I gave the follwing speech this week at the Software Information Industry Association. I chose to be intentionally provocative setting out an argument that traditional consumer media companies (newspapers, broadcast TV, etc) should not be publicly owned because the public equity markets do not have the patience to support a company through the transition to new digital revenues.
I am glad that it has stoked a good debate, both at the SIIA and beyond. What I failed to say in the speech, not wanting to do any more advertising for Reuters, was that our own consumer media business, being already 100% digital and ad supported, did not have this painful transition to make and therefore could happily remain public.
Here is the speech.
SIIA KEYNOTE
Ladies and gentlemen, it’s a pleasure to be here with you this morning at the crossroads of the software and digital content industries.
When Ed Keating asked me last year whether I would come speak at this event, my first reaction was to do what I’m doing a lot of these days, which is to say that I’m really busy combining Reuters and Thomson, and couldn’t I just take a raincheck until next year. However, I then thought the better of it.
We are building Thomson Reuters to be the leading provider of information and related applications to professionals and businesses around the world. What better forum than the SIIA, an organization dedicated to promoting the interests of these industries, to talk a bit about my new company and the trends affecting our markets.
But I don’t think you invited me here to just deliver an advertisement for Thomson Reuters. So first what I would like to do is to continue a dialog that I’ve been putting forward on the forces shaping our industry and what the media company of the 21st century might look like. And if I have time later I’ll get to the ad.
At conferences like this one, in panel discussions like those in Davos last week, and in my blog and other media, I’ve been pursuing a conversation – really just thinking out loud, about topics in our industry that interest me.
So, for example, I’ve spoken and written a lot about the personalization of media – our increasing ability to each receive the custom tailored content we want, in the form we want it, anywhere and anytime we want it. I’ve talked about the creation of the “two-way” pipe – busting the monopoly that publishing companies have had on the means of publication and distribution since the era of Gutenberg, and I’ve talked about the importance of social networking and other Web 2.0 technologies in allowing upstart new competitors to disrupt established media giants.
Today what I want to do is move this debate forward, and throw out some new ideas I’ve been mulling-over in the hope that I can provoke an interesting debate among us. I recognize that it’s early on a Wednesday morning and for those of you not on European time like me, I’ll take on the assignment of laying out a strawman for us all then to debate.
It’ll come as no surprise to you I’m sure that, faced with the not inconsiderable challenge of planning the integration of Thomson and Reuters, I’ve been giving a lot of thought to the economics of our industry. While as I will argue later, the economics of professional publishing are sound, I have come to the conclusion that consumer media companies are ill-suited to be widely-held public companies over the long run.
My central point is that the pace of change is so rapid in the consumer space and the investments required to keep pace are so large and the payback periods so long, that it is very difficult to reconcile these attributes with the relatively short-term focus of the public equity markets.
In a recent piece in the FT, Jeff Zucker of NBCU complained that the problem with new media is not that they were not attracting viewers at an impressive rate, but rather that traditional media companies were replacing eyeballs which could be monetized in dollars for newer eyeballs that could only be monetized in pennies.
I think Jeff is absolutely right about this. It is certainly not a problem isolated to NBC which, in fact, has been one of the more progressive traditional media companies. You can see the same trend at play at newspapers which are feeling the pinch of a negative arbitrage between print classifieds and online ads, as well as with everyone’s favorite canary in the coalmine, the music industry, which is having to sell a whole lot of 99 cent downloads to make up for the loss of hard-to-pirate CDs.
Let me give you an example of a company that has bucked this trend – BskyB in the UK. British Sky Broadcasting was the News Corp. unit which pioneered satellite subscription television in the UK and over the last 18 years or so has gone from a weak, money draining endeavor which almost sank all of News Corp., to a hugely profitable $9 billion behemoth that dominates the industry.
The pattern is a familiar one to anyone who has followed the media model from the creation of the first broadcast TV stations, through cable TV and now onto the internet. The start-up costs of these endeavors are huge. The early days are spent building up audience reach, and the platform build-out, content and marketing costs dwarf the early revenues.
Now I don’t think it’s a coincidence that a large number of these media companies are either family owned or controlled through a variety of dual class equity or similar structures. In last year’s acquisition of Dow Jones by News Corp. we can see both sides of the equation at work.
It would have been very difficult for most public companies to justify the multiple that Rupert paid for his favorite newspaper – even the Pearson owned FT, which had the strongest synergy case, couldn’t justify the price. But I think the transaction will ultimately yield value for News Corp. shareholders – or at least for their children.
On the other side of the equation, it is precisely because the Bancroft and other Dow Jones controlling shareholders no longer were unified in their defense and promotion of a long-term objective for Dow Jones that they failed to stay the course to transition the WSJ from print to online. Once their will was broken, the market did its job.
