Time Warner deals give ‘old media’ a new future

The surprise announcement of a joint venture between Warner Music and EMI reflects the culmination of two prevailing trends in the music sector.

The first is industry consolidation. In a low inflation environment, where top-line growth is hard to come by, companies are merging to reduce costs. Second is the influence of the Internet. With a real threat of disintermediation, content providers are seeing the need to harness the Web. This is especially pertinent in music, where the majors could be challenged by the ability of established artists to break new acts on the Net, as well as fans downloading music directly through MP3.com and so forth. This not only puts downward pressure on retail prices, but threatens the position of music companies in the value chain.

The Warner/EMI deal addresses both critical issues. However, there are regulatory hurdles, especially in the three main European markets, where their combined market share exceeds 25 per cent. There is therefore a chance that the proposed deal will flush out another bidder, particularly as EMI is such an attractive asset. It has a double-digit market share in every global market and a 100-year-old catalogue – built in real time.

Meanwhile, the accompanying merger of America Online and Time Warner proves, if proof were needed, that content is, indeed, king. It also shows the future belongs to companies which can combine strong content with high-speed delivery.

On the surface, the rationale for the deal was the marriage of “old media” (content) to “new media” (distribution), and the creation of a vertically-integrated multimedia giant spanning magazines, films, music, TV, cable and the Net.

However, digging deeper, AOL urgently needed to use its high share price and market-leading subscriber base to acquire proprietary content before the proliferation of free Net service providers. Or before market volatility eroded its position.

Time Warner, for its part, had failed to implement a viable Net strategy, despite the advantages of unique branded content, multiple routes to market and broadband delivery. Obviously, joining AOL – the world’s leading Net company, which had already acquired CompuServe and Netscape – addressed this strategic issue.

Whether the two cultures can be blended remains to be seen. But what is already clear is the commercial imperative to combine “old” media with “new” in a single, cohesive entity that lends itself to cross-promotion. It means a string of anticipated new media spin-offs in the UK (for example, CMP.Net) are now less likely.

Instead, although we should expect further deals of this sort in the US (Yahoo! and Disney?), in Europe – where ISP/portal penetration is less developed and media companies more advanced with their Net strategies – we are more likely to see valuations increase.

Lorna Tilbian is a media analyst at WestLB Panmure.