Media Wars

Traditional, dead-wood media companies are dying. Take a look at the New York Times Co., America's (supposedly) great newspaper company. The NYT is a wonderful proxy for old-style content providers, such as newspapers and broadcasters, because it exhibits all the problems the industry faces: Its revenues are down 10 percent from a year ago, advertising is off by 16 percent and the paper is thinner.

Traditional, dead-wood media companies are dying. Take a look at the New York Times Co., America's (supposedly) great newspaper company. The NYT is a wonderful proxy for old-style content providers, such as newspapers and broadcasters, because it exhibits all the problems the industry faces: Its revenues are down 10 percent from a year ago, advertising is off by 16 percent and the paper is thinner. (A recent Sunday Times had 638 pages, down from closer to 1,000 pages in happier days.) The company, having constructed a brand new building in Times Square, is now laying off distribution personnel as well as journalists. NYT shares are down by about 25 percent in the past 12 months.

Blame new media companies, such as Google and Yahoo!. (Of course, their shares haven't been so hot either over the past year.) Newspapers' share of the advertising market has waned to about 15 percent this year, down from about 22 percent 10 years ago. Newspaper ads will fall in 2008, the third year in a row. Are old media companies toast? Or is this a colossal buying opportunity? The old guys want you to know they're not at all ready to give up the ghost.

“The Googles of the world are the Custers of the world,” Time Warner CEO Richard Parsons told the National Cable and Telecommunications Conference last year. In a panel discussion, Parsons boasted, “We are the Sioux nation. They will lose this war if they go to war.”

Parsons might be forgiven for his swagger. After all, Time Warner's cable division had just reported 61 percent year-over-year revenue growth. But the weakness in the rest of his “nation's” cash flows should have told him that the battle had already been joined and that old media outfits like his were showing up on the casualty lists. After Parson's remarks were published, in fact, investors vamoosed from Time Warner's Little Big Horn, hauling over $1 billion in market capitalization away.

Got Old Media?

You would do well to determine your clients' exposure to old-style media by examining their stock holdings and fund assets. Take a look, for example, at the bellwether issues, the leading six old media industries (the most heavily capitalized companies) in broadcast/cable television, broadcast radio, satellite radio, newspaper publishing, magazine publishing and book publishing.

Comcast Corporation (Nasdaq: CMCSA)

Arguably the largest cable-television operator in the U.S., Comcast not only provides infrastructure for the delivery of content, it also creates content itself through its ownership of cable networks such as E!, the Golf Channel, Versus and Style. Comcast's growth, however, has been a problem; its shares have suffered double-digit losses over the past three years. The Dodge & Cox Stock Fund (DODGX) is the top fund holder of Comcast shares, with 4.5 percent of its assets in Comcast stock.

Rogers Communications (NYSE: RCI)

Toronto-based Roger Communications owns 52 radio stations, making it a broadcasting powerhouse. Rogers also operates in the wireless and cable segments with its global mobile communications and television systems. Rogers' shares have also gotten hammered in the past 12 months. It comprises 2.2 percent of the Thornburg International Value Fund (TGVAX), making it the biggest fund stakeholder.

McGraw-Hill Companies Inc. (NYSE: MHP)

Though McGraw-Hill was originally a book publisher, its portfolio has expanded to include financial services, magazine publishing, marketing, business-to-business marketing and broadcast media. While diversification may be a wise strategy, it also means multiple exposures to economic downturns. McGraw-Hill's stock price hit the skids, accordingly, with the advent of the credit crisis. T. Rowe Price Growth Stock Fund (PRGRX) is in the lead among funds with an 11.8 million share stake in McGraw-Hill.

Reed Elsevier (NYSE: RUK)

Reed Elsevier's primary business is publishing journals for scientific, medical and technical professionals, while the London-based firm's LexisNexis division provides tax, legal and regulatory information services. Business-to-business periodicals and websites services are offered through the company's Reed Business division. Reed Elsevier's American depository shares have been the standout winners among the old media “Big Six,” largely owing to the weakness of the U.S. dollar. The PowerShares International Dividend Achievers Portfolio (PID) owns 123,000 Reed Elsevier American depository shares.

Washington Post Co. (NYSE: WPO)

A long-time Berkshire Hathaway holding, Washington Post shares epitomize the classic value play, meaning investors require the patience of Job to await a return on capital. At least there's the dividend. The company's flagship newspaper is now a relatively small contributor to its bottom line. Test preparation and other educational services figure large in the company's portfolio as well as magazine publishing and cable/broadcast television operations. Longleaf Partners Small Cap Fund (LLSCX) is the largest fund holder of Washington Post's stock; its 352,000 share position represents 6.7 percent of the fund's assets.

Sirius XM Radio (Nasdaq: SIRI)

Sirius Satellite Radio already had a serious case of indigestion before it swallowed rival XM Satellite Radio in July. The newly combined operation offers more than 130 channels of commercial-free music, sports, news, talk and entertainment; it sells radios and accessories through automakers, consumer electronics retailers and mobile audio dealers. Tying its fortunes to subscriptions and to discretionary big-ticket purchases makes the company exquisitely sensitive to the current slowdown. Consumers aren't buying cars and boats with wild abandon anymore. A 42-million share stake in Sirius XM is held by Oppenheimer Global Fund (OPPAX), making up nearly 1 percent of the fund's assets.

As a group, old media issues have been on a three-year slide, losing an average 8.2 percent in stock value annually. New media, with its cheaper distribution capability, is clearly eating old media's lunch.

