.
What are reasonable responses these threats to margins
experienced by publishers and aggregators? Here are a few quick
thoughts as to what requires focus in the months ahead:
- Merger mania math needs to be fine
tuned. The recent
burst of merger and acquisition activity in trade media
publications is fueled by publishers trying to find economies
of scale that will allow older operations to move profitably
into a Web-first publishing environment and demonstrate more
healthy operating margins, but it appears that the meaty part
of this trend will subside by year's end. There is only so
much consolidation that trade media can absorb profitably
while accelerating online channel development without
reducing the inventory of available pages and titles that can
draw advertising or licensing revenues. Expect many
publishing companies deep into folio acquisitions to revisit
their spreadsheets this October and to recognize that the
math may not be adding up the way that they had hoped it
would in the spring. Most will pull through just fine in the
end, but it will change the math for future acquisitions
substantially and quickly.
- Content licensing margins need to
be re-examined. Yahoo!'s push into licensing traditional
media content is a bit risky at this point, as much as
it may seem necessary to them. It's dragging along the boat
anchor of costs and ways of doing business passed along in
licensing fees that need to be removed from the equation.
Other aggregators are exposed on licensing costs also,
struggling to keep up with an online distribution environment
with zero-cost syndication capabilities via RSS and other
emerging technologies that are becoming attractive
distribution alternatives to mainstream publishers quite
rapidly. In the meantime existing licensing deals
handcuff aggregators to publishers at percentages that look
increasingly unattractive to more Web-savvy publishers. The
race is on for commercial aggregators to come up with revenue
equations that are braced for lower relicensing income. For a
poster child representing this equation rebalancing,
reference the (painful) Reuters transformation.
- Consider the cost of content
ownership more carefully. Owning content can be great,
but so can owning nobody's content, as many self-styled
aggregators have discovered. You want to own only as much as
will give you a unique advantage in the marketplace. This
plays out not only with media properties such as Google but
also with business-oriented publishers trying to manage the
transition from database lookup services to integrated
information solutions. Customers will pay for unique sources
but at the end of the day the solutions space favors
technology providers that are not burdened with content
sources that may provide only part of a solution. Those
already at the leading edge of content integration will find
themselves running only harder to keep up with the influx of
solutions providers unburdened by content ownership that gnaw
at their margins.
Baggage can be a handy thing to help you
get valued stuff from point "A" to point "B", but in an era in
which great sums are being made in content by companies
traveling light has become a competitive necessity. A great
many publishers are learning how to focus their content far
more effectively in unique niches that help them to retain its
value with fewer and more effective traditional redistribution
agreements, an important first step to improving long-term
operating margins. In the long run margins will be serviced
best by content that knows how to distribute itself to the best
opportunities for high-margin revenues. That's baggage that's
still pretty new in the making, but when it's fully available
there will be more interesting opportunities for high-margin
content plays than ever before. Happy travels!
-
John Blossom
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