Media companies are particularly vexed, since they don't know what to worry about first: luring advertisers back into the fold, embracing interactivity to reinvent themselves or blowing up what's broken. Before the stock market's uptick last week, media companies were stunned to find out just how low they could sink.

Gannett is indicative of what ails the media sector. The owner of USA Today has 85 daily newspapers, nearly 900 non-daily newspapers, 23 TV stations, Internet sites reaching more than 16% of the Web's audience, and ownership in online businesses such as CareerBuilder and Metromix. It has $4 billion in debt, a P/E ratio of zero, and a market cap that sunk to $455 million when its stock was trading under $2 a share. Standard & Poor's and Moody's recently lowered Gannett's corporate credit ratings to junk status--joining The New York Times Co., The Tribune Co. and McClatchy (whose low was 35 cents a share earlier this month).

Similarly, CBS' market cap recently slipped to near $2 billion (its stock has traded as low as almost $3 a share), giving the entire company a value comparable to some of its individual assets. It has $6 billion in debt and a $1 billion payment due soon. CBS' recently gathered digital businesses will not generate enough revenues anytime soon to offset loss from traditional TV, radio and outdoor billboards--and it cannot change its business models and legacy costs fast enough. With earnings and revenues plummeting, even the biggest media companies have less money and inclination to develop or acquire Internet businesses.

Clearly, television broadcasters are headed down the same treacherous financial path as newspapers. Less clear are the new performance metrics and expectations that will work for more traditional media companies in the future--particularly those highly leveraged and cash-strapped companies that have lost more than half their value. Core advertising revenues will be priced differently, come from radically altered companies and increasingly depend on interactivity. Paid media models will be varied and complex.

In other words, media companies are far from knowing what their assets will be worth in the future, how they will grow revenues and how they will deal with dysfunctional legacy operations and costs. What will be media's new financial norm?

The new temporary lows are not as important as the value levels at which media assets eventually will reestablish themselves, far from their former highs. Some broadcast and newspaper companies will never get that chance, having over-leveraged themselves while losing more than half their value this past year. They will not have the time or resources to construct new ways of creating, distributing, pricing and managing content, advertising and services. These hard changes will reset media financial expectations and metrics.

After further lowering its forecast to a negative 13% decline (from a previous -10%) in total U.S. advertising this year to $243 billion, Barclays Capital analyst Anthony DiClemente addressed some of these perilous dynamics in a March 11 report.

It is difficult to know where the bottom is with so many business fundamentals permanently out of whack. Advertising deterioration continues unabated, declining DVD sales are accelerating, cost-cutting has not occurred quickly enough to preserve margins, free cash flow is plummeting and there is rampant denial as earnings-per-share estimates remain "stubbornly high," DiClemente said.

Specific trouble spots: broadcast TV networks' trying to sell as much as 80% of their ad inventory in what is expected to be a disrupted upfront; the two largest TV station groups owned by Fox and CBS being caught in a terminal local media squeeze; the implosion of automotives and financials proving a permanent and painful disaster for all ad-based media. Moreover, Hollywood entertainment cannot replace the 70% of film profits disappearing in a failing DVD and home video market.

The bottom line: when macroeconomic concerns finally abate, billions more will be lost if broken TV and newspaper business models are not replaced now.

Within the next five years, major markets will be serviced by only a handful of local broadcasters and newspapers that will economically integrate their core operations. Media companies in general will redefine themselves by individual consumers' personal needs, relevance and interactive activities. Advertising will mushroom into a deeper interactive relationship.

Such is the media future that will be fueled by innovation, the one mandatory element Welch advocated last week when he complained to the Financial Times how "dumb" it is for corporations to be fixed on quarterly profits and short-term share price gains.

The most formidable danger for all media companies mired in the financial crisis is failing to innovate enough to grow in a recovering market. Consider that more than one-third of the companies driving the U.S. economy didn't exist before 1980. One of those, Google, last week introduced two new services that promise to generate huge new revenues: the first is a free universal call and voice service that ties all phones together. The second ties advertising sales to consumers' interest and every move online. Both are plays on consumer relevance--a primary catalyst of future growth that most media companies have failed to embrace in these troubled times.

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