Probably, Given How 2005 Changed the Media Landscape

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LOS ANGELES ( -- 2005 could go down as the sea change year in consumer media. Broadcast network TV ratings fell to their lowest level in TV history, newspapers struggled to connect with young readers and a new player emerged as the most valuable media company: Google, with a stock market value of $130 billion and aggressive plans in its search for expansion.

Googlephobia at first seems unwarranted. Google’s bubble-bursting market capitalization is higher than the combined market worth of No. 2 media company Time Warner; newspaper publishers Gannett Co., Dow Jones, Knight Ridder and New York Times Co.; radio giant Clear Channel Communications; and magazine publisher Meredith Corp. Never mind that those seven companies’ revenue in the last four quarters -- $68 billion -- dwarfed Google’s $5 billion.

Growing up fast
But Google, which gets 99% of its revenue from advertising sales, is growing up fast. Already No. 1 in stock value, Google should break into the top 20 U.S. media companies in revenue when Advertising Age publishes its ranking later this year. The company turns Web ads into net income, taking 25 cents of every revenue dollar to the bottom line.

Google’s '05 revenue was about even with that of Microsoft Corp. when it introduced Windows 95 a decade ago. Back then, investors valued Microsoft at $53 billion, less than half of Google’s January 2006 value. Google’s stock price leaves it little room to stumble, and that puts added pressure on the company to keep booking the ads that support its shares.

Can Google keep it up? The “risk” section in a recent Google filing with the U.S. Securities and Exchange Commission ran 11,837 words -- 10 times the length of this article -- with a long list of competitive threats and other troubles that could foil Google’s plans. That’s must reading for optimistic investors -- and for pessimistic, embattled executives from old media.

Not the only story of '05
Google was by no means the only media-tech story of 2005. A common thread for the other stories: How consumers are using technology to access media when and how they want it. As Editor at Large Greg Lindsay wrote in Advertising Age this month, consumers are “running traditional distribution channels through a blender, watching TV on iPods, discovering new music on and then texting each other about it on their cellphones.” Coming up this year: News Corp.-controlled DirecTV, the nation’s leading satellite-TV service, will introduce DirecTV 2Go, a service that will let consumers transfer content from a DirecTV digital video recorder to various portable-media devices.

Media companies are scrambling to keep up, but that doesn’t mean it’s time to write off old forms of media. Data released in 2005 by the U.S. Bureau of Labor Statistics show that American consumers on average spent 51% of leisure hours watching TV in 2004. And newspapers, while struggling for growth, still are highly profitable; No. 1 publisher Gannett over the last four quarters had an operating margin of about 28%, not too far behind Google’s 33%.

But there are warning signs. U.S. broadcast networks’ prime-time ratings fell to a historic low in the 2004-05 season, when just 32.4% of TV households tuned in, down from 54.6% in 1980-81, according to data from Nielsen Media Research. Networks have other reasons to worry: DVRs make it easier to zap ads, and consumers, particularly younger people, often surf the Net while the TV drones on in the background.

Newspapers' serious challenge
Newspapers, meanwhile, face a serious challenge in connecting with the next generation. Weekday paid circulation for 786 U.S. papers dropped by 1.2 million -- a 2.6% decline -- in the six months ended Sept. 30, 2005, vs. a year earlier, according to an analysis of Audit Bureau of Circulations data by the Newspaper Association of America.

To be sure, U.S. ad spending has continued to grow since the ad recovery began in May 2002 (after the recession officially ended in November 2001). But 2005 ad spending came in below projections.

In December 2004, forecasters predicted U.S. ’05 ad-spending growth of 4.2% (Publicis Groupe’s ZenithOptimedia) to 6.4% (Interpublic Group of Cos.’ Universal McCann).

In December 2005, ZenithOptimedia pegged 2005’s actual U.S. growth at 2.9% and predicted a 5.1% boost for 2006; Universal McCann’s Robert J. Coen said ’05 came in at 4.6%, and he predicted a 5.8% jump in 2006, when Winter Olympics and congressional and state election advertising will give this year's spending a boost.

Shrinking payroll at media companies
In the midst of this supposed advertising recovery, media companies have shrunk their U.S. payroll as they try to figure out new rules to a changing game. Since the ad recovery began in May 2002, U.S. media companies have cut employment by 3.9%, according to Advertising Age’s analysis of Bureau of Labor Statistics data.

Internet media companies, with a growing ad business, are expanding employment. But those gains are not enough to make up for major cutbacks in old media. Magazine companies, for example, have eliminated one in 10 U.S. jobs since the “recovery” started. It’s a similar picture for U.S. ad agencies, which have cut 5.6% of jobs during the recovery as they react to pressures from clients to cut costs and from Wall Street to deliver results.

Since the last U.S. recession ended in November 2001, U.S. AdMarket employment -- advertising services and media -- has fallen 6% (to 1.56 million) while total U.S. employment has increased 2.4% (to 135 million), according to Ad Age’s analysis of government data. That cut the AdMarket’s share of U.S. employment to 1.16% in October 2005 from 1.26% in 2001. No big deal? Tell that to the 100,500 people whose ad jobs have been cut since economic expansion resumed in 2001.

Consumer spending
In some respects, the job cuts are a surprise given the relative health of the U.S. economy and the remarkable strength of consumer spending. Give credit (and a load of debt) to U.S. consumers, who now are living beyond their means -- officially. The nation’s personal saving rate turned negative last June and has held there since. That means consumer spending exceeded income from wages, investments and government checks for the first time since the Great Depression in 1933.

Consumers drove the nation out of recession in 2001, and consumer spending as a share of U.S. gross domestic product in 2002 reached -- and has held at -- 70% for the first time since 1940.

But in four of the past five years -- all years except 2004 -- growth in U.S. nominal (pre-inflation) GDP has outpaced ad-spending growth, giving advertising a shrinking share of the U.S. economy. This in part reflects that marketers are shifting spending from advertising to other forms of marketing, such as branded entertainment and promotion. But whatever the micro explanations, the macro meaning is clear: Advertising, media and marketing are undergoing fundamental changes that became readily apparent in 2005.

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