The evisceration of traditional media – advertising flows to digital

The naysayers of the dot-com era took particular delight in the demise of Henry Blodget, the Internet analyst at Merrill Lynch (where I used to work in the late 1980s) who was caught out promoting Internet stocks that he apparently privately thought were “a piece of junk” or “a dog”. As part of a subsequent settlement he is now not allowed to work in the securities industry. However Blodget continues to research the Internet industry on his blog Internet Outsider, where he has recently been writing provocatively titled posts such as Dead-tree media deathwatch: RIP Business 2.0, Running the Numbers: Why Newspapers are Screwed, and The Great Advertising Share Shift: Google Sucks Life Out of Old Media.

In this last post, Blodget analyzes the top 19 media companies (with supporting spreadsheets provided), indicating that advertising has shifted to online by 7% over the course of one year. The top-line figures are that US advertising at Google, Yahoo!, AOL, and Microsoft grew by $1.3 billion in the second quarter of 2007, while advertising at the 15 largest other media organizations fell by $280 million in the same period.

Or from another perspective, total advertising increased by 8% to $13.8 billion over the last year, with online increasing from $3 billion to $4.2 billion (23% to 30%), while offline advertising decreased from $9.9 billion to $9.6 billion (77% to 70%). Blodget comments:

These trends are secular, not cyclical: TV networks, radio networks, and newspaper companies won’t suddenly wake up one morning and find themselves back in charge. Individual Internet companies may screw up (see Yahoo/AOL), but if they do, others will rise to take their place (Google).

Traditional media executives are doing a superb job of milking cash flow out of shrinking businesses, but you can’t save your way to prosperity. The smartest companies acknowledge this and are 1) returning cash flow to shareholders, 2) diversifying via M&A (as the Washington Post has done), and/or investing in or buying promising interactive businesses.

These trends underline why so much media has been shifting into private/ private equity hands: even swiftly eroding cashflow can be used to service debt, whereas equity markets severely punish poor long-term growth prospects. There are certainly a range of viable strategies for traditional media companies, both in dealing with their existing assets, and leveraging current content creation and distribution capabilities into new industry segments. However the pace of the shift to digital (which is far more than just online) advertising makes managing legacy media a challenging proposition.