How to avoid the axe that got Warburton

James Warburton was the most prominent casualty in last week's media carnage, but even the strongest media companies must rethink over reliance on advertising revenue or pay the price.

It’s fair to say last week was not a great one for the local media industry.

The week commenced with APN chief executive officer Brett Chenoweth being pushed from his perch, and ended with Ten chief executive officer James Warburton being terminated from his post effective immediately.

Sandwiched in between these two events were sluggish results from Southern Cross Austereo, Fairfax and Seven West Media. The results from Fairfax and Southern Cross Austereo were expected given industry wide factors impacting their respective businesses, but the revenue slide at Seven – arguably Australia’s current leading media company – was somewhat surprising, with revenue down for the first half $37 million to $986 million.

To clarify, Seven’s dip in performance can be attributed to double-digit revenue drops within its Magazine and Newspaper assets. Its Television area was up year-on-year, however it’s Yahoo!7 division reported a 35 per cent dip in profit. Overall it was a mixed result that demonstrates clearly that even the top media performer is not immune from the challenges faced by the advertising market.

It also demonstrates that having a diversified media company that includes TV, print, magazine and digital assets can be of limited benefit if all areas are solely dependent on the health of one area. Last week was a wake up call to the fact that an over reliance on advertising revenue is a risky one.

And it’s this sole reliance on advertising, which makes a lot of the discussion around the strategy of these media companies somewhat redundant. INM cited doubts on Brett Chenoweth’s "ability to implement the strategic initiatives necessary to reposition APN for the more challenging media landscape in Australia” in looking to oust him, despite INM not demonstrating much in the way of strategic initiatives to help salvage its own business. For all this talk of strategy, there’s not much evidence of media companies using it to help protect them when the ad market goes south.

It’s the same situation with former Ten chief executive James Warburton. Today he is out of a job, two years after being anointed as the man to turn Ten around, and 14 months after starting in the role. Warburton was handed at the beginning of 2012 a bruised and battered Ten – no AFL, no major sports rights, a lack of strong local programming, no digital assets – and tasked with turning it around, fast. Oh, he also had a board not without its share of powerful billionaires with limited to zero experience in the world of television offering him advice. Warburton had enjoyed considerable success at Seven commercially – the network becoming the local model on how to sell across platforms – however this success was in a large way attributable to strong programming decisions giving Seven a selection of strong shows, and effective consumer marketing ensuring wide awareness with viewers.

At Ten Warburton lacked the supporting strength in programming and marketing – which in turn impacted the networks ability to attract the advertising revenue required. For TV networks revenue share is generally closely correlated with audience share – so to grow revenue you either need to increase ratings and increase share, or hold share and rely on the total category increasing in advertising revenue. In 2012 neither happened – Ten lost share in a shrinking market.

It would be easy to look at the first half results from the media companies that reported last week and jump to the conclusion that the companies involved have some fundamental issue with their strategy. It seems it’s even easier to flick the chief executive who’s tasked with implementation of said strategy. The reality is, strategy can only help so much when a business lives and dies on revenue from one source – advertising. Most strategic initiatives undertaken by the majority of domestic media companies revolve around advertising led initiatives – new channels, new audiences, new formats, same revenue source.

It is magnified when a large share of this advertising revenue – that from media agencies – comes from only a handful of companies. It is even further magnified when these agencies are becoming a much more diverse supplier of services to their clients than purely ad buying. The headwinds confronting the advertising world go beyond a dip in consumer confidence giving large advertisers the jitters, marketers are looking at the way they engage with customers in a completely different way which is resulting in above the line advertising spends competing with a plethora of alternative channels for investment, such as branded content, sophisticated CRM channels and social media. The days of the media agency thinking ‘advertising first’ are over, they are wanting to play a wider role in the marketing function of their clients.

As a result of the current market, most media companies are looking to forge greater partnerships with advertisers. They’re hiring ex ad and media agency people, establishing strategy departments and trying to ‘think like agencies’. This strategy is aimed at generating a larger share of wallet when it comes to ad spends. Maybe this is the problem rather than a solution. Focusing too much on a limited growth market when potentially there’s a much higher growth strategic opportunity staring them in the face?

Should media companies be more aggressive in their appetite around adding businesses to their stables that generate the majority of their revenue from consumers not advertisers? Here we have companies like Southern Cross Austereo, APN and Seven who reach and have a relationship with audience numbers in the millions, yet cannot find a meaningful way to monetise them beyond advertising and in some instances circulation. Isn’t it time for media companies to look more assertively at acquiring or building businesses which rely on end user revenue rather than advertising revenue, businesses which can benefit from the customer reach these media companies have built? A media company’s strongest asset is their audience, and the key to successful growth is monetising said audience. For most the sole way of monetising is via advertising, but it doesn’t have to be.

We have seen limited examples of this in recent times. Nine Entertainment Company are pursuing a similar strategy through its Nine Events business and investments in the likes of Ticketek, StyleTread, Cudo and iSelect. DMG Radio acquired 50 per cent of the Australian operations of subscription music service rdio. APN acquired the majority of discount web retailer BrandsExclusive in 2012. Fairfax has perhaps been most active in this area – enjoying strong results from its transaction businesses in particular Stayz, RSVP and Domain, all of which have benefited from the Fairfax audience network.

Given the trend in first half results, and future advertising forecasts being a mix of predictions ranging from zero growth to 1-2 per cent over the next 12-18 months, it seems that the media company focus of growth via an ‘advertising first’ mentality needs a review.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital and can be found on Twitter @shepherd and LinkedIn

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