5 ways to fix Time Warner
A modest proposal for saving Time Warner and the entire industry from themselves.
Erick Schonfeld, Business 2.0 Magazine editor-at-large

(Business 2.0 Magazine) - Running a media conglomerate these days is no easy task. Just ask this magazine's uberbosses at Time Warner. The audience is fragmenting, distribution is under siege, the Internet is stealing advertisers from print and TV, and until recently Carl Icahn was hounding management to break up the company.

Or ask News Corp.'s (Research) Rupert Murdoch, Viacom's (Research) Sumner Redstone, or Disney's (Research) Robert Iger. They're groping for ways to fix their businesses before all content goes digital and their financial assumptions go out the window.

What's a mogul to do? Luckily, the media industry is filled with wanton distributors of unsolicited advice. And I'm one of them. As an editor-at-large at Business 2.0 and the daily keeper of its blog, I can't help obsessing about how the Web is changing the media business. So, since nobody asked me, here's what I have to say to media big cheeses about the state of their industry: It's breaking down. Financial parlor tricks like buying back stock -- as Time Warner (Research) and Viacom are doing -- won't solve the underlying problem. The way people consume media is changing, but the way media companies make money is not.

All the major media companies depend on their ability to attract a mass audience, but the mass audience is being replaced by niche audiences. As management consultant John Hagel puts it, "The cost of getting people's attention is going up." People are simply paying attention to a lot more things than they used to, from the 100 or more channels on their TVs to satellite radio to the billions of pages on the Web. Competition is also increasing from the audience itself. "Anyone can create media," says Internet management consultant Umair Haque. In a Media 2.0 world, content is no longer king. The audience is.

Now, let me be the first to admit that there's a monumental difference between ruminating about what a revamped media company should look like and actually creating one. But when, for example, Time Warner says it will buy back $20 billion of its own shares, well, that seems to me like an unimaginative use of capital. The entire U.S. venture capital industry invested roughly the same amount last year -- and it pumped life into 3,000 new companies. Wouldn't it be better for Time Warner to use some of that money to create the media company of the future? Here's what I would do with Time Warner (or any other media empire) if someone were crazy enough to give me the keys to the kingdom.

1. Problem: Distribution channels are proliferating, and the cost to deliver media to homes is plummeting, making capital-hungry distribution assets less important strategically.

Solution: Dump distribution.

Historically, the most successful media companies have controlled both content and distribution. The media pipes going into people's homes were once limited. But now we have high-speed Internet, video-on-demand, pay-per-view, TiVo (Research), video iPods, and 3G cell phones, with more conduits coming. No one company can control them all. Their proliferation will inevitably drive down the price -- and the profit margin s-- of distribution.

Thus, Time Warner should dump its capital-hungry distribution businesses -- its cable operations and the dial-up part of America Online -- and become a pure content company. Though the cable business is the fastest-growing part of Time Warner, keeping it linked with the content businesses will make less sense over time. A total spinoff (rather than the current plan to spin off 16 percent) would allow it to chart its own path, and likely give its separate stock a takeover premium.

AOL is more complicated. As Merrill Lynch analyst Jason Bazinet suggests, a more prudent route than spinning off the whole thing would be to spin off just AOL's dial-up business and keep the content business (including AOL.com and Advertising.com). AOL dial-up is a cash cow that might appeal to value investors, just as the cable business would be attractive to growth investors (at least in the short term). Meanwhile, the remaining AOL.com content business -- which includes such underutilized assets as AOL Instant Messenger and MapQuest -- should relocate from Dulles, Va., to Silicon Valley. That way it can cross-pollinate with the true innovators of the Web and possibly pick up some entrepreneurial zip that it has sorely lacked.

2. Problem: Media companies are organized around their product lines (books, movies, magazines, websites) instead of their audience segments.

Solution: Structure the company around customers, not products.

Once distribution is jettisoned, the real work begins. Time Warner's content businesses are organized around different media products, from movies to magazines to websites. Instead of selling these products one at a time, the company should restructure itself into businesses that try to meet the needs of specific target audiences--retiree news junkies, teen sports fans, suburban home decorators--across all forms of media. "Start by understanding the audience segmentation," says Saul Berman, entertainment strategist for IBM (Research) Business Consulting.

