Time Warner and the Virtue of Focus

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Once a poster child for the empty promise of synergy between Internet, print, and video media, Time Warner (NYSE: TWX) has rediscovered the old-fashioned virtue of focus, focusing on what it does best -- video and film content creation. This earnings season, it easily bested its media conglomerate rivals, Twenty-First Century Fox (NASDAQ: FOX), Comcast (NASDAQ: CMCSA), and Disney (NYSE: DIS) in operating income growth.

Spinning-off publishing
The lesson of focus, while fully learned, is yet to be fully realized. Time Warner is still looking to spin-off its Time publishing arm, and word is that won't happen until next year. The final deconstruction of AOL Time Warner won't come a moment too soon, as the publishing division revenue continues to decline. 

As noted in a previous post on Jeff Bezos' purchase of the Washington Post, spinning off print publications (even though they always have substantial Internet presence) has become the thing to do. News Corp. separated its print publishing business in the wake of scandals at the British News of the World at the end of June, with the publishing business retaining the News Corp name and the rest of the business rechristened as Twenty-First Century Fox.

Rupert Murdoch, the founder of News Corp, continued as CEO of Fox, by far the larger entity. Fox retained the cable and broadcast television programming business, home of Fox News and Fox Television, as well as the Twentieth Century Fox Studio. Content is king in the digital multi-screen world, as long as it's video content.

Combining content production and physical distribution
Along with some form of video content production and distribution, most of the big media players are involved to a greater or lesser extent in physical distribution networks. Fox owns an interest in BSkyB and a couple of other European direct broadcast satellite operations.

Comcast is a very large cable company, with a TV Network (NBC) and movie studio (Universal) grafted onto it. Comcast completed the acquisition of NBCUniversal in March. The ABC television network represents Disney's involvement in physical distribution. The media company exception when it comes to physical distribution is Time Warner, which has numerous Cable "networks" such as CNN, but no physical cable or television networks. In the table below , I summarize the financial contributions of the major categories of operating units for these media giants.

 

The Cable & Television Networks category combines cable networks such as HBO or CNN, which are really just packages of programming distributed to physical cable operators, with broadcast television programming and distribution. Since the legacy TV networks such as NBC and ABC traditionally combined program creation, distribution, and broadcast network operation into a single company, the media companies continue to report results corresponding to the legacy organizations. This makes it impossible to separate content creation and sales distribution from the physical distribution process for the broadcast TV units.

Studio Film and Video production involves traditional theatrical film production as well as TV show production in the case of Time Warner for third-party broadcast TV networks. 

Synergy or ballast?
Is there synergy between the the physical distribution networks and the video (defined broadly to include film) content creation business? For broadcast television, and to a lesser extent cable, there probably still is. The broadcast TV industry as it grew in the 1950's turned to developing its own content because of the special needs of the medium. The TV industry needed content that could be frequently interrupted with commercials, fit into relatively short half hour and one hour blocks, and which didn't demand too much visually of a medium with serious limits in display size and resolution. 

Even now, broadcast networks produce much of their own content, and in the new distribution medium of the Internet, self-produced content is seen as something of an advantage, as in the case of Netflix. For the most part, however, combining content creation with physical delivery mainly provides financial ballast for the content creation side of the business. 

This is especially true of film production, which is notoriously expensive and risky. Warner's video content business has had a good year, with hits such as Man of Steel and HBO's Game of Thrones, and this is reflected in the greater than 30% increase in operating income in its cable network and film production businesses. Meanwhile, Disney has struggled with flops such as the Lone Ranger, reflected in Disney's greater than 35% operating income decline for its film unit.

Invested in the wrong infrastructure
So, infrastructure operations should be a good thing, you would think, since they provide more consistent revenue. Here, the problem is that the media companies are mostly invested in the wrong infrastructure. Satellite and broadcast TV both suffer from bandwidth limitations and a lack of two way communication. All media delivery is moving to the Internet, and the Internet is inherently interactive. With truly high speed Internet, the kind you can only get with fiber optics, there's no need for any other form of data connection for a fixed location, home or business, service. 

Satellite, cable, and broadcast TV are living on borrowed time, the time required to build out a fiber optic internet delivery system in the U.S. This is especially true since the government and mobile telecom operators covet the TV and satellite spectrum for mobile communications. In the fiber optic future, wireless communication will be reserved almost exclusively for mobile applications.  In the fiber optic future, cable operators will become mere high speed Internet providers, and TV networks will become like cable networks, mere packages of programming.

Investment takeaway 
The virtue of Time Warner's focus on content creation is that it safely insulates itself from the disruptive transition that is taking place in physical content delivery, which is why I consider it the best investment of the four Big Media companies.  Because of its involvement in traditional physical distribution media such as cable and television, the other companies adopt strategies to resist "cord cutting," such as video apps like HBO-Go which only work if the user already has HBO on cable. 

Even as these companies invest in their on-line distribution outlet, Hulu, their ambivalence towards the Internet is driven by simple economics: the old distribution channels are important profit centers, while the future profitability of internet distribution remains an unknown quantity.

Time Warner is not burdened, or restrained, by any of these concerns, to its benefit.  In the fiber optic future, content is still king.

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Mark Hibben has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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