Content, good pricing drove media deals in 2013

Roger Yu | USA TODAY

Nothing gets between Americans and pro football.

It's a lesson learned the hard way by Time Warner Cable as it blinked in its negotiations over licensing fees with CBS on the eve of the NFL regular season debut in September.

If the costly fight — TWC lost 306,000 customers during the third quarter — proved anything this year, it was that owners of compelling content can often steer their destinies even as emerging technologies upend distribution and sales tactics.

Despite tirades about bountiful junk on the Internet and cable and the decline of the legacy media business, investors' money flowed to the producers of TV shows and websites. Even magazines and newspapers got some good news in 2013.

U.S. media and entertainment companies completed $75.8 billion worth of acquisitions and mergers this year, a 47% increase on 2012, according to Thomson Reuters. The number of deals was up, as well — 766, vs. 596 a year ago.

Of course, the relatively stable economy helped spur dealmakers' appetites, and the cheap borrowing environment — not to mention some bargain-basement prices — made more capital available to conduct deals. But various signs indicate that the bet on media is driven by more than broader economic forces.

Some investors found valuation of the target companies ideal as the recovery of the advertising market from the 2008 financial crisis teeters along. Total U.S. advertising spending rose for the fourth-consecutive year in 2013, up 3.8% to $171.3 billion, according to data from eMarketer. A sharp spike in mobile advertising and a steady recovery of TV ads more than offset the continual — and likely, irrevocable — fall in print advertising.

Other deals were the manifestations of companies seeking consolidation — aligning resources with competitors — to fortify themselves against foes and forces that threaten future profits. "Consolidation is happening in every legacy industry," wrote media analyst Ken Doctor, on his website, Newsonomics.com. "2013 was the biggest year of TV station ownership consolidation."

MORE AD MONEY

Even with the talk of appointment TV watching becoming a bit passé, TV producers and broadcasters saw an uptick in ad spending in 2013. But for an industry accustomed to double-digit growth rates, the 2.8% increase in TV ad spending in 2013 — to $66.35 billion — was hardly encouraging. That was a noticeable slowdown from 2012, when TV ad spending grew 6.4%, eMarketer says.

"It's increasing, but at a very slow rate," says Clark Fredricksen, eMarketer's vice president of communications. "Ad-supported TV viewing options are becoming potentially more fragmented and limited."

One area seemingly immune from emerging technology is live sports. Media companies lucky enough to have skin in that game posted encouraging results and pursued expansion efforts this year.

The cable division at Disney, which includes ESPN, posted $1.3 billion in operating income in its most recent quarter, more than half the company total. To compete with the behemoth of Bristol, Conn., Fox launched its own sports channel in 2013, Fox Sports 1.

So it was only fitting that sports would play a significant role in ending the TV industry's fight of the year. With the NFL regular season set to start in three days, on Sept. 2, CBS reached a new broadcasting rights agreement with Time Warner Cable, ending a month-long blackout of the network's shows in several key markets. The two companies had been negotiating for a new retransmission contract, which spells out the amount of money TWC pays CBS for the rights to carry CBS-owned TV stations.

Analysts had predicted that the companies would strike an 11th-hour agreement to avert a blackout spilling into the the NFL regular season and losing lucrative advertising revenue. CBS, citing the popularity of its TV shows, sought higher fees and the right to sell its content to other digital distributors; the network declared victory.

Broadcasters increasingly rely on retransmission fees to make up for sluggish ad revenue. That helped spur deals in other ways this year. Major broadcasters — including Gannett (parent of USA TODAY), Tribune Co., Sinclair and Nexstar Broadcasting — bought more stations, partly in hopes of gaining greater leverage against cable and satellite TV companies at the negotiating table.

Retransmission fees collected by TV station owners rose 38.5% to $3.3 billion this year, according to research firm SNL Kagan. That total is expected to more than double to $7.6 billion by 2019.

Pay-TV companies are also eyeing consolidation, as more customers decide to go without premium TV and rely on video streaming. The trend of "cord-cutting" grew unabated this year, with about 17% of consumers cutting or reducing pay-TV services in the third quarter, according to Digitalsmiths, a video search and recommendation company. That's up from 14% and 13.4% in the second and first quarter, respectively.

Comcast, the largest cable company in the U.S., has had talks with Time Warner Cable about the possibility of merging. Charter Communications is also pursuing a possible deal with TWC in pursuit of a larger portfolio of TV and Internet customers that would give it more clout with cable and TV networks.

PRINT PROBLEMS

The relatively stable economic outlook didn't spill over into the print ad market. Print publishers — while heartened that the rate of decline has eased — continue to be confounded by what seems like an irreversible slide. Newspaper ad spending fell 6.1% in 2013 to $17.8 billion, while magazine ads were relatively flat. That's a slight improvement for newspapers from an 8.4% decline in 2012.

Earlier this year, Newsonomics' Doctor predicted that 2013 would prove to be the year of the great digital "crossover" for legacy media companies — a sober embrace of online distribution coupled with a stepped-up effort to find new revenue sources. The transformation was rough for many, as the year proved that digital ads — at least, without innovation — have a limited upside.

Overall digital ad spending grew 15.7% to $42.6 billion, but that was largely due to mobile ads that more than doubled this year, eMarketer says.

Ad spending on sites delivered via desktop and laptop computers remained flat at about $33 billion this year. Automated ad sales through online ad exchanges helped drive down ad prices. Even as large corporate customers are more comfortable advertising online, they may be increasingly steering clear of click-to-buy banner ads.

Instead, publishers have prominently turned to "sponsored content" and "native ads" — ads tailored to advertisers' wishes and displayed more seamlessly with other content — to replace the slide in more traditional online ads.

At the same time, more evidence surfaced to show that publishers are looking to lessen their dependence on advertising. More publishers are erecting paywalls, charging readers to access their content online. More than 40% of U.S. newspapers will have one in place by mid-2014, Doctor predicts. The New York Times Co., whose moves in the digital realm are carefully monitored, generated more circulation revenue — thanks largely to its metered digital paywall — than advertising sales for the first time in its history. In its most recent quarter, the number of digital subscribers rose 29% from a year ago to 727,000.

The occasional hints that readers and advertisers will pay for quality content — coupled with attractive pricing — may have driven several big names to buy newspapers this year. Amazon.com founder Jeff Bezos' $250 million acquisition of The Washington Post and a $70 million deal by Boston Red Sox owner John Henry to buy The Boston Globe are among the most prominent examples. And superstar financier Warren Buffett also added to his newspaper portfolio this year.