Online: Where the Growth is

DQI Bureau
New Update

New Media are luring eyeballs and ads—and the market is betting
big on Google and Yahoo!



than 220 years ago, when the British surrendered to the colonials at Yorktown,

Va., legend says Lord Cornwallis marched out to a tune called The World Turned

Upside Down. Today, a media investor knows just how the defeated commander must

have felt. Media's collisions and revolutions are upending our notions about

which companies and technologies matter in the $1.3 tn industry. Downloads are

transforming the music business, and pay-per-view is looming for movies and

cable TV, while advertising is sprinting to the Internet. The media pie is

growing faster than the economy, about 7% a year, according to

PricewaterhouseCoopers' most recent forecast. But what we spend the money on,

and who gets it, is changing enormously. And that means the media world will see

plenty of winners and losers.


market is betting hard on Internet companies such as Google and Yahoo! at the

expense of big conglomerates, because New Media are where all the growth is.

Consulting firm Parks Associates forecasts that the Net will double its share of

the US advertising market to 10% by 2010. And that's a conservative estimate.

It assumes Web advertising, now a $12 bn market, grows just 14% a year, about

half the current pace. More aggressively, Piper Jaffray analyst Safa Rashtchy,

one of the first to spot the potential of advertising tied to Internet search

results, says the growth will be more like 20% a year in the US and 40% abroad.

If he's right, the global Web advertising market will hit $55 bn by 2010, up

from $19 bn now.


from Convergence
Company Price* P-E**
Apple Computer

Expensive, but still the innovator in online music and now video
76.33 34

The biggest Web ad agency and a leading player in advertising on emerging
27.15 45
R H Donnelley

Yellow Pages publisher could make key alliances with portals or get bought
63.22 16

Expensive but central to changes in huge markets such as local advertising
409.20 48

Will be a juicy takeover target if it can't make the transition to
25.74 31
Walt Disney

Its ESPN unit is preeminent in the high-growth sports market
25.19 16

9  **Based on 2006 earnings

estimates                                  Â

Data: Bloomberg Financial Markets, I/B/E/S


big losers are likely to be cable companies and others that distribute programs

over expensive pipes. Pricing in that business is becoming cut-throat as phone

companies such as Verizon Communications and SBC Communications follow

satellite-TV outfits such as DirecTV into competing with cable. Legg Mason Value

Trust manager William H. Miller III says he acted on this trend in 2004 by

selling shares of Comcast and using the money to add to his Yahoo holdings.


you want to bet on the New Media age, the first place to look is Google.

Granted, the search engine was an easier pick eight months ago, when it traded

around $200. Google now trades at 48 times the earnings Wall Street analysts

expect for 2006. Is that too much? Maybe, but not if you think influential

Citigroup Smith Barney analyst Mark Mahaney is right. On December 9 he sharply

increased his estimates by nearly 60 cents a share. Now he says Google will earn

$8.84 a share in 2006, in part because it gained 10 points of market share in

2005. That puts Google's price-earnings ratio at 48. “We are removing what

was an overly conservative bias in our estimates,” Mahaney says.


Slow But Sure

For a broader play on Web advertising, try Seattle ad agency aQuantive. Its

Avenue A/Razorfish unit is the largest agency buyer of ads tied to Web search.

And aQuantive is a leader in pay-for-performance schemes that tie payments for

online ads to the sales they actually generate. It is also in the forefront of

bringing ways to measure and personalize ads to traditional media such as print

and TV. aQuantive is a little expensive, trading at 45 times 2006 earnings

estimates. But Merriman, Curhan & Ford analyst Richard Fetyko forecasts its

profits will grow at 25% a year.


seems counterintuitive to bet on change coming slowly than expected, but it

makes sense because some transformations take longer than others. Consider

Netflix. The online video-rental company spent the past year fighting off an

expensive challenge from rival Blockbuster, but good times are starting to roll

again. Analysts say Netflix will make 82 cents a share next year, putting its

p-e ratio at a reasonable 31.


threat to Netflix is that video-on-demand could kill the market for DVD rentals.

But CEO Reed Hastings says VOD is materializing more slowly than expected

because of wrangles over getting studios to license more movies for digital

downloads. That makes next year's profits more secure-and gives Netflix time

to get big before VOD does. Someday a phone, cable, or Web media company will

want to deliver movies online. And the 20 mn subscribers, Hastings believes

Netflix will reach between 2010 and 2012 (it has 3.6 mn now)-all in the habit

of paying for movie subscriptions-will come in handy. Netflix could be an

acquisition candidate for a company that wants to distribute movies online or

stay independent and win attractive terms as a partner.



New Media devotees can hedge their risks with some judicious bets on Old Media

companies that are making a decent transition to the new world. One of them is

Walt Disney, whose sports site is much larger than anything Viacom and

Rupert Murdoch's News have at present. It's a leader in rich-media

advertising, which offers video or animation that spiffs up brand advertising.

Plus, sports-related businesses are expected to grow faster than most

traditional media, according to PricewaterhouseCoopers. Another reason to like

Disney: It partnered early with Apple Computer-still the most innovative

player in digital downloads-to offer ABC programs via its iTunes site.

Walt Disney is an Old Media outfit

making a forceful transition to the New Media world

Golden Pages

Believe it or not, among the hottest media bets is the $15 bn-a-year US Yellow
Pages market. Analysts at Kelsey Group forecast that $5 bn of locally targeted,

small-business advertising will move online by 2009. But Yellow Pages companies

have two things Web companies like: Internet-like margins of 40% or more and

armies of local sales reps-which portals don't have-to sell advertising to

small companies that lack tech savvy.



makes companies such as RH  Donnelley,

which publishes directories in 18 states, hot properties. Already, private

equity types are sniffing around Verizon's Yellow Pages business, which is for

sale. AT&T is taking its Yellow Pages business national through Even Barry Diller's IAC/InterActive which has an elaborate

local-advertising strategy and a cash-flow-conscious acquisition strategy,

isn't out of the question. Since Donnelley is one of the few pure Yellow Pages

plays, it's a good way to wager on the industry's strong cash flow and



media world can be baffling not just because of its size, but also because of

the number and speed of changes. But investors who bet on companies that have

great content and Web advertising-and are selling at reasonable

multiples-should do all right.


Timothy J Mullaney