Tuning Out Media Stocks

January 19, 2008 - 5:00PM

(bettertrades) - DVR, IPods, video games, along with a slew of other alternative entertainment sources are wreaking havoc with media conglomerates, and there appears to be no end in sight. The global slowdown has slashed advertising budgets across the board, sending media stocks into a tailspin.

Since September 19th, shares of Walt Disney (DIS) are down 49%, News Corp (NWSA) is off 58%, and CBS (CBS) stock has plunged 63%.

Consumers are clearly migrating away from broadcast television. Operating income at CBS dropped 52%, 42% at News Corp, 34% at Walt Disney stations, and 9% at NBC Universal.

The global slowdown has spread to cable operators as well. Yesterday, Comcast (CMCSA) reported Q4 quarterly income fell 32% to $412 million, or $0.14/share, from $0.20 last year. The stock slipped on word that the cable provider will cut its 2009 capital spending budget below last year’s total due to weakening subscriber growth. A $600 million write-down charge associated with its Clearwire investment slammed quarterly profits. Ex-items earnings were $0.27/share.

Print media revenue has been falling off a cliff as more readers transition to the internet. Yet online advertising income has slowed after years of swift growth. Last month, the New York Times Company (NYT) reported a 48% decline in profits while online sales declined for the first time.

Traditional print media firms have been banking on a transition to online distribution to right their sinking ship. The conversion has been slow. As of its latest quarterly report, New York Times’ online earnings account for just 12% of total revenue.

If the print media business model is broken, and a widespread downturn in ad spending persists, the survival of such iconic media outlets becomes a viable question.

The cyclicality of media stocks has usually explained downturns in advertising spending. But a clear shift to alternative sources of entertainment and the DVR present new systemic obstacles to the conventional revenue generating model. Instead of purchasing or subscribing to a newspaper or magazine, consumers are downloading articles and podcasts to Ipods and mp3 players. Instead of tuning into a favorite show at its broadcast time, couch potatoes are recording it and watching at their convenience. Even if economic activity picks up, will advertisers be willing to pay up for commercials that are being fast-forwarded through via DVR?

Wall Street is sending a clear message to the sector. Investors are unloading shares of media stocks at a furious pace as the question of how these companies will evolve with the changing dynamics of the advertising market intensifies.