Media companies brace for brutal year

NEW YORK (Reuters) - The U.S. media industry, fresh off a bruising 2008, is preparing for an even more brutal 2009 as the slump in advertising, fall in consumer spending and financial crisis show no signs of easing.

The economic turmoil quickens a challenge that television networks, cable TV operators, newspaper publishers and others already faced: the gradual, but epochal shift of people's tastes toward the Internet and digital media.

"2009 will be a tough year," said Stefanie Kane, partner at PricewaterhouseCoopers's entertainment, media and communications practice. "Clearly, consumers are cutting back spending. It's an economic reality, it's job losses and fear of upcoming job losses."

Even before the mortgage market meltdown that sparked the economic crisis, advertisers were devoting more of their budgets to the Web than ever before, leaving traditional media companies pondering their long-term survival.

The crisis brought that question center-stage and sent stocks of media and entertainment companies plunging -- from conglomerates like News Corp NWSa.N to video game publishers like Take Two Interactive (TTWO.O), from satellite radio provider Sirius XM (SIRI.O) to movie rental chain Blockbuster (BBI.N).

At the Reuters Media Summit in New York next week, top industry executives will discuss how to cope with the crisis.

How can they revive shareholder confidence? Should they sell off some assets or buy another company? The question, whether they are conglomerates or fledglings, is how they will grow as consumers pull back to save money?

On another level, could the crisis spark new interest in some forms of entertainment as people look for cheaper ways to amuse themselves, resulting in big opportunities for some companies? Or will people just stop spending money?

"Some people argue that media entertainment is counter-cyclical because people want and embrace the release that entertainment brings. That's true, but media companies are very concerned about consumer spending," said Howard Bass, senior partner in Ernst & Young's Global Media & Entertainment Advisory Services practice.

"We have to see what happens in retail next month, but I think it's going to be a very tough market," he said.

FEELING DOWN? BUY THINGS

Global advertising could fall 3.9 percent in 2009, led by an 8.7 percent decline in the United States, according to a UBS report released earlier this month.

Against this backdrop, the S&P media index .GSPME has lost 41 percent so far this year, underperforming the Dow Jones Industrial Average .DJI, which is down about 33 percent.

Experts say some media companies could take advantage of the drop in valuations to hunt for bargains. Technology companies, which were often too expensive, could round out some media companies' needs to adapt more to the Internet -- particularly in the mobile device world.

NBC Universal owner General Electric Co's (GE.N) chief executive, Jeffrey Immelt, has said he is interested in buying media properties.

Others include News Corp, with more than $5 billion in cash, and Time Warner Inc (TWX.N) with more than $4 billion. IAC/InterActiveCorp (IACI.O) Chief Executive Barry Diller also has said he is a potential buyer.

"They've got to continue to invest in the business where it makes sense," PricewaterhouseCoopers's Kane said. "Companies that can do it need to continue to drive their business and not just hunker down, or put their heads down."

Companies that will emerge as winners are those who understand that "flat is not the new up," she said.

This could mean buying some properties, as well as getting out of underperforming areas by selling them, even if the market determines that the price might be less than the seller thinks is right, said UBS analyst Michael Morris.

"If times are bad and valuations are depressed, maybe I do try to acquire a business that enhances a portion of my company that I think has very strong intellectual property," he said.

Media and tech deal talks were plentiful this year, though the most high profile, perhaps, were the failures: Microsoft (MSFT.O) and Yahoo (YHOO.O); Blockbuster (BBI.N) and Circuit City (CCTYQ.PK); and Electronic Arts (ERTS.O) and Take Two.

One area that could offer promise for struggling media concerns is video games. Though EA and Take Two was a bust, Vivendi (VIV.PA) successfully snapped up game publisher Activision, and games are one thing that home-bound scrimpers and savers are loath to give up.

"Media companies that see content or distribution in games or mobile that they think can embed well with their brands -- that will be where they will look to see if valuations today support an acquisition," said Ernst & Young's Bass.

(Additional reporting by Yinka Adegoke and Paul Thomasch; Editing by Tiffany Wu, Phil Berlowitz)