The first part of this article will seem a little dated, but bear with me, it leads up to a new point.
Leverage has always played a big role in the media business, sometimes well and sometimes not so much. When media was a relatively stable enterprise, for those lucky few with a protected franchise such as radio or television assets, cable systems, or established newspaper or magazine titles, financial leverage was an effective way to boost equity returns in a limited-growth environment of recurring and predictable cash flow. Those days of “high finance” are far behind us, and limited growth for some of the referenced sectors would be a pleasant daydream to say the least. Where growth is occurring, on the Internet side of the competitive landscape, profits are either still too thin or unreliable to support any kind of financial leverage, and even the largest and more formidable competitors in the field were either not offered or never felt inclined to take on fixed financial liabilities.
And rightly so. With great liability, after all, comes great responsibility, of which media titans such as ClearChannel Communications, the Tribune Company, and Sirius XM Satellite Radio, have served us as perennial reminders. Which is to say, the cushion for any profit erosion diminishes as debt service obligations rise, and the media sector these days is nothing if not volatile. So much so, it seems, that limiting financial leverage is not enough, according to certain perspectives, as even more drastic forms of liability management are being considered.
Two blog articles caught my attention in the past few days, both of which speak to this issue, directly or less so. In Product design debt versus Technical debt, the author (a Silicon Valley entrepreneur and VC), suggests that web design and technology used by digital media companies are a form of “debt,” in the sense that these can, like any form of leverage, constrain the business when the environment turns in a negative direction. In a sector based on the wisdom of “deploy early and often, fail fast, ship and iterate, etc.,” such “debt” may be a detriment and a limiting factor to successful operation. Like financial leverage, it needs to be carefully monitored, perhaps outright avoided, and like any legacy system that can turn into a burden, should be cut loose (i.e. repaid) on a dime.
The other article, unlike the first, actually deals with real financial issues and financial leverage, although it brings to the forefront the limiting and debt-like aspects of equity capital – that’s right, equity capital – in a similar environment of early and frequent deployment, rapid failure, and iteration. In Winner’s Curse: Why Losing A B-School Biz Plan Competition Is Better Than Winning, the argument is made that capital infusions into start-ups are more often than not premature, and can actually constrain business flexibility and progress. “The hottest startup methodologies of today, built around ideas fostered by Y-Combinator and TechStars emphasize giving startups almost no money and encouraging them to get a product to market as quickly as possible in order to get real world validation.” [My emphasis added.]
What both of these articles have in common is not only a focus on flexibility and speed in today’s digital media environment, but a clear sense that positives can quickly turn into huge negatives in an atmosphere of rapid change. A proprietary technology becomes legacy infrastructure in an era of innovation and new market entrants. A great web design is prone to become dated when customers are finding new alternatives and snazzy new features on the Internet every day. A capital infusion can prove to be as limiting in some cases as too much debt in others, if the result is taking the enterprise too firmly down a wrong path.
With a redefinition of media, it seems, there is also a redefinition of leverage underway, and this term is taking on an added element of downside when sector volatility runs high. The news about AOL’s abandonment of infrastructure-heavy businesses, and its focus on a particularly flexible and market-reactive content operation, was news about a leverage reduction strategy, and will be the subject of another article. This was by way of background.
