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Growth pressures in the search industry

June 24, 2005

Google is now considered a media company and in June, it beat Time Warner to become the most valuable business in the media industry.

Now, US investors are again awarding crazy valuations to fast-growing companies: last quarter Google revenues grew by 93 per cent.

Time Warner, meanwhile, is finding growth, 6 per cent currently, hard to come by. It doesn’t help that the company hasn’t really figured out what to do with AOL, which is pretty damning when you consider it is five years since the “merger of the century” brought the internet provider and the Time Warner empire together.

AOL still remains one of the world’s great internet properties, but it has, until now, failed to develop in the way of Google or Yahoo.

Instead it has muddled along with the tricky transition from highly profitable dial-up connections to the greater uncertainty of broadband.

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The new idea is to develop AOL.com, as a portal sucking up advertising and search-related revenues — a Goo-hoo!, me-too strategy that sounds reasonable, but so obvious as to be embarrassing.

Time Warner has also largely run out of growth opportunities at home. It is already the biggest Hollywood film-maker and is the world’s largest magazine publisher. The company could expand in TV channels, but it has given up on music — where the industry is battling the downloader — and was never much into radio, which, satellite radio apart, is out of favour.

A partial exception is cable networks, where Time Warner is buying up parts of its rival Adelphia. But the cable business will then be partially spun off — too much cable and Time Warner risks becoming a wires- in-the-ground business with a few entertainment assets. Before long investors will start agitating for it to sell the “non-core” film studios, a dreary scenario for any media group.

Time Warner is not alone. Its share price is down 10 per cent since January, but other integrated media groups have suffered more, while Google has soared.

The share price of News Corporation, parent company of The Times, has fallen 8 per cent in the same period despite what was hoped to be a value-creating move from Australia to the US. News Corp has opted for a $3 billion (£1.6 billion) share buyback, a way of saying that executives believe the shares are so cheap that there is no better use for shareholders’ money.

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Meanwhile, Sumner Redstone, the octogenarian who controls Viacom, the MTV to CBS company, has other ideas. Redstone plans to split his company in half rather than sell the poorly Infinity radio business that got him into trouble.

Naturally he will keep control of both; an attractive-looking MTV, Nickelodeon and Paramount operation (the growing bits) on one side, leaving the stodgy CBS TV network battling audience fragmentation in tandem with radio (same problem) and the boring Simon & Schuster publishing arm, which, it is hoped, will attract investors by becoming the world’s first media utility.

Dick Parsons, who runs Time Warner, has better ideas, though, and is starting to look overseas. It is a move that his competitors will follow. From here, it usually takes the typical CEO three seconds to start talking about China — “world’s largest market; unbelievable dynamism, have you seen Shanghai?” and so on.

But in media the script is different: China is no longer all it was cracked up to be. Earlier this month it emerged that Microsoft, keen to do business with China, had agreed to introduce filters to help to strip out uses of contentious words such as “democracy” on blog sites running on its Chinese MSN service, echoing a similar row that News Corp once got into when it dropped plans to publish the memoirs of Lord Patten of Barnes, the former Hong Kong Governor.

Facing those kind of difficulties, reflecting an unwillingness by the Chinese to open up their media market, Time Warner has decided to leave the country alone.

Yet the growth pressure remains. Time Warner, and its rivals, are beginning to scout for acquisitions in Europe (watch out ITV), and increasingly in India.

The sub-continent is a reasonable consolation prize, with a democracy, a large English- speaking population and, despite large inequalities, a substantial middle class.

India’s Government is deregulating; this month it agreed to allow foreign newspapers to circulate again, and Reuters and Independent News & Media have made investments this year.

Expect more to follow.

Source: Times OnLine.co.uk


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