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Atlantic Monthly: The Moguls' New Clothes

Authors: Bruce Greenwald, Jonathan A. Knee, and Ava Seave
September 14, 2009

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Bruce C. Greenwald, Jonathan A. Knee, and Ava Seave say media companies will continue to dissapoint their shareholders until they are able to "jettison the flawed thinking" they've followed over the past two decades.

Time Warner announced in May that it plans to spin off its AOL division by year end. The new AOL's value will likely be barely 1 percent of the market price of the inflated stock that Time Warner accepted in the original $175 billion merger almost a decade ago-despite the inclusion of numerous subsequent expensive add-on acquisitions. While extreme, the Time Warner-AOL combination was no aberration. The deal represents less than half the financial damage done during an unprecedented era of excess in the media business. Since 2000, the largest media conglomerates have collectively written down more than $200 billion in assets, a record that would make even Citigroup blush. These write-downs reflect a broad-based legacy of value destruction from relentlessly overpriced acquisitions, "strategic" investments, and contracts for content and talent.

One might be tempted to give media executives a pass because of the impact of the Internet. If we take Netscape's public offering in 1995 as the birth of the Internet era, on average over the next 10 years the biggest media conglomerates achieved less than a third of the returns available from the S&P as a whole. But even more telling is that these companies, as a group, had also underperformed the S&P for much of the previous decade, before the Internet upended their industry. Indeed, one aspect of the media business has remained largely unchanged for a generation: the lousy performance of its leading companies.

Although individual media moguls have come in for skepticism and scrutiny, the industry's underlying strategies have mostly escaped question. Executives, investors, analysts, and the press seem to agree that the primary imperatives are to accelerate growth, diversify internationally, invest in content, and exploit digital convergence. Unfortunately, these are precisely the strategies that media companies pursued aggressively during the past lackluster decade.

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