Challenges Ahead for Vivendi’s New CEOPublished: July 31, 2002 in Knowledge@Wharton
Vivendi Universal’s Jean-Marie Messier, a very public casualty on the information superhighway, is buried alongside other such supposed media industry visionaries as AOL Time Warner’s Robert Pittman and Bertelsmann’s Thomas Middelhoff. Yet Vivendi differs significantly from these two companies. A water utility that tried to transform itself into a global media powerhouse, Vivendi and new CEO Jean-René Fourtou are in a life-threatening struggle for survival.
Vivendi’s expansionist strategy effectively ended with the ousting of CEO Messier a month ago. His removal comes at a time when other media mega-mergers are being buffeted by everything from concerns over accounting procedures to questions about strategy and leadership.
At Bertelsmann, for example, the firing of CEO Middelhoff earlier this week reflected sharp differences in business philosophy between Middelhoff and the company’s controlling shareholders, the Mohn family. Since his appointment in 1997, Middelhoff had embarked on a series of deals that turned the company into the world’s fifth largest media group. His plan to take the company public over the next few years, among other initiatives, ultimately alienated Bertelsmann’s top shareholders and led to his removal.
In Vivendi’s case, the strategy that led to Messier’s downfall and created the current crisis for Fourtou was different. "Vivendi is a conglomerate that put together a lot of unrelated businesses,” says Wharton business and public policy professor Gerald Faulhaber. “In my view, there are only two conglomerates in the history of the industrial revolution that worked – ITT in the 1960s and 1970s under Harold Geneen and GE under Jack Welch in the 1980s and 1990s. Each had an unusually strong personality and was a control freak. Once Geneen left ITT, it broke up. I predict the same for GE now that Welch is gone. Messier was no Jack Welch. Vivendi is one of a hundred failed conglomerates. Media is a tough business. You can’t go in thinking you will just make a lot of money. A lot of people have tried, and a lot have failed."
Vivendi, he adds, “needs to decide what business it’s in. You have to focus on something, and I don’t see any particular value in owning a telecom company.”
Under the Messier regime, Vivendi spent close to $100 billion acquiring interests in film, music, publishing and the Internet, racking up close to $19 billion in debt along the way. The challenge now for Vivendi’s leadership is to restructure and reduce that debt by selling off some combination of assets. Exactly what Vivendi will look like once the tough cost-cutting decisions are made remains to be seen.
Vivendi is currently in three businesses:
• Content, through its Universal Pictures, Universal Music Group, Canal Plus Group (the French pay television and film company) and Houghton Mifflin publishing company
• Distribution, through its cash-spitting telecom business, mainly in France (fixed-line Cegetel, 44%-owned by Vivendi; mobile SFR, majority-owned by Cegetel; and through them Télécom Développement, majority-owned by French railway operator SNCF) plus cable TV
• The utility business/water company, Vivendi Environnement, of which it now owns only 42%.
"I wasn’t surprised that Messier is already out of Vivendi," says marketing professor Jehoshua Eliashberg. The merger between Vivendi and Universal “was not likely to work, because you can’t have businesses together that sell electricity, water and entertainment. It makes no sense.”
Content, distribution, utility: What’s Vivendi to choose? Faulhaber, for one, remains skeptical about the Internet (and thus Vivendi’s copper pipelines) as the next distribution channel for film content. “There’s a misunderstanding [at Vivendi] of the video marketplace. Internet is not a good medium for video,” although, he adds, “people often talk about delivery of content [over broadband connections], billable or not, and typically as some sort of video.”
Phone companies’ ADSL service is a broadband connection over the twisted copper pair of phone lines installed in nearly every home in Western Europe and North America (and Latin America) – but rarely with the ADSL capability. Cable companies also offer high-speed Internet access, but over their coaxial connection. Vivendi is a player in the phone, but not the cable, market.
Two Distinct Paths
“Models are very few,” observes management professor Bruce Kogut, co-director of the Jones Center for Management Policy, Strategy and Organization. “Charging for content – including the Hollywood successes of Universal, plus the large music library that Vivendi owns – was the big hope. It seems to work, but it’s not really radical.” Kogut points a finger at the Baby Bells, noting that they don’t seem “anxious to install competitors’ equipment.” According to a late 1990s FCC decision, so-called “competitive local exchange carriers,” or CLECs, were to be allowed to co-locate equipment on incumbents’ premises. This co-location hasn’t happened in any significant way.
France’s regulator, ART, has also mandated co-location as well as resale of the local copper-wire loop, and has licensed new operators to offer wireless local loop service. All to little avail. In terms of co-location, at a meeting with FCC and ART officials in Paris in December 2000, incumbent France Telecom raised such prickly issues as parking spaces at its exchange offices, wondering how they would be shared with newcomers co-locating on their premises.
