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Look for the likes of News Corp. and Time Warner to hunker down and wait for rivals to fold first
The media industry used to worry that ad dollars would disappear, but what was merely feared is now an accelerating trend. Barclays Capital (BCS) forecasts a 10% decline in U.S. ad expenditures—the worst since the Great Depression—and consumers continue to spend less. Recently a senior executive at a major magazine company told me the first half of '09 will likely bring a 30% decline in ad pages. Companies from book publishers to broadcasters are bracing for serious hurt. Declining trendlines and heavy debt loads, taken on in rosier times, leave the likes of Univision, Clear Channel, and the now-bankrupt Tribune Co. under severe pressure.
Still, there remain big companies with billions in the bank, among them News Corp. (NWS), Comcast (CMCSA), and Time Warner (TWX). You might think that, given the sector's depressed valuations, the more enterprising among them would start chasing big deals. More fancifully, you might imagine that fed-up lenders, tired of debtors who can't make their payments, would start seizing assets and forcing sales in hopes of getting something —anything— back from their investments.
But you'd be wrong. Look instead for several months of stasis and for what we might call the Six Month Staredown, wherein debtors and lenders wait for the other guy to blink first. Those better situated will hunker down and try to outlast the competition and the environment itself. The remaking of media ownership will lag whatever pain the economy inflicts, and by a long time.
Oh, it's not that nothing will happen in early '09. There will be layoffs, internal restructurings, maybe even a bankruptcy or two. Tangential deals, such as the New York Times Co. (NYT) selling its stake in the parent company of the Boston Red Sox, may get done. But when it comes to the big picture and the core portfolios of the big players, expect quiescence, not quick change. To paraphrase one media executive, look for stressed borrowers to try a tack like this: "Hey Mr. Banker, to whom I owe an ungodly amount of money and whose employer just got a federal bailout: Rework my debt package or take over this [expletive] asset yourself." Hard to argue with, since no bank wants the headache of additional illiquid assets. Certain stressed assets, for instance newspapers, are all but illiquid: They lack buyers. Within other media sectors, another executive says, uncertainty over exactly what will happen—an uncertainty that will do much to determine how long the Staredown lasts—will keep deal flows frozen, even for players sitting on wads of cash.
Elsewhere, businesses will hold off on ambitious moves to wait for one simple, nonnegotiable act: their competition opting for hara-kiri and shutting down. One dearly held belief is that riches await the last man standing, the one who makes it to the other side of this downturn. To some degree this is wishful thinking, since no one knows how hospitable said other side will be. But there is some sense to this notion. Hearst Magazines publishes House Beautiful, long a lagging shelter title. In the first nine months of '08, a year in which rivals shut the likes of House & Garden, Home, and Cottage Living, House Beautiful notched a 13.2% ad page gain. While this does not make up for years of significant losses, it puts the magazine on track to post its biggest uptick this decade.
Coincidence? Maybe not. While reality argues that too many real estate and home improvement shows clog the cable dial, perhaps their channels are merely deploying their own version of the Staredown. (This part can drag on, since many companies won't address big problems until the knife at their throat starts slicing through skin.)
This doesn't mean the ad pullback's full reckoning—with big shutdowns, big mergers, and big portfolio changes—won't be severe. It will be. But it will take a long time to arrive. Like the good guys say in hack Westerns when something bad is brewing, for media in the opening months of '09, it will be quiet. Too quiet.