Next Stop for Wall Street Implosion: Madison Avenue

The financial implosion occurring on Wall Street will hit Madison Avenue by 2009 with a force that will take down some media companies and prompt many to seek financial relief in digital interactive solutions. It will be media's first painful step toward securing its future.

All media and ad-related companies will be shaken by the full implications of the deepening credit crisis, financial breakdown and consumer-led economic recession over the coming 18 months. They will reign in costs and cautiously explore ways to generate new digital revenues. Many will budget for a best-case scenario--and will be devastated when the worst case occurs, as many respected economists forecast.

In a conference call Wednesday, RGE Monitor economist Nouriel Roubini--who is known for well-regarded, accurate forecasts--warned of at least an 18-month recession in which corporate earnings generally will see only 5% or negative growth in 2009. Stock market and housing values generally could continue to fall to a collective 40%. Corporate debt will climb without relief, causing many defaults. Nearly half of all homes will be in a negative equity position, destroying the consumption of goods and services and resulting in negative GDP growth.



Dozens of regional and national banks with exposure to real estate will go bust--as will the FDIC, trying to cover them all. Many foreign markets that were supposed to be a source of growth are now also suffering deteriorating economics.

This will inevitably lead to companies reducing expenses, including their advertising and marketing budgets. They will reallocate what they spend across a broader mix of new and traditional media. After all, advertisers are companies across all industries struggling to survive these trying times. The top 100 global brands lost nearly $70 billion in value even before the banking crisis worsened, according to Brand Finance.

Consequently, digital gains against such formidable headwinds will be minimal. While digital interactivity represents a new growth plane for all media and advertising players, necessary comprehensive integration into companies--rather than ancillary topping--will take time and require massive legacy restructuring in some cases.

The widespread concern is that even in the best of cases, digital revenues will not grow fast enough to offset the revenue and earnings declines exacerbated by the financial crisis and recessionary economy. While this has been a dilemma that many media companies have been able to sidestep in the past, they will be unable to escape it in the future.

The systemic problems in the domestic economy and financial system reach deep. It will take even more of an adverse hit on balance sheets, personal budgets and all spending and income through 2009, according to Roubini's worse-case scenario. Many companies have outstanding debt they may not be able to pay on declining income and unavailable credit. Other companies are beholden to banks, private equity, venture capital and other investors demanding collateral and ROI because they are under financial system scrutiny.

Companies are unable to sell or buy assets as freely, because they are uncertain of their value; buyers lack financial flexibility. The huge amount of liquidity on the sidelines in strong corporate balance sheets and cash flows, private equity and venture capital cannot be unlocked without gradually reestablishing the value of assets, advertising, and the U.S. dollar. Roubini reports that private-equity companies raised $163.5 billion in the first quarter and a record $324 billion in distressed funds in the first half of 2008. With the LBO markets shut down and asset values up for grabs, they are taking minority investments in (what else?) financial institutions!

Consumers who lack earnings growth, home equity and investment and job security can no longer be relied upon to fuel commerce. Taxpayers shouldering the cost of a proposed $700 billion financial system bailout will only compound that grassroots angst. "The U.S. consumer is on the ropes and faltering big-time," Roubini said. Even if Congress and Treasury slam the brakes on the freefall of financial institutions, housing assets and credit markets, their plan will take time to stabilize and take hold.

All of these complex interconnections inevitably point to trouble for ad-supported media and Madison Avenue. Feverishly revised forecasts call for steeper declines in ad growth in 2009 ( as much as 10% declines for national spot), coming off a less-than-stellar presidential election and Olympics year. TNS Media Intelligence said second-quarter advertiser spending was down 3.7% from the prior year--the steepest quarterly drop since 2001.

Advertiser and consumer expenditures began contracting in the first quarter--ahead of the housing purge and implosion of Bear Stearns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae and others. Every one of the 19 measured media types posted weaker year-over-year performance in the second quarter, as compared to the first three months of 2008, TNS said.

Newspapers were down -7.4%, radio was down -6.5%, spot TV was down -4.4%, and even network TV was down -2.4%; thwarted by a -11% decline in automotive spending and a -9% decline in telecom spending. Pullbacks were occurring across the board, as spending by the top 50 advertisers fell -5% in what was supposed to be a strong year for ad-supported media. An 8% growth in Internet spending (half of what was expected) indicates the continuing shift of dollars by brand marketers seeking increased efficiency from connecting with online target consumers.

Still, the digital transition that promises to generate new revenues could be stymied by the financial malaise and companies reluctant or unable to do more with less.

The confusion and compromise of traditional business models short-term, as well as an inability to quickly change legacy structures, adds yet another layer of financial uncertainty for media-related companies of all sizes and persuasions.

Companies can only take charge of what little they can control, such as devising a multi-stage action plan with their new 2009 budgets. At the moment, it is all about clarity and process. Corporate fire drills should call for: restructuring soon-to-expire corporate debt, matching cost cuts with investments in innovation and development, utilizing existing resources in new digital ventures, making advertising and marketing interactive, partnering and bartering with others to minimize costs, identifying and filling marketplace voids, securing target consumer connections with relevant services and products they can't refuse, and phasing out legacy operations.

Survival of the fittest is that complicated and that simple.

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