Media Companies Struggle to Capitalize on Internet

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Media titans are still a long way from figuring out how to deliver their goods and engage with their audiences over the Internet, while still making a profit. As they enter 2007, many of these companies will be turning to newly installed executives to make it happen.

At TV and radio broadcaster CBS Corp., CEO Leslie Moonves recently tapped a veteran Silicon Valley dealmaker, Quincy Smith, to build up its interactive offerings. Smith said that part of his mission is to make sure CBS is ?very approachable? by entrepreneurs with new ideas.

Another media stalwart, News Corp., is already moving out of entrepreneurial mode with MySpace, the social networking site it acquired 18 months ago, replacing its interactive chief Ross Levinsohn with a seasoned Fox TV executive Peter Levinsohn, who happened to be a distant cousin.

?The feeling was that we were entering a stage when this was less about deals … and more about maximizing what we have,? News Corp.?s chief operating officer Peter Chernin told a recent meeting of investors. ?Now our focus is how to we build out the asset.?

For many media companies, a big question for 2007 will be how to grow their revenues from online and interactive sources, and whether to do it by buying businesses, building up ones they already have or coming up with new models from scratch.

Philippe Dauman, who took over as CEO of MTV owner Viacom Inc. in September, affirmed his goal of reaching $500 million in revenue from digital businesses in 2007, but acknowledged that the company needed to work harder at creating opportunities for advertisers online. ?We could sell a lot more than we have,? Dauman said at an investor conference.

Dauman came in after Viacom?s chairman and controlling shareholder Sumner Redstone grew impatient with the company?s lagging share price and what he saw as the apparent hesitation by former CEO Tom Freston to aggressively pursue Internet deals.

How aggressive Big Media will be in 2007 with deals, however, is far from certain. Media bigwigs watched with a mixture of fear and fascination this year as the video-sharing site YouTube became a cultural phenomenon, but few were ready to brave the copyright issues that would have come with buying it, let alone the $1.76 billion price tag that Google Inc. wound up paying for the upstart company, which had yet to make profits.

Media CEOs would love to make transformative deals ? CBS? Moonves says he wants to find the ?next? YouTube ? but the big prizes may remain out of reach. ?If your stock is at $500, most deals look pretty cheap,? quipped News Corp.?s Chernin, referring to Google?s lofty share price. ?We don?t have that luxury.?

Tony Kern, head of the media and entertainment practice at Deloitte, a consulting and accounting firm based in New York, says 2007 will be a year of ?re-evaluation? for several of the recent deals to hit the media space, notably Google?s deal for YouTube.

?There?s a lot of money being spent, and while advertising is increasing dramatically across the Internet sites, I don?t think it?s increasing at a rate that will prove out the investment strategy,? Kern said.

Online advertising continues to grow very quickly, but its share of the overall advertising pie remains relatively small. ZenithOptimedia forecast this month that global Internet advertising spending would grow 28.2 percent in 2007, compared to growth in other media of 3.9 percent.

However, the $24.4 billion spent on Internet advertising in 2006 is just 5.8 percent of global advertising spending of $423.8 billion, according to ZenithOptimedia. The Internet?s share of global advertising is expected to rise to 7 percent next year.

Many expect smaller deals to continue as 2007 unfolds, a process that could result in even more Internet entrepreneurs coming into the fold of media companies.

Media companies also could find themselves on the receiving end of investor interest in 2007. With the stocks of many traditional media operators still out of favor on Wall Street, many expect an emerging wave of buyout deals by private equity firms to continue.

Already this year, Readers Digest Association Inc., radio industry leader Clear Channel Communications Inc. and Univision Communications Inc., the nation?s largest Spanish-language broadcaster, have all agreed to be bought out by private equity firms, and more deals could be on the way. Newspaper publisher Tribune Co. is considering a sale of all or part of the company, a process that should conclude early next year.

?There is a ton of capital in the market right now,? says Brendan Buckley, the lead media analyst at Fitch Ratings Inc., a credit ratings agency. ?We don?t think anyone is immune in this particular market.?

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