Globalised business and the limits of media regulation

The German state media authorities have published the study on the influence of financial investors on the media. I have already been discussing it at length in some previous articles (19 March, 3 April, and 14 April).

The 328-page document, prepared by reputable researchers from the universities of Hamburg, Munich and Zurich, basically comes to the same conclusion as I did before: When you look at it from the perspective of media pluralism and public value, there is no discernable difference between financial and strategic investors. Both categories of owners go for economic profit, and neither make it a general practice to directly influence editorial content. Major ethical problems could therefore not be detected.

Of course, the economic situation of a media company indirectly sets the framework for editorial content. The funds available affect how much time journalists spend researching and writing a story, how many of them can be employed and how qualified they are to do their jobs. The same holds true for entertainment content accordingly. But again, that’s not a specific trait of companies owned by financial investors.

Conclusions drawn by the authors of the study are therefore quite tame and restrained. They basically suggest that German legislators more clearly define which kind of public service they expect from commercial broadcasters, rather than introduce rules concerning which type of investors may own the media.

While this result at first glance seems a bit underwhelming and obvious for a six-month, €100,000 inquiry, it was necessary to perform the study in order to move the debate in German media politics back to an empirical, concrete basis and to take the sometimes hysterical overtones out of it.

The authors explain in detail how financial investors work and take a close look at a representative number of case studies from Germany and other countries in order to determine typical strategies of hedge funds and private equity.

However, the study only assumes a system-immanent point of view, analysing exclusively what happens to the affected companies during the lifespan of a short-term financial engagement. While massive changes in management style occurred, most of the specimen cases were not found to have massively reduced staff nor to have lowered ongoing investments.

This is not really surprising, because the financial investors’ exit strategy normally assumes that the company must be made up to become highly attractive to the next potential buyer who is expected to pay a much higher amount of money than the current owners have put down for it.

A TV station, for example, will only be seen as a lucrative business opportunity if it retains attractive programming and high-quality series, movie and sports rights. A cable company will only appear as a sure-fire investment if it upgrades its network to digital transmission capacities and Internet access.

So, of course, in most cases, financial investors make sure that a company continues to operate properly and that its earnings before debt service and depreciations (EBITDA) go up. If that’s only possible for the price of lower wages, higher staff workloads, and major streamlining efforts – tough luck for those employees. But it has nothing to do with media regulation as such.
The real questions about hedge funds and private equity investors (or at least about the ruthless kind) are conveniently not asked by the authors of the study: (1) Is what they do in the sustainable interest of the affected company? (2) Is it good for the domestic economy and marketplace? And (3) is it at all ethical?

It can be argued that the answer to all three questions is no. The financial investors’ strategy to overly indebted companies in order to draw huge dividends out of them basically destroys value in the companies’ home country. Because most times, this means that a formerly profitable, corporate-tax paying firm will not be paying any taxes for the foreseeable future, since all earnings can be set off against the debt service. And paying back huge debts would not have been necessary in the first place if the company had just been left alone.

And whoever eventually takes the company off the financial investors’ hands might notice that he overpaid only when it is too late – when, e.g., it turns out that major sports rights are too expensive to ever amortise, or that there is no consumer demand for Internet access over cable. A lot of such activities are actually more PR than business. That means that there even could be a kind of chain reaction later on, where third parties are drawn under out of ignorance or sheer stupidity.

What may be needed therefore is an initiative to better extend corporate governance to public value considerations – not only in the media. Media regulation, however, would clearly be overtasked with a task like that.