• by Diane Mermigas , April 15, 2008

The latest slash and burn forecasts by some Wall Street analysts for even the biggest media companies--in anticipation of lower earnings and a dearth of growth catalysts--are a prelude to the pain to come. Digital products and services aren't generating new revs fast enough to offset losses in traditional areas especially strained in a recessionary economy.

Nowhere is this problematic schism more apparent than at CBS and News Corp., despite their contrasting size and composition. News Corp. generates 39% of its total revenue from advertising--making it the most economically vulnerable media conglomerate, second only to CBS Corp., with 70%-plus exposure. The big difference was supposed to be News Corp.'s more diversified base, which hasn't provided enough of the requisite balance during economic hard times. In particular, Fox Interactive Media, expected to be a revenue rocket, is missing its $1 billion fiscal year target despite a 25% increase in user engagement (time spent online) at MySpace in the first quarter.

FIM's operating income will now be closer to $116 million on revenues of $904 million--despite increased use of its services, such as MySpace, casting doubt on bullish long-term forecasts. The problem for MySpace and so many popular online services is adequately monetizing users and traffic as advertisers continue to tread cautiously on social networking sites. With only $10 million in display ad revenues in 2007, according to TNS Media Intelligence/CMR, and $250 million guaranteed minimum payment from Google for search, other FIM's ad revenues have grown about 31% in fiscal 2008, or about half of what was expected. With costs increasing about 46% this year (about the same as all advertising) FIM's overall growth and the multiple on News' stock are in question.

That is why Bernstein Research on Monday downgraded News Corp to market perform on a lower $21 a share price target. Analyst Michael Nathanson says he no longer can make a "bull case" for News Corp.'s ability to produce double-digit operating growth from FIM, Fox cable networks and Sky Italia to sufficiently offset weaker performance by its newspapers and broadcast television. The 11% decline in first-quarter TV station revenues reported by NBC last week signaled weakness among broadcasters in a normally strong quadrennial year, due to reliance on advertisers in declining sectors such as automobiles and retail. Economic instability, especially in the financial sector, has prompted Bernstein to shave one-third off its initial operating income outlook for News Corp.'s recently acquired Dow Jones. Although its 17% studio operating profit growth is second only to Walt Disney Co.'s 18%, both could be impinged by a slowdown in consumer spending on film.

Analysts are split on how insulated Disney is from the same volatile factors, since consumers and advertiser spend underscores a majority of its businesses. Even with new digital revenues topping $1 billion, CitiGroup analyst Jason Bazinet insists Disney could be less risk adverse to macroeconomic forces than it thinks.

Over the next five years, News Corp.'s operating income growth will shift from television stations, filmed entertainment and newspapers to Fox cable networks, Sky Italia and FIM, falling to an average annual 11% growth and dipping as low as 10% in fiscal 2009.

Morgan Stanley analyst Benjamin Swinburne likewise has sounded the alarm on MySpace and other new media returns due to monetization difficulties. As pointed out in this column last week, that's the motivation for MySpace seeking to partner with Microsoft in a Yahoo acquisition. Even so, Swinburne estimates FIM will generate about $300 million in operating income on $1.54 billion in revenue by 2012.

That temporarily puts News Corp. in a vulnerable spot not so different from a much smaller pure-play CBS, which relies on more than 70% of its revenues from advertising, mostly from strained businesses such as broadcast television and radio. CBS' digital revenues are also growing slower than losses from its traditional revenues outlets.

Goldman Sachs analyst Ingrid Chung Monday reiterated her sell on rating on CBS in light of NBC's surprisingly weak results. She based it on CBS having the highest risk exposure to lower ad spending, the least exposure to international sales growth, TV network ratings and audience share losses, and downward trends in TV and radio resulting in, at best, 2% earnings growth through decade's end. CBS' digital media businesses may generate about $18 million in operating income on about $51 billion in revenues. However, analysts now expect national advertising to deteriorate over the remainder of 2008, taking a big bite out of network TV earnings. The only offsets are CBS' outdoor business, operating income from which should grow about 12% on 8% growth in revenues, and syndicated program pipeline.

The past may be prologue. Quarterly-earnings reports (May 7 for News Corp., April 29 for CBS and May 6 for Disney) may trigger some weighty considerations at these and other traditional media companies that expected to take shelter in emerging digital media and cyclical business upticks steamrolled by the recession.