Investors: Stay Out Of Media

We might have expected the traditional media companies to enjoy robust circumstances longer than they did. But with advertising numbers for 2006 beginning to filter in for the television broadcasters and the magazine publishers, it is becoming increasingly clear that the same sort of malady that has been so often discussed for newspapers is also pervasive for many traditional media companies.
At the newspaper publishers -- companies like New York Times (NYSE: NYT), Tribune (NYSE: TRB), and McClatchy (NYSE: MNI) -- a somewhat vicious circle of lower circulation is propelling reduced advertising revenues, which in turn is leading to talk of outright company buyouts in some cases and asset divestitures in others. The lower circulation figures themselves can be tied largely to the inherent lack of immediacy in the newspaper format and frequency.
A first pass at counting television advertising revenues for 2006 by accounting firm Ernst & Young -- and limited to a sampling of six New York stations -- now appears to substantiate somewhat the notion that advertising revenues for television may also have dipped for the second year in a row. According to the survey, the six stations billed about $1.402 billion, or about 0.3% below 2005.
Even given the biannual one-two punch provided by Olympic games and federal elections, the lack of growth was expected. And according to those who study broadcast advertising trends carefully, the "base market" -- total advertising dollars minus Olympics and political ads -- was up ever so slightly in 2006. Looking ahead, the expectation appears to be for that same base market to continue to grow in the low single digits this year, with a similarly expected decline in the overall market.
Interestingly, television broadcasters have experienced a variety of share price reactions amidst these market circumstances. Hearst-Argyle (NYSE: HTV), for instance, perhaps the purest play in television broadcasting, watched its share price increase by about 10% last year, while Belo (NYSE: BLC), which is both a newspaper publisher and a television broadcaster, experienced about an 18% share price reduction.
The world of magazines did not fare better than broadcasting last year. For instance, Time Warner's (NYSE: TWX) Time Inc. publishing unit experienced a 4.8% drop in ad pages, although its flagship Time held relatively steady, with just an 0.8% dip. At the same time, People dropped 2.8% and Sports Illustrated fell by 3.5%.
Over at Hearst Corporation, total ad pages were down 0.7%, but Esquire increased its count by 4.1% and Redbook was up 3.5%. Conversely, Cosmopolitan was 4.0% lower, and Country Living was down 4.4%. At Meredith (NYSE: MDP), which publishes mostly women's interest titles, the total decline was 1.4%, although Family Circle increased its advertising pages by a healthy 8.9%. Ladies' Home Journal was, however, essentially flat, with a 0.5% decline in ad pages, and Better Homes and Gardens fell by 8.2%.
What, then, is the lesson in these figures for Foolish investors? My take, quite simply, is that the optimum way to invest in the media space as we move into 2007 is either through those companies that were formed specifically to serve the Internet or those -- the cable operators are a noteworthy example -- whose fate is not highly dependent on advertising. The more traditional media companies clearly need more time for strategic redirections.

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