The New Gang

Check your holdings for these “Big Five” new media stocks:

Google (Nasdaq: GOOG)

Google, with a market capitalization of nearly $146 billion, is the internet content leviathan. By dint of its size, Google is the primary driver of the sector. The company just launched its Chrome web browser in another direct challenge to archrival Microsoft. Growth Fund of America (AGTHX) devotes 2.8 percent of its assets to Google shares, making it the largest fund holder of the stock.

Yahoo! (Nasdaq: YHOO)

To the extent Google represents digital media's upside, Yahoo! is the poster child for the sector's disappointments. The company has been the target of Microsoft takeover bids and, in a left-handed way, is now staving off further advances by partnering with Google to put up search ads on Yahoo! websites. With 1.1 percent of its assets invested in Yahoo!, Growth Fund of America holds the distinction as this stock's largest fund holder.

Baidu.com (Nasdaq: BIDU)

Through its subsidiaries, Baidu provides internet search service in China. Surging demand in the People's Republic has levered Baidu's price trajectory upward to become the fastest-rising new media issue of all those examined here. Calamos Growth Fund (CVGRX) holds more than a half million shares of Baidu, making up 1.3 percent of the portfolio's asset base.

Expedia (Nasdaq: EXPE)

Online travel company Expedia owns and operates a portfolio of brands, including Expedia.com, Hotels.com, Hotwire.com and TripAdvisor, among others. The leisure and corporate travel markets are particularly sensitive to the ebbs and flows of the economy, so Expedia's earnings expectations have been ratcheted downward recently. A 10.1-million share stake, representing 2.8 percent of its portfolio, makes the Legg Mason Opportunity Fund (LMOPX) the largest mutual fund holder of Expedia stock.

Akamai Technologies

Akamai Technologies provides file management and software distribution services for content and applications over the internet. Private upstarts — such as Conviva, BitGravity and Limelight — are now challenging the company's preeminence though Akamai's diversification may yet prevail against the newbies' video-driven assault. Legg Mason Partners Large Cap Growth Fund (SBLGX) has allocated 4.7 percent of its assets to a 3.9-million share stake in Akamai.

Collectively, new media issues have fared well over the past three years, at least when compared to the broader stock market. Though only three out of the five biggies cranked out positive returns for the period, the average annual return for the group is a not-too-shabby 23 percent.

Getting Old and Defensive

Competing head-to-head with the new kids is futility writ large, but old line media companies are adopting digital technology to make online versions of themselves. Take Sirius XM, for example. It offers an internet variant for the same $12.95 monthly subscription fee as its broadcast version. Increasingly, too, local newspapers are shrinking their page (and staff) counts and moving reportage to newly developed websites.

Adding online technology alone isn't a panacea. Old media's lunch is being eaten by its new competitors largely because of old media's inside-the-lunchbox thinking, according to Steve Petersen, an associate at Washington, D.C.-based Bivings Group media consultancy. Citing the New York Times' recent purchase of the Freakonomics blog run by University of Chicago economist Steven Levitt, Petersen says, “Buying a blog is another example of how old media organizations are missing the point. Old media companies should focus on fostering innovative new media properties themselves and not simply purchasing them; it doesn't take the place of in-house innovation.”

If old media finds a way to leverage its strengths while building out product lines, it may be able to turn its fortunes around. And, if that plays out, investors can find leveraged exposure to old media in some smaller fund portfolios. The funds in the table at right, up top, have the largest exposures, measured as percentages of their total assets, to our old media Big Six.

OLD MEDIA FUNDAMENTALS & PERFORMANCE (1 SEP 05 - 1 AUG 08)
Stock Market Capitalization ($ billion) Annual Return (%) Sharpe Ratio S&P 500 Correlation (%)
CMCSA 61.8 -10.3 -0.41 33.5
RCI 23.3 -2.8 -0.15 40.1
MHP 13.6 -3.8 -0.33 48.2
RUK 12.4 7.5 0.24 60.2
WPO 5.6 -9.2 -1.01 31.5
SIRI 4.2 -41.2 -1.31 13.8
Old Media “Big 6” 120.7 -8.2 -1.02 48.5
S&P 500 11,368.0 1.4 -0.23 --
NEW MEDIA FUNDAMENTALS & PERFORMANCE (1 SEP 05 - 1 AUG 08)
Stock Market Capitalization ($ billion) Annual Return (%) Sharpe Ratio S&P 500 Correlation (%)
GOOG 145.7 13.6 0.25 60.7
YHOO 26.9 -17.0 -0.48 22.1
BIDU 10.7 69.9 1.06 42.3
EXPE 5.1 -3.8 -0.16 58.3
AKAM 3.9 12.8 0.17 35.1
New Media “Big 5” 192.3 23.0 0.50 62.4
S&P 500 11,368.0 1.4 -0.23
CONCENTRATED OLD MEDIA POSITIONS
Stock Fund Percent of Fund Assets
CMCSA Fidelity Select Multimedia (FBMPX) 8.4%
RCI Am Cent Lng/Sht Mkt Neutral (ALIAX) 19.2
MHP Matrix Advisor Value (MAVFX) 3.8
RUK Stewart Intl Equity (SNTCX) 0.2
WPO Longleaf Partners Small Cap (LLSCX) 6.7
SIRI Monetta Mid-Cap Equity (MMCEX) 1.8

For those investors who think it's time to stick a fork in old media, heavy dollops of Big Five new media exposure can be found in these funds below.

CONCENTRATED NEW MEDIA POSITIONS
Stock Fund Percent of Fund Assets
GOOG Fidelity Select Software & Comp.(FSCSX) 12.4%
YHOO ProFunds Internet Ultra Sector (INPIX) 7.7
BIDU Oberweis China Opportunities (OBCHX) 3.5
EXPE Pin Oak Aggressive Stock (POGSX) 5.8
AKAM Phoenix Market Neutral (EMNAX) 7.9
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