"Creative Destruction" is the term Austrian economist Joseph Schumpeter coined to define the business Darwinism that drives capitalism. The basic theory being that new ideas, technologies, ways of working, organizational approaches and other creative discontinuities spark competition ultimately driving the economy. Through economic cycles of all sorts, across every industry and size of company, creative destruction has played a seminal role in driving growth, productivity and ultimately the economy itself. When the innovations, new ideas and new approaches in an industry become out of balance however, the natural process of creative destruction ceases to work. This imbalance is playing out in the media industry today.
Over the last decade we have seen an unprecedented level of debt fueled M&A activity in media. In the last 10 years we've witnessed the largest roll up of media assets in history by public companies scooping up brands and companies to create media conglomerates that had "scale" and "synergy". Private equity increased it's activity in media deals over this time frame as well, completing the highest number of deals for the most value, that the market has ever seen.
The innovation in debt instruments that created the massive amount of capital to fuel this M&A activity, masked the need for far more systemic and foundational change required in many media businesses as the industry continued the inexorable shift from analog to digital. This debt fueled infusion actually restricted creative destruction as brands, companies and business models that were in dire need of wholesale change, were rolled up into broad conglomerates which were able to cut costs and show short term growth on the bottom line.
This process also held back the growth of innovative brands and companies that were practicing creative destruction in their markets, by thining the revenues, talent pools and resources that would have allowed for faster growth. This is becoming very clear today as a closer examination of many of the media conglomerates show severely challenged balance sheets. To put it distinctly, debt load is not a sustainable business model. It is a short term financing tactic; that requres significant market growth in equity value to work.
So where do we go from here? Well it's a safe assumption that many of the M&A deals done at the height of the market will unwind as there is little if any chance that the firms involved can get anywhere near the value they paid, let alone service the debt load. It's also safe to assume we will see some assets on the market at what would have previously been thought of as unheard of price discounts. It would not be a huge surprise to also see additional bankruptcies as we've seen with Ziff-Davis and Tribune Corp as over leveraged organizations look to get out from under crushing debt loads.
The companies who have been prudent with their balance sheets will benefit. Those that haven't will suffer. I also hope that what we ultimately see come from this is a return to a more "natural" creative destruction where the innovation, new approaches, new technology and new competition come more from media businesses themselves and less from innovations in debt/equity financing.
Update on Friday, February 6, 2009 by Tony Uphoff:
Fair amount of on and off channel discussion about innovation in media based on the "Creative Destruction" post and thread. From my vantage point I don't share an overt cynicism about a lack of innovation in this era of media. The shift from analog to digital, the connected acceleration of integrated media and the emergence of social media and micro messaging platforms are all amazing transitions fueled by innovation. Not all of this is pretty or smooth however. It's also clear that while very challenging and in some cases stark in the reality it brings, the current economic climate is a positive forcing function that is continuing to drive innovation and change in the media business. Media always has been and always will be a business driven by innovators. As often times happens, financial speculators rush into a gold rush post innovation and that in turn creates a winnowing period as it sorts out. I would argue we are in one of those phases right now. This also creates tremendous opportunity however as you will see companies with solid business models but flawed capital structures that will become available in the market.,