Great (Media) Depression Looms

Experts agree that the U.S. economy has fallen off a cliff, and there is lots more bad news to come. Wall Street and corporate America are scrambling to determine how much is already baked into free-falling stock prices and earnings forecasts. Uncertainty about where the recession bottoms--amid worst-yet unemployment, housing and retail sales--is causing angst in every boardroom.

Last week's grim warnings from advertising and consumer-dependent Big Media notably culminated with Walt Disney CEO Bob Iger conceding that this economic downturn and ad falloff have been faster than any he has witnessed in 30 years. It has spread like wildfire from local television, radio and newspapers to the cable and broadcast networks to theme parks and resorts. That Disney missed fiscal fourth-quarter consensus earnings estimates (43 cents versus 48 cents) for the first time in Iger's tenure is a testament to the difficulty of the current environment, analysts say.

Barclays Capital analyst Anthony DiClemente came away from Disney's sobering Nov. 6 earnings call concluding that "most trends now appear worse than those following 9/11." Disney's refrain from providing guidance leaves analysts with little visibility about the scope of the downside. DiClemente has reduced his fiscal 2009 earnings-per-share estimate for Disney by -16% to $1.90 per share. He has dramatically lowered his target stock price to $18 a share from $23 a share, or about where Disney is currently trading.



Equally important, DiClemente echoed a point repeatedly made by this column: Companies and analysts are flying blind trying to anticipate the damage. The severity and complexity of this recession, compounded by ongoing digital dynamics, makes this economic downturn unique. "It has become evident that 2002 can no longer be used as valid historical downturn for the consumer and advertising recessions that entertainment now faces," DiClemente said. While Disney is better prepared to navigate a recession than in 2001-2002 (when its operating income declined 37% on 4% lower revenues), this recession is more devastating for consumers and advertisers.

That reality is just now beginning to show up in the balance sheets of Disney and its media peers.

Like CBS (down 18%) and News Corp. (down 22%), Disney's ABC TV-owned stations' ad revenues declined 12% last quarter, even with political advertising. All local television and newspaper business will further deteriorate post-election. Even for Disney bellwether ESPN, advertising will continue to pace down with its significant exposure to auto and financial advertising.

To stem declines in its 80% non-ad related revenues, Disney has launched aggressive promotions to reverse the 10% drop in bookings for its theme parks and resorts this quarter and next. "It's a Slow World After All," mused Bernstein analyst Michael Nathanson. Industry-wide studio entertainment (which for Disney is 15% of operating income) is buckling to lower box office and home video returns, and continues to be hit-driven.

If Disney's broadly diverse, global branded assets are on the squeeze, that means all media industry margins are at risk over the next 18 months, with only so much cost-cutting and radical restructuring possible. "It is difficult for us to predict the length or depth of the global economic downturn and consequently the impact on our businesses," Iger said.

Digital content and advertising remains under-monetized and is likely to grow modestly or be flat--leaving analysts and investors wondering how media concerns will offset sustained traditional revenue losses, especially if the recession and recovery drag well into 2010, as some economists forecast.

Like News Corp., Disney's annual digital-related revenues were shy of $1 billion and may modestly exceed those levels in the coming year, given online's recently demonstrated vulnerability. Online advertising growth is unexpectedly normalizing at a time when non-digital advertising is plummeting and e-commerce has not yet taken off. Online advertising is a critical link to reinventing and re-pricing the entire business.

Still, Disney said it will continue investing as much as $100 million more than the $170 million already spent on the clear growth areas, such as video games, which is a break-even business. Its $350 million Club Penguin acquisition is indicative of the tuck-in expansion that Disney and its peers will continue to cautiously pursue, although none will significantly boost bottom lines.

That digital has become pervasive enough to be mainstream, but not advanced enough to be robustly profitable, is especially problematic. Morgan Stanley Internet analyst Mary Meeker sifted through the current mess in a recent Web 2.0 Summit presentation--conceding that online advertising trends are not the runaway train forecast only a year ago, when there were an estimated 1.35 billion Internet users, $41 billion in online advertising revenues, and about $30 in ad revenues generated per user.

In the midst of a recession, online ad prices will likely decline as supply far outstrips demand. The good news: "History proves that ads follow eyeballs; it just takes time," she said. The bad news: eyeballs are fixed to every kind of screen imaginable in the world, making measurement and ROI challenging.

The best way to counter the unknown depth and breadth of the recession is to persevere, Meeker added. Master the mobile Internet, learn how to monetize social networks, create a cogent business model, get a foothold in emerging markets and provide digital consumers with value.

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