Not a Bump, but a Boulder on
Media Companies' Information Superhighway

by Laura Asplund
The Financial Manager, May/April Issue

With its limitless potential and current financial implications, new media remains the hot topic of the day and at the forefront of this year's Conference issues.

This special section offers a glimpse into new media at present; the Conference will provide lessons to survive - and flourish - in the future.

Only a year ago internet companies were cautiously considered successful new business models, until just after the holidays when the bottom dropped out. Now "dot-com" is spoken with trepidation, layoffs and shutdowns are common and the future of internet companies no longer blazes like the sun.

But is that true of internet properties held by traditional media companies?

While some broadcast corporations that have spun off internet divisions are still operating soundly, others actually have followed the stand-alone internet sites into the ground - a la Disney and Go.com. And although the revenue generation of traditional media's internet properties has continued to increase, profit accountability might see them headed for the same fate.

Realism

Part of the reason for media internet sites' continued existence and growth is the profitability of media companies overall and their more realistic approach to advertising, says Amando Madan, director at communications industry analyst BIA Financial Network, Chantilly, VA. Madan says that although reliance on advertising hurt internet companies, it wasn't because advertising isn't a solid revenue source.

"Much of the valuations of internet companies were predicated on the cost per thousand really exponentially growing," Madan says. "Given that it's interactive, you can click through - you're not just staring at a newspaper. The idea was that the new medium of advertising would be worth more per view, per thousand views, per impression that over time this internet ad revenue would be growing at an increasing rate."

"While we continue to see growth year after year, much of the valuations were based on explosive growth and the speed of that growth has been tempered."

Smart move

Madan says the traditional media companies' ability to "cross-pollinate" helped the value of their internet holdings, particularly if the properties were kept under the company umbrella.

"When there is a true company behind it, that obviously gives it a tremendous amount of staying power," he says. "In some cases people considered it cannibalization, but basically it was the ability to be there. It was the hedging of bets and one that I think was, although costly in many cases, a smart move."

Slow down

Veronis Suhler & Associates, New York, foreshadowed the internet implosion when it reported internet companies' operating losses of more than twice what it reported in 1998, from $1.5 billion to $3.9 billion. Traditional media, on the other hand, reported operating cash flow margins of between 28% and 40%, except for newspapers, which reported a margin of 17.6%, according to Veronis Suhler.

Last fall Zenith Media, New York, was predicting a major slowdown in advertising revenue by 2001. Ad revenues increased 13% from 1998 to 1999 and 9% from 1999 to 2000 - to $49.8 billion. The company projects only a 5% increase for 2001 to $54.5 billion.

Principals at Bond & Pecaro, Washington, DC, say even that kind of projection may be overly optimistic, citing reports that advertising revenue has been flat so far this year.

Tim Pecaro says Go.com was one of the top visited sites and still is, even though Disney is abandoning it. The number of pages or ads viewed isn't being converted into dollars generated.

"The air is out of the balloon and expectations are going to have to be more reasonable," Pecaro says. "Internet businesses are going to have to justify themselves through profitability and a solid business model."

"I'd be surprised if you didn't see more people pulling back," Pecaro says. "Operating an internet site is very costly and takes a lot of money to make it work - you've got to change the content, make it graphically interesting. The question is whether all that will be a return on investment."

Back seat

Jeff Anderson, principal at Bond & Pecaro, says it isn't unusual to see revenue growth even now, but the bottom line is profitability within a 12- to 24-month period, which Anderson said is unreasonable.

"I don't think the market has fully adjusted," he says. "Companies have very stringent expectations. Whether it's funded privately, publicly or through a parent company, the bottom line is that it better be generating some profitability soon."

Anderson says more companies are now taking a wait-and-see approach, taking a back seat until the technology that will allow quality content, not just content, is fully developed.

"Until the infrastructure is built, you won't get a lot of content and advertising-based companies," Anderson says. "Everyone is waiting for broadband and people will be looking to invest in those companies that are broadband-based."

Value now

Pecaro says the value in broadcast internet sites will materialize when broadcast audio and video can be delivered comparably to what viewers watch on their television screens.

"It's now painful to watch video unless you have a high-speed line," Pecaro says. "It doesn't add a lot of value right now."

Size doesn't seem to matter

The merger of Time Warner and AOL created the largest media conglomerate in the US, with combined revenues of $13.4 billion in 1999. AOL's 22 million subscribers are equal to one quarter of all households who use the internet. Madan says the merger was a good example of a needs-based combination - with Time Warner having the cable delivery capabilities and AOL bringing additional content and subscribers.

Many of the communication consulting firms are revising white papers and company analyses based on the internet downturn of the past few months. Bond & Pecaro's "CyberValuations" was expected to be completed by March and BIA's white paper on valuing the internet is scheduled to be published on its web site in May.

Chicago-based Laura Asplund is feature writer, The Financial Manager