Content Matters

Last week's NY Times article, “For Wallflowers, a Time to Dance” described how some old media companies have become the darlings of private equity firms.  That comes as no surprise to anyone who has watched the private equity dollars flow to the content space in recent years.   

While much of the article focused on ClearChannel Communications and the antitrust hurdles it will have to clear, it also discusses the recent $1.6 Bn (plus $0.7bn in debt) deal to take Reader’s Digest private.  Ripplewood investor Robert Berner describes how he likes old media businesses, which tend to have strong cash flow and low multiples (Reader’s Digest sold for about 11x estimated 2007 EBITDA).  According to the article, “Private equity firms believe they can unlock value by selling off pieces or making drastic operational changes, in that they can sell off pieces and reduce operational expenses.”

I have no doubt that you can take a company like Reader’s Digest private, shed some unproductive assets, cut out some costs and improve short-term profitability.  So, I understand why this model makes sense to the private equity firms.  In a fairly short timeframe (24-30 months) you can “clean up” a company and flip it to a larger private equity firm or, depending upon market conditions, take it public again.

What’s less obvious to me is whether this is in the long-term interests of the Company.  Companies like Reader’s Digest are not going to build a sustainable business model simply by cutting costs.  I know – I’ve been places where they’ve tried.  For companies where growth has been flat or negative for more than a couple of years, the only way to reinvigorate the brand is to turn the model on its head.

If I were running a company with strong brand recognition and substantial but declining subscription revenue, I’d look to capitalize on the brand by aggressively changing the business model.  One obvious switch move in the content industry is from subscription to advertising, but you could also explore lead generation and freemium approaches.  The transition would be slightly uncomfortable and probably wouldn’t be feasible for a publicly traded company, but if you’re going to go private (or are already privately held), you can sustain the short-term turmoil in return for creating long-term, sustainable value.