Markets & Finance

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

From Standard & Poor's Equity ResearchIf 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! Aids Old Media

To further enhance its already significant presence and opportunities in online video streaming, sharing, and advertising, Google last month announced the proposed acquisition of YouTube for $1.65 billion in stock. This would be the largest and most aggressive acquisition Google has ever made, in our view, and an acknowledgement of YouTube's growing importance. We foresee deal consummation by the end of 2006, pending necessary approvals.

Google isn't the only Internet-based company that helps traditional media companies attract, interact with, and sell to their audiences. Yahoo! has nearly half a billion users around the world and, like Google, operates a top search engine and shopping service. Yahoo! also sells more Internet display advertising than any other company, and has extensive relationships with Fortune 500 media firms.

In addition, Yahoo! has a nascent video offering that features user-generated content. Last March, Yahoo! announced a partnership with CBS (CBS; ranked 3 STARS, hold) to offer content from 60 Minutes. Yahoo! now features 60 Minutes video and other content on its news, sports, and entertainment sites. The two companies are also collaborating on a 60 Minutes microsite. We believe this deal will provide Yahoo! with unique and revenue-generating content, and 60 Minutes with advertising revenues and exposure to a massive and younger audience.

Web Partners is the Way to Go

Although Apple Computer (AAPL; ranked 4 STARS, buy) isn't an Internet company, it also has become an important Internet distribution and money-making partner for TV companies. iTunes is the world's most popular online video store. As of September, 2006, Apple was selling more than 1 million videos a week, with content from more than 220 different TV shows. In September, the company announced a movie download service with more than 75 titles.

In addition, a number of smaller companies sell online video advertising to enable purveyors of online video content to make money from their offerings. We believe Google and Yahoo! also have notable opportunities in this area.

In our opinion, the faster traditional media firms work toward partnerships focused on making money from content, the sooner they will be able to reap the benefits.


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