Bear Stearns Takes Media Names Down; A Silver Lining for Digital Media


This morning we are seeing weakness in media stocks as Bear Stearns lowered its sector rating from MARKET OVERWEIGHT to MARKET WEIGHT.  Here are some excerpts (the “we” comments means “Bear Stearns”):  YTD in ’06, the MEDIA group is up 22% vs. +11% for the S&P 500. We have been bullish on the sector….. We also posited the Street would start to view technology as a positive driver rather than just purely a risk….We argued these factors would drive improved ROIC and multiple expansion…..Now that multiples have expanded, we think positive Street sentiment masks some very real challenges facing the entertainment stocks…..

We identify 3 issues that we think will limit sector outperformance in 2007: 
1. Long Tail. Incumbent creators of content will see slowing growth and market share losses to user generated content over the long run. Although this trend is unlikely to affect near term earnings, this could influence sentiment on entertainment stocks. 
2. Renewed M&A Cycle…History suggests that new more nimble competitors will emerge and that incumbents are unlikely to be able to compete organically and will need to acquire…..may dampen ROIC. 
3. Shift Happens. Advertising executives suggest marketers’ will 
accelerate their shift of ad spend away from traditional media to digital 
platforms in 2007. Digital today makes up about 10% of most ad budgets. Our 
contacts suggest this could Double in the next 24 months at the expense of 
traditional media. 

Net-net, we think these issues and strong performance in 2006 will moderate stock appreciation in 2007 for the group. As a result, we are lowering our sector rating from Market Overweight to Market Weight.  Bear Stearns expects that News Corp (NWS), Time Warner (TWX), and Disney (DIS) will be Market Performers; and Viacom (VIA) listed as the outperformer….Bear expects the “market perform” names to be in-line with S&P 500 Index performance: Bear Stearns however does not envision significant downside in entertainment stocks at this stage.

News Corp (NWS) had dipped to negative but shares are now up 0.35% at $21.44.  Time Warner (TWX) fell to over 1% down but now down 0.75% at $20.18.  Disney (DIS) had dipped to negative but shares are now up 0.25% at $32.97.  Viacom (VIA) had been negative all day, but are now up $0.02 to $37.75.

The silver lining here is in the expectations for online ad spending and the ramifications for everything all-digital:  Digital today makes up about 10% of most ad budgets. “Our” (Bear’s) contacts suggest this could Double in the next 24 months at the expense of traditional media.  This is the sort of things that online ad-dependent giants to the tune of Google (GOOG), Yahoo! (YHOO), CNET (CNET), Digital River (DRIV), Digitas (DTAS), 24/7 Real Media (TFSM), Aquantive (AQNT), and many others.

You will have to determine for yourself if you believe the projections in the note and trust the data.  Now time will tell if this all pans out and if it works out this way.  At least there is some more street forecasting and formal expectations of digital versus traditional ad spending for the coming years.

Jon C. Ogg
November 30, 2006

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