Monday, December 15, 2008

Media: Don't Cut Jobs, Cut Bad Business Model

Behind the current flood of job cuts are broken companies requiring a more enterprising fix.
The recession is prompting massive layoffs in all media sectors, even at the biggest players. The sheer magnitude denotes a scramble for survival that masks the urgent need for major restructuring. However, the intense focus on cutting rather than building is unlikely to leave media players as they prepare for digital growth.
Job losses in an unreformed legacy structure only address part of the reinvention equation. It also requires the closing of some traditional operations and the launching of new operations to accommodate new skill sets and growth paradigms. It is unclear how much of the latter is occurring in a market driven by fear.
Even more overwhelming than the most recent unemployment numbers, bordering on 7% nationally, is the dearth of efforts to innovate for better times. There is a troubling lack of evidence across the domestic business landscape that funds from the federal bailout or cash reserves being hoarded by corporations are being put to work for the future.
"It's time to not just address the immediate economic threats, but to start laying the groundwork for long-term prosperity," president-elect Barack Obama said last week. It is essential to look behind the nearly 2 million jobs lost so far this year to determine what, if anything, companies are doing to competitively reposition themselves. With job losses now shifting to the service and creative sectors-- traditionally economic growth drivers--it is difficult to see how companies are managing anything more than trying to get through the next several quarters.
The 12,000 job cuts at AT&T (T) (4% of the workforce), as much a function of its fading wire line phone business as a battered economy, are just the beginning of belt-tightening throughout the $1 trillion telecom industry. After eliminating 1,500 jobs (10% of its workforce), Yahoo (YHOO) is still slashing positions while searching for a new CEO and business strategy. The 850 job cuts (7% of the workforce) at Viacom (VIA) were said to be part of a comprehensive restructuring that was not detailed. About two-thirds of an estimated $450 million pre-tax charge is related to programming writedowns; the overall result will be $250 million in 2009 pretax savings.
"Viacom's long-term health will depend on our shared commitment to adapt, to innovate and to make difficult choices. To compete and thrive, we need to create an organization and a cost structure that are in step with the evolving economic environment," Viacom CEO Philippe Dauman said in a memo last week.
Although Viacom and NBC (GE) management stress the strength of their franchise brands, some of their workforce reductions are aimed at eliminating overlap between their traditional and digital online businesses. NBC is soon expected to announce as many as 500 jobs cuts (or 3% of its workforce) as part of $500 million in cost reductions, which are in addition to the 1,350 jobs lost across all divisions of parent NBC Universal.
Time Warner (TWX) has eliminated more than 1,000 positions, a majority of them from its Time Inc. publishing unit. Disney (DIS) and CBS (CBS) have not made public planned reductions in workforce or operations. None have explained how any reorganization and refocusing are geared to new business lines or future growth.
In fact, much of the cutting has been aimed at trimming core business lines--such as delaying movie releases until next year, reducing the number and size of films and television production. Networks and studios--the more marginal of which could be consolidated--are under pressure to cut operating expenses in programming and production, home entertainment and distribution.
Like Viacom, some will take one-time charges and writeoffs related to content. But without a strategic plan for new job functions, operations and revenues, there can be no meaningful rationalization of existing resources. Just look at Detroit's big three automakers. Taking huge chunks out of their workforce does not reinvent their broken business model, which lawmakers are loath to fund.
Many media concerns, such as Tribune Co., are too dogged by loan covenants and debt payment deadlines they cannot make and are riveted on deep cost cuts and asset sales. Fitch Ratings and S&P say they expect more newspapers and newspaper groups will default, close operations and be liquidated in 2009, leaving some cities without a daily print newspaper by 2010.
Advertising-dependent newspaper and magazine publishers also are bracing for a major falloff in subscriptions next year as consumers cut back. A year from now, the marketplace could be saturated with distressed print and broadcast properties, the sale of which could be the only way for some media companies to make themselves financially whole. But who is buying?
As it turns out, the job cuts so far and other cost reductions will be an insufficient response to a projected 10% decline in advertising revenue in 2009, led by the imploding automotive (about 15% of all ad spending) and financial industries, as well as retail and travel-related businesses. Weakening DVD and home video sales, fixed content costs and dramatic ad revenues losses "carry a high incremental margin" that may need to be addressed with more dramatic action.
"The industry needs to continue to make more moves to reduce variable operating expenses, and soon," says Barclays Capital analyst Anthony DiClemente. In other words, media must provide its own bailout.

Source: SeekingAlpha

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