Unfortunately, there has been little talk of the innovation necessary to create new income to replace the old revenues that will not return in a recovery. A deep, protracted recession is one thing; a permanent digital shift in industry economics is another.
The digital transformation of media continues to explode, even as corporations ratchet down investing for the future in response to plummeting revenues and earnings. Top ad categories, such as automotives and financials, are undergoing extreme makeovers. The stunning drop in retail and housing sales masks a quietly accelerating e-commerce model that eventually will siphon more traditional revenues.
What senior executives have failed to address in their recent quarterly earnings calls is that digital continues to alter their economic reality, which surely will make the outcome of this recession different than any other. Businesses expect to resume the status quo on the other end of this downturn, although even modest consumer and advertiser spending will continue to shift to digital platforms. Consumers will continue to revel in their social networks and cyber pastimes even if they don't buy the latest model iPhone, BlackBerry or laptop computer. Consumers will continue to break with their old media habits. Media companies are sure to be blindsided, even in a potentially improved 2010, if they refuse to recast themselves for a radically changed landscape.
Worst case: broadcast television stations and newspapers with unchanged legacy costs will struggle to maintain their financial footing after the recession abates and they lose any competitive edge. Such old-line media will not be able to rely on their branded Web sites for much support, either. Growth from related online ad revenues is now expected to be flat or even in decline, according to a new report by Borrell.
At this point, there is no way to avoid the bold, long-term change that is critical to future growth. Media's dilemma is not all that different from the Big Three automakers; at least one of which (General Motors) says it is suspending development as sales plummet. That decision will handicap advancements in fuel-efficient cars to generate new revenues and restore global competitiveness. The knee-jerk response to reducing cash at the expense of long-term vision and income will have dire consequences--for Big Autos and Big Media.
Judith Estrin, Cisco System's former chief technology officer turned Silicon Valley, has been warning about an innovation and creativity deficit that will dash America's global competitiveness in better times. In a Web 2.0 conference address of Nov. 5, Morgan Stanley analyst Mary Meeker noted that technology rebounded from a three-year recessionary slump beginning in 2000 because "eyeballs continued to grow, innovation continued to occur, and the revenue followed that." The only antidote for what could be double-digit declines in ad spending tied to a negative GDP next year is innovation that capitalizes on the mobile Internet and emerging market tech adoption. Such subjects were barely touched on by media conglomerates in their gloomy earnings calls.
News Corp. Chairman and CEO Rupert Murdoch said that despite "stringent cost cutting," it would use its strong cash position to "invest in those businesses and opportunities that present our next generation of growth." He did not elaborate.
What Goldman Sachs analyst Mark Wienkes calls "the unclear depth of declines" at all TV stations and newspapers makes News Corp.'s revised fiscal-year outlook for double-digit declines in global operating income "among the most sober across large cap media." News Corp.'s implied $1 billion earnings shortfall (weak advertising and foreign exchange rates) fuels the fear that media conglomerates cannot cut fast or deep enough to offset accelerating losses. It also suggests that Big Media is too cumbersome to radically reinvent itself to financially and creatively survive in a digital age.
While Time Warner might appear safe as a streamlined content play, its cable networks are bracing for a hit from the weakening scatter market. Still, Viacom has demonstrated the vulnerability of relying on ad-supported big cable networks, where weakness is clobbering its overall earnings. Building more cable subscription-based businesses globally--which could prove risky when consumers are so spending-averse--was one of the only growth strategies mentioned by the media players this week. Any semblance of new business development seems otherwise assigned to their digital online units, such as Fox Interactive Media and AOL, which also are suffering from slower growth and even slower returns.
Those with excess capital are sitting on cash, slowing buybacks and buying only safe tuck-in assets. Time Warner CEO Jeff Bewkes went so far as to say the company would bankroll "only hit movies from now on," reflecting a similar pullback by rivals that are equally concerned about shrinking home video, box office and other related returns.
The closest thing to a Big Media innovation lab is the companion Brain Trusts at Pixar Studios and its corporate parent Walt Disney. Still, Disney CEO Bob Iger made the point on Thursday's earnings call that capital may be best spent just now on answering stressed consumers' demand for value with more innovative marketing and enhancements to existing products and services--from theme parks to movies. "The price-to-value relationship has never been more critical," Iger said.