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November 16, 2005 5:00 pm

Rakuten states case for TBS merger

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In a country where hostile bids were unheard of until recently, Japan has this year seen two controversial merger attempts by internet start-ups for some of its largest TV networks.

This year, Livedoor, a fast-growing internet services group, acquired a 35 per cent stake in Nippon Broadcasting Systems, a radio group, but made no secret that its real target was Fuji TV, an NBS subsidiary.

Last month Rakuten, operator of Japan’s largest internet shopping mall, quietly emerged as the largest shareholder in TBS, Japan’s third-largest TV group, with a 19 per cent stake and a proposal to merge with the broadcaster.

Such moves beg the question whether there is method to the internet companies’ madness.

In Rakuten’s case, Hiroshi Mikitani, chief executive, has outlined the strategic arguments for a merger between his company and TBS in a 115-page document.

Mr Mikitani says TV broadcasters are facing major changes to their business environment that he believes will force them to rethink their current business model.

The spread of the internet and the availability of new technology are already reducing the value advertisers see in buying TV airtime, he says.

Although people still spend more time watching TV than other media, Mr Mikitani says, the amount of time they spend on the internet is growing much faster than TV, especially among people in their 20s, 30s and 40s.

“We believe there is a possibility that this structural change in the viewer profile will have an impact on broadcasters’ profitability,” states Rakuten’s proposal document.

Furthermore, DVD recorders are making it easier for users to skip TV advertising.

According to figures quoted in the document,
45.5 per cent of those who own a digital video recorder skip all commercials while an additional 36 per cent do so frequently.

The value of TV broadcasters as distributors of content is also set to decline as digitalisation makes it easier for anybody to offer high-quality programming through a range of distribution channels.

To survive in this environment, TBS will need to invest substantially more in developing compelling content. For that it needs to enhance its business scale and fundraising capability, Mr Mikitani says.

An internet company like Rakuten can help TBS face these changes, Mr Mikitani argues, by providing skills in database marketing, which would enable TBS to provide more targeted advertising and help generate actual purchasing activity.

Tying up with Rakuten would give TBS direct access to its 30m-strong online membership as well as new platforms for its content.

Such arguments, however, have not impressed TBS’s management, which instead has accused Rakuten of being mainly interested in the group’s cash flow.

In addition to annual operating profits of about Y20bn ($168m), the redevelopment of the site of the broadcaster’s headquarters in central Tokyo alone is expected to earn Y5bn-Y6bn in operating profits a year – a stable source of cash in an advertising slump.

Although there is general agreement that TV and the internet are converging with the spread of broadband communications, the consensus among analysts is that a merger would benefit Rakuten more than it would TBS.

With future growth in TV advertising expected to be limited, “TBS has to increase non-broadcasting revenues, so they don’t necessarily have to reject Rakuten”, one analyst says.

But in terms of raising ad revenues for TBS, Rakuten’s merger proposal is not convincing, says Masaru Ohnishi, analyst at JPMorgan in Tokyo. “I think there is very little incentive for TBS.”

A merger with Rakuten would also make tie-ups difficult with other internet services groups, such as Yahoo Japan whose Y117.8bn in sales dwarf Rakuten’s Y45.6bn.

“I don’t think TBS should form an exclusive tie-up with one internet company. I think they can do better by tying up with other groups as well,” Mr Ohnishi says.

For Rakuten, which has grown mainly via acquisitions, TBS would instantly add revenue growth, substantial real-estate assets and human resources.

If Rakuten can also get its name or logo on TBS programmes, it would provide a huge boost to its brand recognition, analysts say.

TBS, which has said it would respond to Rakuten’s proposal by the end of this month, is widely expected to reject the merger proposal, potentially triggering a costly takeover bid by the internet company.

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