Commentary

Financial Crisis Trickle-Down To Media, Consumers

The historic restructuring of debt and financial players on Wall Street will continue to have an arresting impact on Main Street, as well as on media-related companies dependent on advertiser and consumer spending in a troubled economy.

Players of all sizes and sectors are hunkering down for more pounding. The impact varies, from severe disruption of ad-dependent core revenues for companies such as CBS to debt repayment issues for Tribune and Univision. A growing number of small to-mid-size broadcasters--including Young Broadcasting, Gray Television and ION Media Networks--are wrestling with liquidity pressures, according to Standard & Poor's. Still others will have trouble meeting loan covenants in a weak economy. Many new media upstarts have no stock-market exit strategy, or once-regular cash infusions.

On a broad scale, there will be fewer investment banks with tighter lending requirements to finance mergers and acquisitions. There also will be less capital available overall, with stiffer credit standards to fuel consumer and business spending. Non-institutional sources of deal financing are virtually paralyzed in the continuing unprecedented shakeout process, although plummeting public values make for opportunistic buys. Those with assets to sell--from Time Warner to IAC--may have to lower expectations. The large-cap media conglomerates with high-cash balances and low net leverage (such as Disney and Viacom) may prefer to sit out this mess for now.

However, the fluctuation and uncertainty of asset valuations, metrics and baseline comparables--especially for companies in the throes of digital transition--are also formidable deal obstacles. That is why an estimated $5 billion in private-equity money has been sidelined. Venture capital groups are treading lightly and rethinking their investment models and ROI timetables.

As economic volatility and the shakeup in the financial markets seep into the far reaches of grassroots business and consumers, they will be reflected in 2009 media-related company balance sheets. The tumultuous elements of the financial crisis--which is not occurring in a vacuum--reflect similar issues in media, entertainment and technology circles.

The failure of Fannie Mae and Freddie Mac is the result of a broken business model. The media world has plenty of its own, including metrics and content monetization.

The collapse of Lehman Brothers (in Chapter 11 bankruptcy), Bear Stearns (acquired on the cheap by JP Morgan Chase) and others to come is essentially about making unchecked bad bets (on reckless mortgage lending) and creating excessive leverage with inadequate capital. It's also about the sins of deregulation. Now, Wall Street is singing a different tune: Bailouts are another word for corporate socialism: Half the Fed's balance sheet is now at risk, and taxpayers ultimately will get stuck with the bill.

Bank of America's rescue of Countrywide Financial and Merrill Lynch is just the beginning. Experts estimate that half the 9,000 U.S. banks will consolidate or fold short-term, and that the overall financial system has accumulated as much as $40 of unqualified excessive debt for every $1 invested.

Highly leveraged insurance giant American International Group (AIG) lost half its market value Monday--seeking at least a $40 billion bridge loan from the Federal Reserve, fearing a potential downgrade from credit ratings agencies. On Monday night, S&P downgraded AIG, heightening urgency about the need for a cash infusion to avoid bankruptcy. It raises critical questions: Where does the federal government draw the line, having provided $300 billion in bailouts to companies making bad investment risks? Will some media-related companies burdened with debt and deteriorating credit ratings also face similar need and fate?

Media, entertainment, telecommunications and tech industries are also wrestling with their own vulnerable and broken business models. Recessionary and digital-driven revenue shift will clip earnings or cause some to default. On other levels, the purge of financial, transportation, auto and other major industry players will have a dramatic impact on all media advertising. Widespread consolidation means fewer companies to spend ad dollars and invest capital in technology software and hardware. It also can mean unmanageable scale. There will be less money all-around to fund the intelligent risks and creativity needed for long-term growth.

Survival and stabilization are short-order goals, although opportunities will eventually emerge from the chaos. Once things settle down, everything will depend on integrating and executing new business models that need to be crafted now. The transition from static to interactive advertising is no small task.

All of these adverse factors collectively will serve one good end. Companies along the broad media, entertainment and Internet spectrum will be forced to find ways to generate new income from new interactive trappings, such as social networks. They will be forced to create real value instead of relying on a continuous flood of unqualified capital to pave the way to prosperity.

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