The lesson of EMI is not that media industries are unique, but that you can lose a lot of money if you overpay for a company with a broken business model, as you can in any other industry.
EMI, Britain’s leading entertainment business, not only promoted the Beatles but pioneered computers, television and medical scanners. Today the company is struggling to avoid becoming the UK’s highest-profile private equity failure.
Some people think the travails of EMI are a just rebuke to those who would treat media as merely another industry. Creative people need the love that bean counters cannot provide. And not just love: executives at Terra Firma, its private equity owner, were appalled to find a £200,000 budget for fruit and flowers.
So media businesses are not to be run by ordinary mortals, but require moguls – larger-than-life individuals like Sam Goldwyn, who chomp cigars while uttering mangled yet profound aphorisms, and have an uncanny capacity to identify talent and foster it. The most beautiful women in the world vie to jump into the mogul’s bed. Many middle-aged corporate executives entertain this fantasy. Jean-Marie Messier was beyond parody: he attempted to turn a French water company into a global entertainment conglomerate – Vivendi – before being driven from office by the French elite and banned from US boardrooms.
The notion that media industries are different is challenged in a new book by Jonathan Knee, Bruce Greenwald and Ava Seave, The Curse of the Mogul. They observe the prevalence of the mogul: of the 15 largest US media businesses, 11 have complex share structures designed to sustain control in the hands of the current chief executive and his family. But judged by the ordinary standards of earnings and return on investment, the results have been dire. The farce of Vivendi followed the “worst deal in history”, the merger of Time Warner and AOL. But these are only the most extreme manifestations of the systematic destruction of shareholder value through the industry’s frenetic rounds of acquisitions and disposals.
The moguls have justified this dealmaking with platitudes: the importance of globalisation, the necessity of convergence and the slogan that content is king. Mr Knee and colleagues demolish the business arguments derived from these banalities. Songs and films may be enjoyed globally, but the most consistently profitable media businesses are in market niches. Often these niches are defined by local geography – regional cinema chains and cable networks, newspapers in small towns. Convergence of media does not necessitate convergence of companies: the erosion of boundaries between activities is a threat to profitability, not an enhancement, because it reduces barriers to industry entry. There is truth in the claim that content is king, but content belongs to those, such as J.K. Rowling and Steven Spielberg, who create it and reap a large proportion of the rewards.
But such remonstrances will make no difference. The belief that a small number of talented individuals have a unique ability to understand how the complex industry will evolve and to create value for investors through their insight is firmly held, especially by those who believe they have such talent. There is just enough validity in the idea for it to stop short of mental derangement. A few business people, such as Rupert Murdoch, have indeed demonstrated a capacity to identify undervalued business opportunities. But not many.
Still, the fantasy of the strategic visionary is vigorously promoted by management consultants, investment bankers and analysts. Today’s moguls are mobbed, not just by starlets anxious for parts, but by graduates of the finest business schools anxious for fees. With such people always at your side, a realistic appraisal of one’s own abilities is hard to make.
The lifestyle of the mogul is an attractive one, but not for investors in their businesses. A fixation with revenues and costs, though more financially rewarding, is less glamorous than life with the stars. The lesson of EMI is not that media industries are unique, but that you can lose a lot of money if you overpay for a company with a broken business model, as you can in any other industry.
