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Sector Overview: Media

Posted on Wednesday, Dec 10th 2008

If 2007 was an unpleasant year for the media industry, 2008 was no better. The economic headwinds have troubled both traditional and new media companies, and stock prices have slipped by 15%-60% over the year. Here is a brief analysis of the year that was for my top 8 media stocks

Google is one of the biggest names in the new media pack. Its market leadership in seach advertising has helped ensure that it continues to beat the market’s expectations on quarterly results. Yet, the stock has slipped to a three-year low and recorded a 60% erosion in market value since the beginning of the year. Conditions don’t look any better for the future; recent announcements from Google suggest slowdown as they start paring down jobs and other expenses, and an end to Googlemania. CEO Eric Schmidt is showing signs of moving on. Today he was on CNN, discussing climate change. Quite possibly, he is on the shortlist for the Obama administration’s CTO position. Even the two founders seem bored and are looking for “bigger” challenges like solving the world’s energy problems. It appears that Google may look for fresh leadership next year.

Meanwhile, Google’s next closest competitor, Yahoo!, is still struggling with leadership issues. Even though Jerry Yang finally has stepped down after being criticized for not accepting the Microsoft deal, his successor’s name has not yet been officially announced. Rumor has it that Arun Sarin, ex-CEO Vodafone Group, is in the running for the job. Hopefully, the new CEO will be able to get Yahoo! back on its feet.

News Corp had been speculated as a potential white knight for Yahoo! to save it from the Microsoft bid last year. Today, however, it is a far more challenging economic environment to battle for them. After managing to beat the recession till the last quarter, finally succumbed to the pressures in the recently announced quarterly results.  NewsCorp knows how to succeed in the digital world. Be it through acquisitions like those of Photobucket, MySpace or Dow Jones or through defined vertical strategies. If you keep the macro conditions aside, this is one of my preferred traditional media companies that has made a nice transition to the web.

Time Warner and IAC were two other companies that did some serious restructuring to improve shareholder value. It is ironic though, that market conditions are such that both stocks hit record lows this year.

IAC finally managed to go through with their longtime plan of splitting into five companies. They also seemed to be getting a hang of monetizing they assets as they did major redesigning of Ask.com during the recent quarter. Acquisition of Dictionary.com also helped them beat market expectations with revenue growth of 10% over the year. However, given that the restructuring came at a cost, IAC ended up reporting a Q3 loss of $0.11 per share. 

Time Warner, meanwhile, is all set to separate their cable division by early next year to become a pure content player. But they still need to make the big decision to hive off AOL. Again, rumor has it that Yahoo! is looking at acquiring AOL, but nothing will happen until a new CEO takes over at Yahoo! Time Warner does have a well-defined digital media strategy focused on taking advantage of the strong and continuing secular online trends to grow its advertising revenues. Unfortunately, the current market conditions are not easy grounds to ensure success of such strategies. But with brands such as CNN and Time in its arsenal, the stock though should be able to bounce as soon as the market sees some positive vibes. In a world that is being continuously rattled by big shocks, CNN viewership continues to rise both in TV and online.

Of all the companies, Viacom probably has one of the most well-defined digital strategy, one which focuses on strengthening popular brands by acquisition and improving the quality of content, without letting go of innovation. That one reason why despite market conditions being so bad, Viacom continued to outperform expectations and beat peers in the recently announced quarter results

Disney is also trying to stay in tune with the digital music. Their tie-up with Apple’s iPhone is one such example of such efforts. Their diverse portfolio (Parks, Resorts and Studios) and outreaches into geographies of India and China have helped them fight off the recession to quite an extent. Add to that quality content, and you have a potential leader once market conditions improve.

Comcast is another player which has good strategy, although it sometimes misses out on implementation. While 35% stock value eroded in 2007, the current year was relatively better, given that Comcast recorded a meager 16% erosion even under extremely unfavorable market conditions. This year, they acquired Plaxo and DailyCandy to spruce up their vertical and community-related offerings. In fact, Viacom was one of the few companies to beat the market’s expectations in its last quarterly result announcement. Revenues grew 10% annually and EPS grew to $0.26 compared with $0.18 a year ago. When others were revising their outlook downwards, Comcast reaffirmed their annual outlook of 8-10% revenue growth for the year. Comcast also benefits from excessive television viewing during these troubled times.

All in all, the year was not that great for the media industry. With companies like the Tribune Company falling prey to market conditions (it filed for bankruptcy earlier this week), the sector’s future remains shaky, especially for the newspapers. Falling ad revenues have been plaguing the industry in the last few quarters. Additionally, some players have significant burdens of debt.

2009 will be a tough year, as the sector copes with the times. However, most of the companies on my Top 8 lists are undeniably strong ones, and with good leadership I don’t see why they would not be able emerge prosperous when markets recover.

This segment is a part in the series : Sector Overview

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