Let’s imagine it’s 1999. You’re the CEO of the world’s largest media conglomerate, happily leeching money from your cable news network, your britney spears sound-alike franchise, and a few dozen feature films (among other things) and turning a respectable profit in the process. Times are good, you’ve relegated Ted Turner to his penthouse live-in office in Atlanta, and you’re dabbling in the local Cable TV services market; but no one seems to care.
While your juggernaut plugs along at 15% annual growth, you watch in abject horror as Dr. Koop launches some sort of web site which inexplicably blooms to a $2 Billion capitalization overnight — with no revenue. Angry investors jam your voice mail with demands for 100% weekly returns, and inexplicably your cash business is eclipsed by the market capitalization of an Internet Services Provider who lays claim to 30 million internet users — at a time when, arguably, such quantity of ‘net surfers doesn’t even exist. Time for a vacation!
Before your toes even hit the sand, however, you’re yanked back into reality from your Cayman Islands hideaway by Wall St. rumours of a takeover bid from said ISP whose valuation has bubbled to make it one of the largest companies in the world. You find yourself sitting in a room as the tieless, Dockers-clad “visionaries” who run this ISP pick apart your company’s formerly impressive stable of assets as though it were the carcass of some wildebeast. You learn the mantra: “Old Media is Dead; Long Live New Media!”
Rather than fighting the inevitable and angering your investors even further, you decide to play the game and give ’em what they want. You check your retirement clock and remind yourself that it’s been a good run, you’ve assembled a nifty little media conglomerate; and you begin to search for the perfect 46′ sailboat in which to sink the better part of your fortune.
Like a hermit crab, the ISP’s prodigies dump their shell and slide comfortably into yours, expressing no particular interest in making movies (except for some strange production called “You’ve Got Mail”) or quality Lou Pearlmann(tm) productions. Instead, they gleefully continue to ship out hundreds of millions of CD ROMs to every penthouse, cathouse, outhouse, and doghouse in America; citing some fuzzy concept known as “customer acquisition”; and inexplicably writing off the whole thing as “capital expenditure”, so that it doesn’t show up on your company’s rosy EBITDA.
This all raises your eyebrows of course, but what are you to do about it? These, clearly are the methods of the New Economy; so it’s best to just keep quiet and continue picking out the perfect varnish for your schooner. These new kids are running the show.
Deep within the bowels of your huge conglomerate, some of those New Media kids write some software that allows people to share and copy your Old Media products. Rather than trying to sell the software, they give it away — in fact, they give away the source code. Your heart beats wildly out of control and your temples nearly burst. As your fellow old-media cronies happily stomp all over some other music piracy tool called “Napster” you are forced to the sidelines.
Then, one day, the bubble bursts. Advertising sales drop off. There are no more crazy start-up companies who can pay multimillion-dollar “slotting fees” to expose themselves (sometimes literally) to your 30 million (or less) ISP customers. Desperate, the whiz kids decide to explore “creative options” to keep the revenue train rolling. They make deals to exchange advertising with other companies, booking the trades as revenue. They broker ad space for other online companies and book that as revenue, too. Very creative accounting, they tell you.
But as Dr. Koop and Boo and DEN and eVoice and all the rest start to drop like flies the ire of the investment community turns to the Poster Child for all that is On-Line, and eyes the smoldering heap of what once was your company (now a quarter-over-quarter money-loser) suspiciously. “What’s wrong with the fundamentals?” they ask. “Things were looking so promising!” With 9 out of every 10 of your ISP’s business partners dead and buried, any answer you could provide is merely rhetorical.
You turn to the whiz kids who attached this parasite to your company for answers. Peering at you over the plans for their 13-room Chesapeake Bay mansions they offer no solution, save offering their resignation to “pursue other business interests”. As investors begin to lay siege to your voice mail once again you hire more bodyguards and call the suits back in to laboriously establish your restructuring plan.
During a late night session, one of the MBAs comes up with a brilliant idea: Using something called “Good Will” you can essentially shrug your shoulders and shed some of the needless expense from your balance sheet, thus justifying a diminished valuation and setting the stage for positive growth. You ask the MBA how much “Good Will” will be good enough? The MBA says: “All of it.”
So, you do it: you bite the bullet. You take the entire value of your parasite at the time of that once-hallowed merger and you kick it out the door, exonerating yourself from having to answer questions about its profitability (or the absence thereof) for the immediate future. “Good Will” indeed, but the market begins to hammer you into the dirt, and it hurts. You begin to think maybe a 30-footer would be good enough.
Luckily for you, some crazy fools fly 767s into the World Trade Centre and every company gets hammered. With the full-on stoppage in the economy, you take the opportunity to shed some of the cabal of twentysomethings that were installed by the Dockers-wearing set and build a team to restructure some of their now failed operations. Maybe broadband would be a good tie-in for all of your media properties, you surmise.
Things all seem to be hobbling along smoothly until some fools in Texas get caught pinching from the cookie jar, artificially inflating world energy markets, and generally wreaking havoc with the economy. As their own bubble burts, what remains of the investment community starts to scream — echoing their sentiment, every politician in the capitol declares that heads will indeed roll.
As the snowball rolls down the hill, gathering with it telecommunications players, software companies, hardware manufacturers, and any others in its path, you get a distinct tingling feeling. You remember something about writing off marketing campaigns as a capital expenditure. You wonder to yourself: “is that legal?” One of your expensive auditors buys you dinner one evening and reminds you about something to do with your ISP’s “creative accounting.”
It’s too late.
-Ian.