• by Erik Sass  @eriksass1, April 7, 2008

Like hapless George Costanza in "Seinfeld," legacy media companies are desperately trying to convince their shareholders that shrinkage is a transient phenomenon. Investors should not judge them by a few bad quarters, they argue, because it's all part of the "transition" to digital publishing. The economic waters are so chilly that any company would look bad. But a broad survey of the fortunes of big media companies from 2003-2007 suggests that recession or no, they will end up smaller and confirm George's worst nightmare: Shrinkage is here to stay.

Take Time Warner--the media behemoth that lost almost three-quarters of its value after its merger with AOL in 2000. From a combined market capitalization of $280 billion in 2000, it has fallen to a meager $52 billion today. And the company's woes were not limited to the spectacular write-downs earlier this decade: Since January 2007, the stock price has fallen from about $22.50 to $14.68 today.

The decline at Time Warner spans different divisions that were at one time considered premiere Internet and publishing properties, including AOL and magazine publisher Time Inc. From $8.8 billion in 2003, AOL's revenue declined 40% to $5.2 billion in 2007, due largely to ditching subscriptions in favor of ad sales. Ad sales did more than double in that time, to $2.2 billion in 2007. This was not enough to offset losses on the subscription side, and it doesn't come anywhere near the rate of growth of better-positioned online players like Google--whose revenues expanded tenfold, from $1.5 billion in 2003 to $16.6 billion in 2007--or Yahoo, which more than trebled, from $1.6 billion in 2003 to $5.1 billion in 2007. Publisher Time Inc. has seen total revenues decline 9% from 2003-2007, from $5.5 billion to $5 billion.

All these drops come despite Time Warner's real efforts to grapple with the realities of the digital age, including AOL's purchase of Advertising.com in 2004, Tacoda in 2007 and Time Inc.'s purchase of Fan Nation in 2007. The company has not hesitated to dump less profitable businesses, including Warner Music in 2003 and Time Inc.'s portfolio of enthusiast pubs, Time4Media, in 2007. Currently, Time Inc. chairman and CEO Ann Moore is said to be mulling another round of magazine sales, possibly targeting slumping shelter and home-improvement titles.

Time Warner's bright spot is its cable and Internet operation, where cable video grew from $6.2 billion in 2004 to $10.2 billion in 2007. High-speed data more than doubled, from $1.8 billion in 2003 to $3.7 billion in 2007. It's no surprise, then, that in 2007, investors put pressure on management to sell AOL and Time Inc.--an idea that Jeffrey Bewkes, the company's new CEO, mused over publicly in late December.

Of course, Time Warner isn't alone. A part of Viacom until 2005, CBS Corp. saw its approximate value slip from $21 billion in 2003 to $15.5 billion in 2007. In more recent comparisons, the company's total advertising revenues fell from $10.4 billion in 2005 to $10.1 billion in 2007.

In particular, the CBS Radio business is suffering--with revenue down 17% from 2003 and 11% from 2006, to $1.75 billion in 2007. That's due partly to the sale of less-profitable stations, but the company's contribution to income is also down. CBS Radio's misfortunes come despite numerous investments that are intended to grow online revenue streams, including a controlling stake in TargetSpot, which allows advertisers to sell, place and track ads in streaming audio, and its purchase in May 2007 of Last.fm.

Indeed, CBS Radio's recent performance is about par for the radio industry, which grew moderately or stagnated through the middle part of the decade before contracting over the last year--even after aggressive investments in online media businesses, both through acquisitions and partnerships.

Even Clear Channel Radio, the largest broadcaster in the U.S. and long the industry leader, showed no growth from 2006-2007. A memo to employees from CEO John Hogan in February detailed its hard first quarter and enacted a spending freeze, suggested that worse results may be on the way.

This news comes despite the excellent performance of the company's network of Web sites. For overall revenue growth in 2007, Clear Channel Communications had to rely on Clear Channel Outdoor, which like CBS is profiting from the boom in out-of-home spending. Again, it's no surprise that the company has come under pressure from investors to spin off the more profitable outdoor business, even before the current buyout by private equity, which recently ended up in court.

As Wachovia analyst Marci Ryvicker wrote in her roundup after the SNL/Kagan Radio/TV Summit: "We are at least five (if not 10) years away before new media/digital opportunities have any financial significance in the broadcast space."

Since 2003, radio's grand total revenues basically remained flat, edging up slightly from $20.86 billion in 2003 to $21.31 billion in 2007. The recent downturn, when they fell by 2% from 2006-2007, is more ominous. As Ryvicker indicated, new investments notwithstanding, Internet-derived radio revenues remain a tiny part of the overall business. A separate estimate puts all kinds of Internet radio revenues, including new Web-only companies and combining advertising and subscription models, at just $500 million in 2007. Even if this sum were attributed to the Radio Advertising Bureau's "non-spot" category, it's still just 2% of radio's overall revenues. (This figure is actually overly generous, as some online broadcasters are not measured by the RAB.)

Finally, consider the newspaper business, where results have been universally abysmal for several years running, and where online revenues still contribute less than 10% of the overall figure. Worse, online revenue growth appears to be slowing, making it very unlikely that it can offset losses in print ad revenue.

From 2003-2008 the New York Times Co.--long an industry leader--saw its market capitalization dwindle from $6.4 billion to $2.74 billion; the company shed over 2,000 employees from 2003-2007, or about 16% of the total workforce. Over the same period, total revenues remained basically flat, ticking down from $3.23 billion to $3.2 billion--even as the cost of sales and administration rose from $1.26 billion to $1.4 billion.

It should be noted that the NYTCO hasn't been shy about picking up online properties and launching new digital ventures in this period, including About.com in 2005, Baseline StudioSystems, an entertainment media database, and Calorie-Count.com in 2006. In 2007, it also formed a strategic partnership with Monster.com, acquired ConsumerSearch.com, and dumped its broadcast division. Most recently, the company partnered with Tribune Co., Gannett, and Hearst to launch an online display ad network, quadrantOne. Despite all these moves, the company has come under blistering attacks from shareholders for slumping revenues and stock prices.

Tribune, like NYTCO, has had problems. Before it sold to Sam Zell for $8.2 billion, Tribune Co.'s market capitalization fell from $5.8 billion in 2003 to $3.9 billion in 2007; the stock price tumbled 36% to about $30 per share. It shed over 4,000 employees, or about 17% of its workforce. Revenues fell from $5.4 billion in 2005 to $5 billion in 2007. Likewise, Gannett has seen its market capitalization plummet from $17 billion in 2003 to $6.9 billion in 2007, while shedding 7,000 employees, or roughly 13% of its workforce. And while newspaper revenues actually grew from $6 billion to $6.7 billion, the company's income fell from $1.21 billion to $1.05 billion in that period.

Not every company is shrinking during the digital "transition." Disney, which owns ABC and ESPN, has seen revenues from both divisions rise, along with its market capitalization, which grew from $37.3 billion to $59.7 billion, 2003-2008. In that period, its cable network revenue grew 67% from $5.5 billion to $9.2 billion, while broadcast rose a more modest $450 million, or 8%.