Ad Declines in Mass Media Seen as More Than Just Economic

By NAT WORDEN

With dire forecasts, multibillion-dollar write-downs and widespread job losses piling up throughout the industry, media companies are watching their life blood -- advertising -- erode at a rate not seen in a generation.

And this week, titans of media acknowledged the possibility that when the economy finally recovers, advertising dollars may never return to major media outlets in full force as the rise of the Internet leaves audiences increasingly fragmented and less accessible to mass marketing.

For example, Walt Disney Co. Chief Executive Robert Iger told analysts Tuesday that some of the entertainment empire's businesses, like its broadcast television network, are feeling "signs of secular change as competition for people's time is increasing and the abundance of choice is allowing consumers to be more selective."

Mr. Iger's comments raised eyebrows because he was suggesting that something more than just the worldwide economic downturn was behind Disney's 32% drop in fiscal first-quarter earnings and 8.2% revenue slide. Media stocks, like other industries, are at multiyear lows, but Mr. Iger's comments -- echoed by others -- indicate the challenges facing media companies.

"We don't believe the changes we are seeing in consumer behavior can all be attributed to a weak economy, and we feel it is important for us to address them as more than just cyclical issues," Mr. Iger said.

His counterpart at News Corp., Rupert Murdoch, acknowledged the heightened threat posed to the ad business by digital distribution.

"I recognize that we may never return to record levels, but we do believe [News Corp.] can recapture a large percentage of the advertising that does return," Mr. Murdoch said. "It's why we continue to believe in newspapers and their brand extensions and television and film as mass media."

For that reason, News Corp. continues to invest in its businesses.

"We have never bought in to the pervasive fear that all is lost when the business hits a recession, that advertising is gone [and] never to return, that consumers won't pay for entertainment," Mr. Murdoch said. "Sure, there's reason to be concerned, and we are running our business to respond to that concern, but historically, every time we've seen a recession, mild or major, we've endured this panic and come out better."

News Corp.'s results underscored the reasons for concern. The company swung to a loss for the quarter totaling $6.4 billion thanks in part to an asset impairment charge of $8.4 billion stemming from the 70% drop in its stock price over the last two years. Its revenue was down 8.1%.

"Despite management's optimistic view of the earnings recovery potential, we believe the challenges News Corp. is facing are secular," JPMorgan analyst Imran Khan said.

"The company's management believes that newspaper and television earning power will return after the economy bottoms," Mr. Khan said. "We, however, think that advertising-supported industries are undergoing a structural shift and, as such, think that newspapers and local TV revenue base will continue to face significant challenges."

News Corp. wasn't the only media company to record massive impairment charges. Time Warner Inc., with its stock down 56% over the last two years, logged a $16 billion quarterly loss on Wednesday with asset write-downs totaling $24 billion as its magazine publishing and online media segments suffered sharp declines.

CBS Corp., which will report its fourth-quarter earnings on Feb. 18, recorded a $14.1 billion charge in November amid an ongoing slump at its broadcast radio and television businesses. Its shares are down 73% over the past 12 months.

Analysts say the big write-downs reflect poor capital allocation on the part of media companies over the last decade and a recognition that declines in the value of their businesses are likely permanent.

Recently, media companies have invested heavily in digital media assets to keep pace with technology, but most of these deals have yet to bear financial fruit and some have been disastrous.

Most notable is Time Warner's infamous merger with AOL, which is still plaguing the company as it struggles to unload the shrinking Internet business. Meanwhile, Google Inc. is trying to cash out of its AOL investment, having written down its 5% position by more than 70%.

News Corp.'s Murdoch conceded that players in the Internet search advertising business, like Google, are "on to a very good thing," and he noted the difficulties facing News Corp.'s digital media business, comprised mostly of the social networking site, MySpace, which focuses on display advertising.

MySpace was the toast of the traditional media industry when News Corp. acquired it for $580 million in 2005 to be its new media growth engine. In its latest quarter, however, ad revenue at Fox Interactive Media, which includes MySpace, was flat, and its division posted an operating loss of $38 million.

News Corp. also owns Dow Jones & Co., publisher of The Wall Street Journal.

JPMorgan's Khan said he expects more headwinds for MySpace amid increasing competition from sites like Facebook, making it "more difficult to reach meaningful profitability." He also sees trouble for MySpace when its search deal with Google ends next year, "creating additional pressure on profitability."

Sites with user-generated content -- like MySpace, Facebook and YouTube -- are struggling to drive advertising revenue growth for their owners despite rapid audience growth. Mr. Murdoch said News Corp. has adopted an "underlying philosophy" that online media businesses will shift to subscription models, but outside of a few notable exceptions, like Apple Inc.'s iTunes, a culture that demands free access to information and entertainment dominates the Web, leaving advertising as the key revenue source.

"The problem is that there's an almost infinite increase in inventory for Web sites and for display, so there's constant downward pressure on the [ad] rates you can get," Mr. Murdoch said. "We have to find new ways to monetize our huge audiences."