The individual products are important only in that they help build loyal relationships with and deep profiles of each audience member. The idea, Hagel says, is to know that "you, Jane Smith, are interested in this type of homemaking. And I can target media to you based on that understanding."

As media consumption becomes more digital, and trackable, this sort of relationship database marketing will become the norm. This could open up the possibility of new forms of advertising that promise Google (Research)-size returns. The more details you know about your audience, the better you can tailor your advertising--ads that people actually want to see and will act on. And the more you can then charge for those ads.

3. Problem: Blockbusters are becoming more expensive to produce, while drawing smaller audiences as media consumption continues to fragment.

Solution: Create nichebusters instead of blockbusters.

Once the businesses are organized around audience niches, creating blockbusters becomes less necessary. Instead, media businesses that are focused on narrow audiences will naturally give rise to the more cost-effective "nichebuster." A nichebuster is any kind of content that becomes a breakout hit with people in a target audience. In fact, within that group, it's a blockbuster, while outsiders might take little notice of it because it doesn't appeal to them or because its immediate sales are modest.

For instance, Sports Illustrated might produce a low-budget documentary about street basketball with no big-name stars; it could even solicit video footage from the audience itself. The key to keeping costs low is to know the audience -- in this case, street kids, street kid wannabes, and hard-core fans -- and give it exactly what it wants: gritty hoop action that feels real.

I'm not saying blockbusters will disappear. Inevitably, some content created for a particular audience will break out and have broader appeal. The Warner Independent Pictures documentary March of the Penguins, which has grossed $120 million worldwide, is one such nichebuster-turned-blockbuster. (The initial niche was nature lovers.) But the media business model simply cannot be as dependent on costly megahits as it is today. The latest Harry Potter flick has grossed about $900 million worldwide on a budget of $150 million, but the Oliver Stone flop Alexander cost about the same and never broke even. (In the United States, it grossed just $34 million.) With enough nichebusters, Warner Bros. could actually reach more people, far more cheaply. It could also create richer connections with its audience because each nichebuster would focus on a topic about which the consumers in the niche care deeply.

4. Problem: As people spend more time creating their own digital media -- on blogs, in podcasts, or simply sharing photos and Web links -- it is becoming difficult to compete for their attention.

Solution: Let the audience play with the content.

Big Media execs must come to grips with the fact that the audience is now able to entertain itself. Increasingly, content alone will have less value than what people can do with it. Time Warner should embrace this shift by making its content available in spliceable chunks and encouraging consumers to do with it what they will. The company should then observe how people come together in self-defining groups around reconstituted forms of content. Each group becomes a new niche to target with other media and ads. As audiences create their own content, production costs plummet.

How might this work? One scenario: Time Warner could allow consumers to search its nearly 7,000-title video library on the Web. It could help them find any scenes with, say, Christopher Walken and allow them to splice those scenes into their home movies. Targeted ads could also appear within the search engine or superimposed over the videos themselves. People could snatch short clips for free --similar to what constitutes "fair use" today -- or pay for a download or DVD of the full movie.

5. Problem: Once the audience gets ahold of the content and reuses it, you can't charge for it the way you used to.

Solution: Become a content rebundler.

It's not enough for Time Warner to let consumers loose in its archives. There's also a profitable role for editors and producers who can take all the newly atomized content and rebundle it in ways that would be difficult for the audience to do on its own.

In other words, Time Warner can play the role, Haque says, "of a DJ remixing media." It can dip into its own stack of content or scour the Web for more. And it can take what it knows about its customers to fine-tune the media bundles to their tastes. It can also help the audience become better editors, programmers, and directors (with sophisticated Web-based editing tools that can help raise the quality and potential audience of all the amateur video out there). The best DJs always attract the most attention, and in the Media 2.0 world the most attention will attract the most ad dollars and the most opportunities to upsell still more content.

Some will say that this and everything else I've outlined here is too radical for Time Warner or any other media company to consider seriously. Probably. It's true that nobody really knows how fast the media companies' existing business models will degrade. But radical or not, this much is indisputable: Today's media bosses need to figure out a way to remake their companies for the digital era before the audience does it for them. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.