• by Diane Mermigas , October 14, 2008

There will be no bailout for media and Internet companies scrambling to survive the intensifying collapse of consumer spending and reduction in advertising dollars stretching into 2009.

The consolidation, failure and radical reshaping of companies across all industries--led by automotives and financial services--will change the post-recession advertising marketplace. So will the continued--albeit slower--growth of online and other digital platforms, although these new revenue streams will not ramp fast enough to offset cutbacks in advertiser and consumer spending. Just when media and entertainment players are beginning to comprehend the magnitude of the retreat and shift in ad dollars, they are confronted by signs of a deepening consumer crisis.

Media and entertainment concerns can expect little short-term relief from discretionary consumer spending on movie, theater and theme park attendance downloads and related products. With unemployment expected to soar past the current 6.1% and no credit stabilization, consumer spending that comprises two-thirds of GDP is sinking into deep negative territory. Record amounts of personal debt (nearing $3 trillion), tight credit and plummeting value of homes are among the systemic factors that make this recession different from most. It is leaving domestic and global consumers unable or unwilling to engage in nearly as much optional spending--not even online--regardless of aggressive marketing and promotions during the holidays.

Especially put to the test will be conventional wisdom that the steady growth of consumer-supported media (including cable fees, video games, home video and online activities such as search and shopping) will gain enough consumer share to offset ad-supported share losses (in television, newspaper and radio).

The lowered earnings forecasts from CBS and Viacom were just the first glimpse of a widespread retrenchment of financials at advertising-based media, entertainment and Internet concerns. The single-day 20% sell-off in both companies' stocks, triggered by the sale of $233 million in non-voting stock by Viacom and CBS Chairman Sumner Redstone to satisfy automatic loan covenants, was a dramatic reminder of all media vulnerability.

There has been a stunning loss of market capitalization over the past 18 months, ranging from an -80% decline for CBS (with three-quarters of its revenues exposed to advertising) to a -40% decline for Walt Disney (which is generating more than $1.5 billion in digital revenues across all businesses). Time Warner, which gleans about 18% of its revenues from digital, has lost 60% of its market cap as of Friday, Oct. 10.

The intense focus on advertiser fallout overlooks the dramatic impact that will come from a pullback in consumer discretionary spending, which most notably contributes to 35% of revenues and 31% of operating income at Disney, to 16% of revenues and 18% of operating income at Time Warner, and to 10% of revenues and 17% of operating income at Viacom, according to Goldman Sachs.

The continued volatility and uncertainty that hangs over even the best-run media, entertainment and Internet companies will continue to wreak havoc unless these players construct, articulate and skillfully execute their own industry-specific survival strategies. No one is exempt. Even the largest advertising-supported Internet concerns are braced. Analysts have been lowering forecasts for Google, which announces quarterly earnings Thursday, because even the online giant is feeling the pinch. Online users are clicking on ads, but buying fewer goods and services; advertisers are reducing budgets, and ad networks, including Google's AdSense), are under-performing.

Although all media and Internet company stocks will continue to ebb and flow on broad economic uncertainties, they will increasingly respond to a growing list of industry-specific pressures to: *Define the gap between permanently displaced advertising and suspended consumer spending *Reduce and better manage costs to mitigate that hit *Revamp and eliminate legacy expenses, which will drag on new digital revenues *Mine growing returns from international markets depressed by the credit crisis *Manage their own outstanding debt, loan covenant, cash flow and asset value problems

As a result, expect to see media and Internet companies make further cost cuts, delay the release of some projects and products into 2009 (as Time Warner did with the next "Harry Potter" film), engage in more joint ventures to share the risks and rewards, consolidate in core business areas, increasingly move operations and revenue flow into digital, and create new measurement metrics and pricing to attract advertisers.

Also expect an accelerated push into interactive online content and advertising, and e-commerce that provides advertisers with immediate ROI. CBS' formal pact with Google's YouTube to run more full-length series on the social network with ads is a counter to NBC Universal-News Corp.'s Hulu.com and an effort to more aggressively pursue viewers online. Not surprisingly, YouTube has begun testing "click-to-buy" text ads that direct users to purchase items displayed in video games, songs and other online content. It has pacts with Amazon and iTunes to sell products that utilize such links, designed to monetize impulsive buyers.

Less certain is the success that could come from increased reliance on deferred payments, represented by eBay's recent $1 billion acquisition of Bill Me Later. Online players are more aggressively playing the e-commerce card by betting against unmanageable consumer debt--a risk that seems to contradict fiscal reality.