Now I happen to believe that, in general, the pressure of being a publicly listed company exerts a positive force on managers like myself. This has certainly been the case at Reuters and I expect it to be at Thomson Reuters as well. However, as I will argue in a moment, I believe that professional publishers like Thomson Reuters, are more suitable entities to be publicly owned.
The core problem of consumer media companies is a mismatch in time horizons. It works well enough for a start-up which can point to leading indicators of revenue such as subscriber numbers or page views, but it works very poorly for established media companies which find they need to transition in a hurry from the old model to the new. Once this transition is underway there is just no way that the new revenues from, say, online advertising, are going to replace the disappearing old revenues from newsstand sales within any given budget year. As Jeff Zucker says, we’re trying to replace dollars with pennies.
Now, the proponents of efficient capital markets hypothesis among you will say that the problem lies not in the core economics, but in the communication to the market. And I acknowledge that, in theory, shareholders should be able to recognize the long time that is required for new media revenues to grow, and give the company
in transition the benefit of the doubt. Unfortunately, I have the public market CEO scars to cast doubt on this.
What I would like to do now is shift gears a little and explain why I think professional publishing businesses are different and perfectly well suited to public ownership – unless of course you believe that we too will have to go to an all-advertising-supported model in a hurry.
For me, the key distinctions are:
1. That this is must-have information and software to do your job;
2. That your professional reputation and millions in value are at stake;
3. That it is often your employer or even an ultimate third party that pays the bill;
4. That you want just the right amount of information, and not too much information, and you want it in a hurry; and
5. That it is delivered at precisely the moment and in the format that fits your professional workflow.
Let me use Thomson Reuters as an example of some of the differences between the consumer media and professional publishing worlds.
Imagine you’re a lawyer preparing for a big court hearing. Imagine one day 99% of all cases and other precedents you need are available online for free, and imagine you can search for them without the first 10 results being Wiki entries or paid retrievals. Would you risk your professional reputation and fee on your opponent not having the one-in-a-hundred case that blows away your argument? Not if your client was paying the research bill. It would be verging on professional negligence not to use Westlaw or perhaps Lexis.
The mission of Thomson Reuters will be simple – to be the number one provider of information and related applications in each vertical industry where knowledge workers need intelligent information to fulfill their professional obligations and do their jobs. Information that is “intelligent” because it provides insight to humans and, importantly in the Web services world, because it can be processed and used by machines. Information that is easily searchable by its tags or metadata, that is expressed in a logical data model and is distributed via published APIs.
I think everyone is pretty familiar with the concept of machine consumption of data – so, for example, it’s not particularly surprising that a majority of foreign currency trading is now handled electronically. Machines on the sell-side called pricing engines which are programmed to spit out two-sided prices all day, and machines on the buy-side – so-called algorithms – which are programmed to execute against this stream. At Reuters we’ve been providing such systems and data for a long time.
It is more unusual that machines are entering into the production and consumption of news. So at Reuters we’ve just introduced a product called Newscope, which uses computers to “sentiment score” news stories so as to permit clients’ trading algorithms to make buy and sell decisions off stories written by journalists.
I give these examples to explain what we mean by “intelligent information”. Once we open our eyes to a world in which not only human beings are potential consumers of, and purchasers of, our information, but the multiple computers and agents that will assist us in everything from our investment activities through our healthcare choices, the opportunities for professional publishers become enormous. And because this intelligent information is needed to make vital, time-critical decisions, as opposed to only entertaining us, individuals and firms are willing to pay real money for it.
From Day 1, Thomson Reuters will deliver intelligent information in each of the Finance, Media, Legal, Tax & Accounting, Scientific and Healthcare markets. Although finance professionals have traditionally paid the most for mission-critical content and applications, lawyers, accountants, research scientists and healthcare professionals will also pay for services that give them the knowledge to act and make them more competitive.
In addition, we will add extra value by providing the platform that lies across these verticals and by combining (or mashing-up) content from different fields to create powerful new services. So, for example, only Thomson Reuters will be able to satisfy the investment needs of investors in the pharma industry with not only traditional financial data, but also indepth content from Thomson Scientific on (say) the probability of success of a given compound in its Phase III trials. Similarly, we will be able to deliver the latest bankruptcy court developments to the distressed debt trader.
These are only a couple of examples of the synergies we expect when we combine Thomson and Reuters early in the second quarter.
I could not be more excited about the road that lies ahead, and am grateful that I have been given the chance to lead what I believe will be the model of the digital content company of the 21st century.
OK – so that was my intro. I now would like to open up the discussion to the floor. I have been intentionally provocative to get a real debate going this morning, so please don’t disappoint me.