Big Media and The Black Liquid in 2007

Shamefully, it's been a month to the day since I last blogged. It's been one of those tough, grueling months, indispersed with a transatlantic trip to New York, hectic reporting deadlines on top of the usual Christmas-time mayhem, along with a couple of London visits which puts me in the family countryside home now in the south of England.

During advent I've had some time to reflect on what I see as the significant trends and events in the coming year. There are two big sectors I'll kick-off with in this post: media and oil.

The state of the media and what 2007 holds for it seems to be the big question on everyone's minds and topic for discussion recently. In a piece I wrote for the Wall Street Journal recently (Free Newspapers in a Contest), I uncovered a variety of contrasting opinions over the question of news free-sheets when I began asking around:

"We have been able to reach a younger audience with the free press," says Peter Jorgensen, marketing director for Telenor ASA's Sonofon, a leading mobile-telephone provider in Denmark that advertises in Danish freesheets Metro and Urban.

These free newspapers and Web sites, cheaper to buy space in than traditional broadsheets and tabloids, are attracting both classified and full-page corporate-ad deals at a much faster rate.

But distribution is a huge problem for the freesheets, Mr. Lichtenberg says, which raises the question of whether the advertising is effective. "They are all over the streets, in trains and in coffee shops," he says. "It's annoying and it adds another meaning to the word junk-news. There have been many incidences of entire truckloads of free newspapers left at parking lots."

... Readers such as Fredrika Falkestav, a receptionist at the five-star Rica Hotel in Stockholm, find the freesheet format easily digestible. "In my job it's important to know a little bit about everything that's going on in the world, and the freesheets are better at giving me a quick summary of everything," she says. "And it's free."

I have to say, I think the era of newspapers in general is over, free or not; by contrast, the era of free news online is at a thrilling cusp. For a start, the print business model is completely defunct. Secondly, it's hardly an effective medium with which to 'break' news stories. Someone in New York put it to me like this: "Hundreds of reporters in all locations go out and compile stories. A group of editors then sits at a desk, lays out those stories, edits them, and prepares them for publication. The blueprint then goes out to a large printing factory, the papers printed then get delivered to lots of regional depots; the papers in those regional depots go out to more subregional depots where they're delivered to shops or direct to someone's home. The reader picks up the paper in the morning, reads three articles, and throws it out." Absolutely.

If you're in the newspaper business right now, let me give you a piece of friendly advice: make it your New Year's resolution to get out and get online, because 2007/8 is probably the last chance you'll get before everyone starts rushing towards the internet door (indeed, the migration is already starting to happen, but like anything, the quality has been slower to come than the initial quantity).

This brings me to a further, reflexive prediction: one or more of the big blogs will be offered a huge sum of money as news corporations continue their obsessive search to discover those ever-elusive but too-good-to-resist online advertising bucks. I said a little while ago - to much subsequent debate - that Instapundit may be able to fetch up to $35.1 million. Expect a few exaggerated offers like this for the big blogs this year: they are the next logical step on from social networking sites and internet news sites. If your a skeptic, consider the potential: if the New York Times or the Los Angeles Times acquired some of the big personality-driven blogs it would give them the ammunition (in terms of increased reader volumes and interactivity) to fuel that crucial push into online-only publishing (recalling the defunct-business-model hypothesis).

I'm looking forward to Yahoo!'s Panama - at a fraction of Google's price this upcoming media giant is an exciting buy this January. Yahoo! boasts more daily visitors than Google and has a great media distribution platform. Ironically, it's the easiest stumbling block of all that's weighing down on the company's $35-billion valuation: figuring out how to boost margins, and the chances are good that Panama, with its customized advertising, will serve this purpose.

The next big dinner-table topic this Christmas-time is the price of oil. Last week, I covered the Norsk Hydro-Statoil merger in Norway for thestreet.com (Norsk Hydro Scores Coup). As I pointed out in the article, this was less a merger than a buy-out:

"On paper it's a so-called merger among equals, but it's fair to say that Statoil is paying with its own shares" for Norsk Hydro's oil and gas assets, says Morten Normann, a senior research analyst at Kaupthing AS, noting that Statoil's reserves and production facilities double those of Norsk Hydro's.

Norsk Hydro will end up owning 32.7% in the newly combined company, while Statoil will hold a 67.3% stake.

What led me to this line of investigation was actually Norsk Hydro's own beguiling reaction to my questioning about whether this was really a merger or a disguised take-over. "It's a merger among equals and I don't have any more time for this call," Hydro's press spokesman Kama Strand told me abruptly.

Although this is definitely a big deal for shareholders in Hydro, I'm afraid I'm not so bullish on this deal. The deceiving announcement, along with the fact that Norway's two largest oil companies are getting in bed together (albeit very much one on top of the other) when the government rejected this exact same deal only three years back, all smacks to me of a hugely defensive maneuver designed to shore up these two companies' regional and international assets in the wake of a commodity price which is dancing on the edge right now. As one analyst noted in the article:

While bullish on the deal, Molsater points out that if oil prices continue to decline, investors in both companies have more to lose now that the plans have been announced. "What we'll see now with this transaction is that the decline will start from a much a higher level than before the merger plans were announced," he says.

And there is your real story. Oil prices are going to be under some serious pressure this year and you'll probably see a bunch of big declines across-the-board and shareholders scrambling to the doors of the regulators crying about unfair treatment as profits fail to live up to over-inflated 2006 forecasts. It's the same old story, and it happens time and time again. This type of deal should sound big warning signals to shareholders. Hydro investors would be best off taking the cash and putting it into something with a traditionally higher P/E ratio this year, like technology.

And here's why. There are no big global elections this year, geo-political risk is in line to hit a five-year low, and the worst of the middle east  action seems to have passed us, with troops pulling out slowly but surely. In short, there's little to fuel a big push behind the black liquid. Conversely, there's a lot to be bullish about speculatively - particularly considering the euphoric and undiminishing rise of private equity venture capital this year - which is why traditionally higher risk-reward stocks like tech will pick up lots of the excess cash.

I'll write again shortly with some more predictions for 2007; for now, a very happy New Year.