May 16, 2006

Mediums new and old vying for TV ad dollars

By Diane Mermigas

CHICAGO -- The recent Wall Street rebound of many media and entertainment company stocks might have as much to do with their first bold but uncertain steps through the new-media landscape as with their improving quarterly financial results. Maybe.

It is fair to ask whether big media players are prospering ahead of new media or because of it. Where are core media companies settling in this fast-paced revolution, and how will it continue to alter their financial ledgers?

In truth, it is as risky for investors or anyone else to assess the ongoing strength of such industry titans as Viacom, Time Warner, News Corp. or the Walt Disney Co. on only the short-term financial results reflecting challenged, if not fading, business metrics as it is trying to gauge their digital performance gains using formative interactive measurement and accounting. At least for now, both must be cautiously considered.

This transitional phenomenon might have its most dramatic display yet in the upfront advertising market under way this week in which major advertisers will be wrestling with how much of their spending to bet on stagnating and even declining viewership at the broadcast and cable television networks.

So, Johnson & Johnson's withdrawal from the upfront process -- in a desire to more thoughtfully redistribute its $500 million in network TV dollars -- is not so much a negotiation ploy as a strategic recognition of changing tides of media spending and values. And it won't be the last.

While the television networks will strain to match last year's $9 billion upfront advertising commitments, they also are placing their bets on an array of digital platforms and devices to which they are extending their branded content that could represent as much as 8% of that spending, analysts say. That ranges from new online streaming program networks (such as NBC's new comedy broadband channel and TV 360 digital platform and CBS' InnerTube.com) to single paid downloads on iTunes and Web sites to cable ad-supported video-on-demand, cell phone mobisodes and digital content subscription services where revenue has nowhere to go but up.

But even with an estimated one in five television programs now having some digital extensions, broadcast and cable powers-that-be can't seem to move fast enough. The same TV series advertisers buying 30-second spots also are buying page views and other cyber exposure via Web sites, cell phones and video games, where the value propositions are very different.

Television executives say they will be tickled if the networks overall can match last year's upfront pricing and volume in an eclectic media environment in which ad sales at MySpace double every three to four months, and ads on the front page of Yahoo! command $1 million. Even the nascent broadband video market could generate as much as $1 billion in ad revenue this year, underscoring advertisers' unfettered embrace of the unknown.

While television remains a powerful commercial and artistic force, the credibility of its business model -- from the way it monetizes and produces content to the way it prices and sells advertising time -- faces serious challenge from interactive media that has better justified economics.

In fairness, the digital transformation is occurring at such a rigorous pace that even the so-called new media giants such as Google, Yahoo! Inc. and Microsoft already are wrestling with growth and transition issues of their own. Yahoo! and Google stocks are now way off their former highs as they ponder ways to grow their core ad-supported search services. Even with $50 billion in cash reserves each, Google and Microsoft concede that they must brainstorm, not buy, their way into their next new-media paradigm.

As the networked home becomes the networked world, the lines of distinction will blur among various forms of content, advertising and distribution platforms. When that occurs, all of media's buying and selling propositions will have to change as media thrives off of a single economy.

The fact is that, even now, new and old media companies are scrambling for the same domestic $186.5 billion in advertising and $405 billion in consumer spending, each growing at 6.7%, according to PriceWaterhouseCoopers, which soon is expected to upwardly revise its estimates.

The increasingly important distinction that will continue to drive advertisers and consumers to such newer interactive media platforms as digital cable, cell phones and streaming Web sites is the accountability, communications and interaction that will continue to redefine media and build new value.

Trying to create an interactive financial measurement matrix for one-way broadcasting can't happen soon enough, either by closing the return loop back to consumers through an alliance with cable operators, Internet providers or some other means. It is essential because the broad and deep sweep of user data provided by interactive media platforms surely will become the basis for future economic modeling, assessment and pricing.

The smart media players already have begun staking their claim on new-media revenue, even if some of their early initiatives appear contradictory or short-lived. For instance, single $1.99 TV series downloads eventually will give way to monthly bulk download packages that span across most media platforms, simply because thrifty consumers will demand such a service.

In light of such shifting value propositions and spending, News Corp. president Peter Chernin and Disney CEO Robert Iger were right to assert during a recent industry conference panel discussion that their objective is to follow the money into developing new-media platforms rather than trying to protect their more traditional media businesses from inevitable transformation. But the challenge they face is tricky business indeed, given that so much of the creative pool feeding the new digital pipelines is the conventional television and film businesses under siege.

It would not be surprising if, by decade's end, all of the content distribution and replay opportunities outside of television's traditional primetime schedule and outside of film's initial boxoffice premieres collectively matched those core revenue and content resources, both of which will continue to be an important part of the entire media mix.

With advertisers already spending on the Internet one-third as much as the $60 billion they spend on all television, which is on the decline, these developing trends can't help but eventually show up on corporate balance sheets, though industry executives and analysts are hesitant to forecast exactly how.

For instance, News Corp. has said it will generate at least $350 million in new-media revenue this year, which could represent more profit than is produced by the Fox Broadcasting Co., which generates much of the content cycled through cell phone, Internet and other new-media outlets.

Merrill Lynch analyst Jessica Reif Cohen estimates digital businesses will account for as much as 9% of the earnings, 20% of the cash flow of such traditional media giants as Disney, News and Viacom by 2010, and as much as 21% of the earnings and 47% of the cash flow at Time Warner, because of its asset mix.

The telephone companies' aggressive entry into video alone will create nearly $4 billion in incremental value for the same media companies with cable network exposure, adding as much as 1.7% to their equity value, according to CitiGroup analyst Jason Bazinet. Online and console video games, which are expected to double Hollywood's waning $9 billion boxoffice receipts, also will be a growing source of revenue for content players.

By decade's end, the media giants still in control today will have made significant changes in their operations, business models and balance sheets based on the digital broadband revolution under way. And they all will co-exist with smaller, more spry competitors in such places as local media, consumer-created content, interactive ads, electronic commerce and peer-to-peer sharing.

That interconnected media realm will render a clearer sense of how and where revenue and profits will be generated at individual companies and on individual media platforms and devices. It will involve a complete re-evaluation of media content, time, space and economics. Until then, making money in the media world -- as well as assessing a company's ability to effectively compete -- will be a bit uncomfortable and uncertain as long-held assumptions and rules disintegrate.