With broadcasters expanding their businesses into new-media opportunities, finance officers must be careful to avoid using financial analysis of the past to predict the future.
In his recently published Ten Laws Of The Telecosm Redux, futurist George Gilder offers his first law: “Knowledge is about the past. Entrepreneurship is about the future.”
He goes on to explain that “CFOs deal with past numbers. By the time they get them all parsed and pinned down, the numbers are often wrong. In effect, CFOs are trying to steer companies by peering into the rearview mirror. Past numbers do not have anything much to do with future numbers.”
While most people may not see or hear much from CFOs other than when they are reporting historical results, a practice reinforced by financial disclosure laws, this hasn’t been my experience. With CFOs for many of the country’s TV, radio, cable and entertainment companies on the BCFM board, I have the chance to witness firsthand how forward-looking the CFO’s job needs to be. Beyond ensuring that any company forecasts contain the safe harbor caveat concerning forward-looking statements, they are the ones ultimately responsible for the data in the projections that drives annual performance benchmarks and the valuations that determine how much to pay for a prospective station or company.
Let me give you an example. In his Eleven Costly Myths and Misconceptions about Buying Broadcast Stations, Garvey Schubert Barer attorney Erwin Krasnow, who has represented sellers and buyers of broadcasting, cable and telecommunications properties in transactions totaling well in excess of $21 billion, points to the expectation that we place upon our industry’s financial mangers to act as futurists. As the former SVP and general counsel for NAB notes, purchasing media properties based upon future cash flow projections requires an amalgam of market information that can bear little resemblance to a chart that extends past performance trends into the future.
In fact, when the pro formas developed for an acquisition have a trajectory as straight as a pencil, the first raised eyebrows in the room are likely to belong to the industry’s maligned pencil pushers. Krasnow, whose involvement in stimulating minority investments numbered among the accomplishments that earned him BCFM’s Jack Zwaska Lifetime Achievement Award, provides a litany of factors that need to be scrutinized in order to calculate future performance.
Among the volatile factors cited in Krasnow’s Eleven Myths are: lending rates; new competition for ad revenues; changes in federal and state regulation; changes in the station’s culture that can be brought about by the presence of new management; disruptions to sales representative-client relationships; differences in programming costs and how they are amortized; real estate or local zoning changes that can affect towers as well as taxes; and the cash flow multiples that will be used by the property’s next buyer. The only way you can get close to the mark on these factors using a rearview mirror is when you have your back to the target.
While these examples are applied to purchasing traditional media properties, the odds are just as good that CFOs will be also be analyzing investments in new media properties. These may take for form of an acquisition, such as Fox’s MySpace purchase, or follow one of the many examples of traditional media’s expansion into cross-platform content distribution. With content distribution opportunities exploding to include VOD, online and mobile applications, content creation activities are expanding to include massaging source programming to suit these new media formats as well as creating and acquiring content that’s tailor-made for them.
With this in mind, the CFO-centric leadership of BCFM identified “Business Modeling the Internet” as one of the association’s primary educational topics for 2006, and called for expanding the topic to include mobile media in 2007 Conference sessions. While mobile media isn’t novel to companies that sell newspapers on sidewalks or capitalize on drive-time radio audiences, the convergence of digital technologies with our “always on the go” society represents challenges and opportunities for everyone in the industry.
Moreover, new media’s interactive characteristics have also opened up new opportunities for the advertising community. While creating competition for traditional forms of advertising, it also opens the door to entirely new ways for targeting personally relevant information to consumers, toward providing incentives and pathways for purchasing and for creating business models to support them.
At BCFM/BCCA’s first business modeling seminar, held in New York last September, attendees chewed into presentations on podcasts, Web sites and VOD content. Their oft-repeated questions about the financial results for these new media ventures reminded me of the “Where’s the beef?” catchphrase from a 1980s Wendy’s commercial that was popularized in everyday conversations and presidential campaign speeches. The industry’s finance professionals recognize it’s their job to determine that there’s steak with the sizzle.
As always, our presenters, including Jonathan Leess, president and GM of CBS Television Stations’ Digital Media Group, and Beth Higbee, senior vice president, interactive for Scripps Networks, were up to the task. So it wasn’t surprising to see the New Year lead off with industry developments such as:
Ãƒâ€šÃ‚Â· Seeing Gannett, McClatchy and Tribune team up to market national Web advertising.
Ãƒâ€šÃ‚Â· The online communities that CBS is creating around its flagship shows.
Ãƒâ€šÃ‚Â· The high usage of community-centric Web sites operated by traditional media outlets.
Ãƒâ€šÃ‚Â· Sinclair Group’s foray into broadcasting TV to cell phones.
A December article in the Wall Street Journal resurrected the “dot bomb” setback of 2001 with the question: “Is ‘Web 2.0’ Another Bubble?” Using Gilder’s logic, it would be a mistake to use financial analysis of the past to predict the future. However, as long as trial and error remains a vital aspect of human behavior, I believe we can rely upon our industry’s finance professionals to reduce the risk of repeating mistakes while capitalizing our successes.
Mary Collins in the president of the Broadcast Cable Financial Management Association, a professional society for financial, MIS and HR executives in the electronic media. Her column appears here every other Friday. She can be contacted at [email protected] or 847-716-7000.