The Bells haven’t been models of broadband roll-out, either, and France Telecom may be imitating the Bells. In a verbal agreement with the FCC, for example, when SBC bought Ameritech in the late 1990s, the regulator asked the new company to offer ADSL service over its entire territory within three years – by 2001 or 2002. This ADSL roll-out has not happened in SBC’s U.S territory; one report puts ADSL penetration in the U.S. at 1% of copper-wired households. In Europe, the penetration is likely similar.
At the same time, the demise of the U.S.’s CLECs unleashed a raft of barely used exchange equipment on a market where, since then, the Ciscos and Lucents of this world have been unable to sell new gear. Consequently telecoms and IT equipment-makers have suffered substantially.
Looking at both Vivendi’s past and future, management professor John Kimberly, who has spent the last three years on the INSEAD campus in Fontainebleau, France, sees Messier as a CEO who very quickly sought “to radically transfer a long and reasonably distinguished very French company – Compagnie Générale des Eaux –into a media and entertainment business.” And what happened to Messier, says Kimberly, “is what happens when you try to produce radical change.”
Kimberly believes that there are “two paths that Fourtou can go down: return to the roots [in utilities] if – and only if – the return on assets at the holding-company level is not as strong as it should be, and if they shed all unrelated assets. The other [path] is to say, ‘Okay, this media and entertainment strategy is right,’” so the other non-related pieces should be sold off.
While new CEO Jean-Rene Fourtou is still formulating an overall strategy for the company, he did announce a plan last week to split the Canal Plus Group into two. One part would be a new entity, to be listed on the Paris stock exchange, that would include Canal Plus, the premium pay TV network, along with a satellite distribution company, cable operator and film production unit. The second part involves selling off cable TV operations outside of France, where Vivendi was losing huge amounts of cash.
Ownership of content, particularly in a digital environment, has been for many years a thorn in the side of media players like Vivendi and AOL Time Warner. Do you, as the owner of “Gone With the Wind,” for example, really want a digitally perfect copy of the film you own to be stored on a video server somewhere else in the world? As long as films – celluloid heavy-weight copies of movies – are trucked around, you know where your property is, and (more or less) who’s using and viewing it. Once your property becomes a string of zeros and ones, streamed out across the Internet, what’s the value of your ownership?
Yet according to Faulhaber, “Content is not king,” a point he has made in reference to the recent problems of other media mergers like AOL Time Warner. Why? Because “the Internet is built on peer-to-peer” networking technology, he says. AOL makes money by “keeping people in touch with each other. They never will be showing movies.” 3G (or third-generation mobile services, for which Vivendi through subsidiary SFR bid heavily) is, again according to Faulhaber, “a non-starter. … Show me the application that needs broadband mobile connectivity.”
“It’s not obvious that [the] content and infrastructure business[es] have to be together,” adds Kogut, noting that it’s “harder to own content in Europe.” He also believes that the water utility business is important because France is one of the few countries in the utility industry to be “globally competitive.” And he points out that Vivendi Environnement was still buying overseas water utilities until May of this year.
Kogut, whose book, The Global Internet Economy, is due out at year-end, sees what he politely calls a “cash problem” at Vivendi. He views the Internet as a “great success, but an economic failure. Most of the traffic [on the Internet] is e-mail” – and what are the profit margins on providing that service? Vivendi’s Télécom Développement (TD) sees huge data traffic growth, but is it profitable? (TD, in some ways, could be compared to WorldCom’s UUNet, although TD carries circuit-switched traffic, including ATM cells, as well as Internet traffic.)
Gambling applications, Kogut thinks, are a possible money-maker, and somewhat painfully admits that pornography is another profit-driver. “In Korea, for example, pornographic content is surely a beneficiary of broadband access,” he says.
To avoid the dot.com/telecoms graveyard, Vivendi is having to line up financing. Debt repayment deadlines loom just as the return-on-investment timeline is getting shorter. Fourtou – who hails from the pharmaceuticals industry, where he oversaw a transatlantic acquisition that brought the U.S.’s Rorer under the umbrella of Rhone-Poulenc, the company he formerly headed – must be struggling for long-term telecoms/media vision at the same time as he tries to staunch short-term cash flow hemorrhaging.
Along with selling off minority stakes in cable distribution in Europe, Fourtou needs to decide on which industry Vivendi Universal competes in: content, distribution, or utility. Kimberly sees some “interesting dynamics” ahead in terms of Vivendi’s board. And, regarding Fourtou, he guesses that “he won’t go the way of keeping media and entertainment.” He predicts that Fourtou is “going to be whipsawed by those who still are concerned about the [Messier] move to New York.”
Vivendi, like AOL Time Warner, is a business case waiting to be proved. Fourtou is reining in the ambitions. But technology may overtake him. And he seems to have accepted that Vivendi, unlike AOL Time Warner, is a “domestic” company, obeying its French roots.