Waiting for the Dough on the Web
NOW and then, an executive whose brain I'm siphoning will turn the tables and pose a question. And lately, I've been getting a few versions of this: "You talk to a lot of the traditional media companies. Who do you think has got this Internet thing figured out?"
That is a tough but very pertinent question, given all the digital hurly-burly of the past decade or so.
Rupert Murdoch and the News Corporation, for instance, get points for their speed and resolve to gain traction online. The company's moves have included the purchase last year of the teenage hangout MySpace.
Time Warner has the AOL paradox on its hands: it owns one of the top Internet destinations but is clouded by the service's daunting business challenges.
Viacom has made some small but clever acquisitions — Neopets and iFilm, for instance — and has a proven record for knowing what young people want and giving it to them on MTV and Nickelodeon.
And, for cable television channels, CNN and MSNBC seem to have staked out prime real estate online.
But one could make a case that the amount of focus on — and hype about — Internet activities at media companies has some kind of inverse relationship to the amount of near-term revenue they represent for these companies.
We're still in the early innings, but given how much the Internet has already transformed the media and society, it's surprising how little money traditional media companies make directly from it.
Don't take my word for it. Flip through the financial statements of some of the biggest names to see what they say about their Web sales and profits. You won't find separately broken-out figures at Disney, Viacom, or Time Warner (aside from AOL).
Even at the News Corporation, the combined Internet operations, including the increasingly popular MySpace, don't merit being listed separately on the income statement. Rather, the company focuses on seven somewhat old-fashioned "industry segments," including cable network programming, television, newspapers and filmed entertainment. Online activities are lumped into a category called "other," which includes billboard companies in Russia and Eastern Europe, a record label in New Zealand, an Israeli technology company and a business that owns the broadcast and sponsorship rights to the 2007 Cricket World Cup.
In the nine months ended March 31, "other" represented not quite $1 billion of the News Corporation's total revenue of $18.5 billion, and posted an operating loss of $68 million at a company that showed total operating income of $2.84 billion. In other words, the Internet was a rounding error.
Some companies are starting to give glimpses of how they are doing online. For instance, the Tribune Company, which owns dozens of newspapers and television stations, said that digital media revenue would total $225 million this year — or 6 percent of its publishing revenue, a percentage that it said it expected to double by 2010.
Disney's chief financial officer, Thomas O. Staggs, recently told an investors' conference that the company was generating roughly $500 million in online advertising sales across its properties, which include ESPN.com. But this is at a company that, over all, is expected to generate revenue of $34 billion this year.
A while back, I paid a visit to Sumner M. Redstone, the chairman of Viacom, at his home in Beverly Hills. While perusing his collection of saltwater fish — the world's largest such collection, he says — I ran by him my theory that strikingly little money is being generated online despite all the activity among the media cabal. "I'm expecting we'll have a $500 million business in three years' time," Mr. Redstone said. "That may not be a lot of money to you, but it is to me."
So maybe I was being a little cheeky. The optimist's view is that the spoils from this new frontier are still very much up for grabs. Only about 6 percent of all advertising spending in the United States went to the Internet in the first quarter of the year, according to Merrill Lynch. But it was clearly the fastest-growing category — up 38 percent year over year. And PricewaterhouseCoopers forecasts that Internet ad spending over the next five years will more than double globally, to $51.6 billion.
The less-cheerful view of the traditional media companies is that all their online efforts will not translate directly into more revenue or fatter profits. Thanks to aggregators, file sharers, pirates and other disruptors, more value will leak away or be stolen than will be gained by these companies.
THIS is not to say that online will never be an important — if not central — financial contributor to media businesses of all kinds. For some companies, though, it could serve increasingly as a promotional or marketing outlet, or as a cut-rate but widely distributed version of what consumers can buy in conventional formats. (A case in point: if you are reading this on newsprint, the chances are that you paid for it one way or another. If you are reading it online, there is a decent chance that it is coming to you free. But, then again, it didn't cost very much to make it available to you digitally.)
For now, though, the question of who among the media companies has this Internet thing figured out remains open. But at this time of upheaval and gloom about media's prospects, it is funny to think about how much money there is still to be made in the good old offline world.