Sector Overview: Media

If 2007 was an unpleasant year for the Media industry, 2008 was no better. The economic headwinds troubled not only the traditional media companies, but the new media companies as well and stock prices have slipped by 15%-60% over the year. Here is a quick analysis of the year that was for my top eight media stocks.

Google (GOOG) is one of the biggest names among the new media pack. Its market leadership in search advertising has helped ensure that it continues to beat the market’s expectations about quarterly results. Yet, the stock had slipped to a three-year low and recorded a 60% erosion in its market value since the beginning of the year. Going forward too, the conditions don’t look any better. Recent announcements from the company also suggest a slowdown as it starts paring down jobs and other expenses, and an end to Googlemania.

CEO Eric Schmidt is showing signs of moving on. On Wednesday, 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 they 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! (YHOO) is still struggling with leadership issues. Even though, finally, Jerry Yang has stepped down after being criticized for not accepting the Microsoft (MSFT) deal, the successor’s name has not yet been officially announced. Rumor has it that Arun Sarin, ex-CEO of Vodafone Group, is in the running for the job. Hopefully, the new CEO would be able to get Yahoo! back on its feet.

News Corp. (NWS) had been speculated as a potential white knight for Yahoo! to help 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 until the last quarter, it finally succumbed to the pressures in the recently announced quarterly results. News Corp. 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, which has made a nice transition to the web.

Time Warner (TWC) and IAC (IACI) were two other companies which did some serious restructuring to help improve shareholder value. It was quite ironic though that the market conditions are such that both stocks hit record lows this year.

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

In the meantime, Time Warner is all set to separate its Cable division by early next year to become a pure content player. The company, however, still needs to take the big decision of hiving 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, though, the current market conditions are not easy grounds to ensure success of its strategies. With brands like 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 rattled continuously by big shocks, CNN viewership continues to rise both in TV and online.

Of all the companies, Viacom (VIA) probably has one of the most well defined digital strategies, which focuses on strengthening popular brands by acquisition and improving the quality of content, without letting go of innovation. That is one of the reasons that, despite market conditions being so bad, it continued to outperform expectations and beat its peers in the recently announced quarter results.

Disney (DIS) is also trying to stay in tune with the digital music. Its tie-up with Apple’s (AAPL) iPhone is one such illustration. Its 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 good quality content, and you have a potential leader once the market conditions improve.

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

Overall, the year was not that great for the media industry. With companies like the Tribune Company falling prey to the market conditions and filing for bankruptcy earlier this week, the future for the sector remains shaky, especially for the newspaper sector. Falling ad revenues have been plaguing the industry in the last few quarters. Additionally the burden of debt is quite prominent in some of the players.

Therefore, 2009 will be a tough year to withstand, as the sector copes with the times. However, most of the companies on my top eight list are undeniably strong companies, and with good leadership, I don’t see why they cannot emerge prosperous when markets recover.

Disclosure: None