In the biggest strategic change to come out of cable in the past few years – Time Warner announced that they would spin off Time Warner Cable. Strategically speaking, this is big news. The prevailing strategy from cable operators has been owning the value chain. In this case TW owned the content (shows), the production and the distribution (cable facilities). TW’s move away from that strategy is important to the media industry and to consumers since it signals a power shift in the market.
This integration is often pursued to realize synergies or exercise more control over the value chain. Consider movie theaters during the middle of the last century, a single company created the movie, produced it, and owned the theaters where it would ultimately show. When you own the value chain from creation to distribution, you can capture more margin instead of paying a bunch of middlemen between you and the consumer (synergy) and you can ensure distribution for your product (control). Same principle was applied to the strategy of cable operators.
As the highly fragmented cable systems were rolled up into the behemoths that rule today, these companies took the same approach as old-world movie theaters – own the chain. In addition to gobbling up smaller cable system, lock in content and create a channel line up that the company controls. The problem for the cable companies has been that consumers didn’t want to play that way. Consumers wanted choice. Hence the value of owning the whole chain was reduced, not necessarily ruined, but definitely diminished. There is still great value in vertical integration, even if the company doesn’t realize the full value. What is amazing is the TW decided that they are ready to head in a new direction, now. If a company can’t pursue a tight vertical integration strategy, they begin to look more like a conglomerate, which may be the key to understanding the decision that TW management made.
TW has been under pressure from investors. Conglomerates always seem hard for markets to understand. While investors get the idea of synergies and how margins can improve, some segment of investors are just looking for the pure-play. A company the size of TW in as many diverse businesses as TW has (Internet, content creation, distribution, etc) is tough to categorize.
Quite honestly, I think that the biggest challenge in managing the business comes down to leadership. If you have a strong leader who can balance driving accountability in each business unit with fostering the synergies between BUs, then you have the best of both worlds. However, that is a very challenging thing to do. GE does it well, but other companies vacillate and I think that without a steady hand steering it is easy for a company to loose it’s way and have a group of underperforming assets.
With this first step away from vertical integration, I wonder how far TW will go. There seem to be lots of potential decisions in-play. Given all the focus on Yahoo! / MSFT / Google, and the performance of the AOL unit, I’m sure that an AOL spin off is on the table again (the recent gains that AOL has made in traffic bode well for a “we bottomed out and AOL is all up from here” message to a buyer).
There is a lot of upside for the cable industry, first within the core business, then in the move to more business customers, and ultimately rounding out the rest of communications package. I do wonder how much of that a company can and should do themselves and where they should partner.
