Old Media and New Media: Friends, Not Foes

Search and advertising services from Google and Yahoo! are helping traditional media companies extend their content online and generate revenue

by Scott Kessler From Standard & Poor's Equity Research

If content is king, then its queen is making money. This marriage of substance and sales has driven progress and profits in the media world for decades. The Internet has been and will continue to be no different, in our view. This is why we believe Internet companies that enable and promote revenue generation from their content should be viewed as critical allies of, not necessarily competitors to, traditional media companies.

Despite a growing population, TV and radio audiences have been declining in the U.S. Movie ticket sales peaked in 2002, and magazine and newspaper circulations have been trending lower for half a decade, with revenue and earnings growth stagnating.

Conversely, from 2000 to 2005, the number of U.S. households with Internet access rose 31%, and the number with broadband access increased more than sevenfold, according to Forrester Research. Internet advertising revenues jumped 55% during the same period, according to the Interactive Advertising Bureau. From 2001 to 2005, spending on Internet content nearly tripled, according to the Online Publishers Assn. We view this as impressive, considering that the Internet bubble burst in 2000, and the industry really didn't start to recover until mid-2003.

Extending Content's Reach

This shift in consumer consumption to online media from traditional media has spawned a change in expenditures, and, we believe, companies such as Google (GOOG; ranked 4 STARS, buy) and Yahoo! (YHOO; ranked 3 STARS, hold) have benefited handsomely as a result.

Some have suggested that certain Internet innovations reduce the value of content and the companies that create it. Search engines, for instance, allow Web surfers to find free content that might otherwise have been sold. Peer-to-peer networks enable users illegally to download copyrighted music and video content. YouTube streams more than 100 million free videos per day. At no charge, Google users can download and print books.

There have been complaints that the Internet has made it impossible to sell content. While there is some truth to this statement, we believe the Internet also enables media companies to reach readers and generate revenue from content in new ways.

Google Primed for Profits

Google's search engine attracts hundreds of millions of unique monthly users and helps them find specific content—often on media-company Web sites that include plenty of advertising. Google Video (a link to which first appeared on the company's home page in August, 2006) lets users search for, discover, and watch digital videos. The company's Froogle Web site allows people to find and purchase books, CDs, and videos. Media companies also use Google's services to target users, based on their searches.

Google also sells advertising on media-company Web sites. In August, Google announced an online advertising pact with News Corp.'s (NWS; ranked 4 STARS, buy) Fox Interactive Media, which includes the popular MySpace social-networking business. Google will provide search and display advertising services to Fox Interactive's Web sites. Google also announced it would distribute ad-supported video content from MTV Networks (owned by Viacom (VIA.B) to a network of Web sites.

We think these relationships could serve as the foundation for Google's efforts to make money from video content. In our opinion, Google is very well positioned to pioneer a new Internet video-advertising model because of its substantial online traffic, technology infrastructure, and expansive networks of advertisers and Web publishers.

Yahoo!