• by Diane Mermigas , July 2, 2008

We're waiting out a long, hard Quintuple Whammy.

The good news about the pervasive corporate and consumer economic angst is that it can't get much worse. The bad news is that it will be a while before it gets better.

The reason is the unprecedented confluence of factors that will necessitate fundamental changes in all businesses, consumer spending and lending. A full recovery will not likely occur until 2010--and only if serious reform takes place.

The quintuple whammy is the result of natural and market forces transforming the status quo. A worse-than-anticipated recession that will stretch well into 2009 is being exacerbated by record high oil prices and a profound credit crisis. The issues that have businesses and consumers in a vise cannot be addressed merely by periodic cutbacks. Dramatic changes in structure, operations, overall expenses, staffing and strategy are required for companies to shed their costly and ineffective legacy shells and emerge more competitive. The result is the dramatic transformation of entire industry sectors and companies. No business will go unscathed.

Until companies and consumers can make permanent operational changes amid rising energy costs, routine business projections as well as normal supply and demand will be interrupted. The financial crisis will continue to paralyze the natural flow of transactions. Banks, venture capital and private equity generally will hold tight until the economic malaise begins to subside. And that won't happen until there is a clear bottom to asset prices, justifiable new business models and solid revaluations for everything from homes to companies. Globalization, which has been a godsend to boosting some business, could begin to pose regional economic, competitive and regulatory challenges. European central bankers warned Tuesday of a global slowdown so severe it could transform current rising inflation into a period of falling prices.

Advertising, media's revenue backbone, will continue to decline and shift, responding to the deterioration of corporate balance sheets, as well as changing media options. The auto manufacturers are wrestling with unprecedented sales declines and product shifts that will impact their overall losses and marketing spend for at least another year. Retail, the other dominant advertising sector, is being sacked by a drastic pullback in consumer spending. Domestic advertising estimates continue to be lowered to just above 3% overall this year and barely half that in 2009. Even the Internet's double-digit growth is deflating, since it draws dollars from the same bearish marketplace reflected in the Dow industrials flirting with bear-market territory. Experts agree; economic ills will prevail into 2009.

All of these factors are weighing heavily in what was supposed to be a robust 2008, bolstered by presidential election and Olympics spending, the effects of which are being muted. That means 2009, a cyclical low odd year, will be worse than expected as a result of protracted housing, fuel and financial woes. The vortex of bad news has continued this week as Chrysler reported a 28% decline in June auto sales, Ford 19% and Lexus 21%--all worse than expected. Venture capital-backed deals came to a complete halt last quarter for the first time in 30 years. (120 VC deals in the first quarter off 28% from 169 such deals reported the first half of 2007.) Overall media deals fell to $23.2 billion the first half of 2008, down nearly two-thirds from $65.8 billion a year earlier, with U.S. M&A off 40% in the second quarter, according to the Jordan Edmiston Group.

Finally, there is the overriding digital conversion, a treasure trove of long-term financial gain but short-term pain as media, telecommunications, Internet and commerce companies scramble to alter their businesses. Raising digital rights and revenue-sharing issues which, if left unresolved, could prompt another debilitating strike is raising havoc. The prospect of a Screen Actors Guild walkout already has slowed or halted most Hollywood filming.

Bottom line: the critical economic angst and the digital sea change will not allow for business as usual.

The factors that could trick companies into thinking the travails are just temporary include the television broadcast networks' upfront market, which matched the prior season's spending. The proof will be in the amount of advertiser spending commitments that are fulfilled over the next nine months and the amount of makegoods the broadcast networks will need to make when they fall short of ratings guarantees. The upfront ad market may look like an aberration against other economic trends, providing a relatively safe, familiar marketing medium--but it is also a speculative market that gives advertisers wiggle room on the bets they place today.

The additive political and Olympic spending will mask declines in overall national and local TV ad revenues, creating no-win comparisons for broadcasters in a weaker 2009. These are the same broadcasters that are investing billions to become digicasters in a government-mandated conversion in February that will gradually produce hearty new revenue streams. While there surely is upside and opportunity to be had out of this purge, it is foolhardy to minimize the lasting significance of these concurrent extraordinary dynamics. You can write off one of these change agents, but you can't blow them all off.

The quest for fiscal stability--much less growth--will be a leading objective of the 2009 budget process now underway. Companies are best advised to think outside the box; plan for the worst and hope for the best.