Source : Globe & Mail

Eight months ago, no less an authority than Warren Buffett declared the old-media game in critical condition, if not dead.

"People are always going to want to be entertained and informed. But we've only got two eyeballs and 24 hours a day," he said. "Technology has given us many more ways of being entertained and informed, but not the time." As their audience gets carved up into ever-smaller pieces, he suggested, profit margins for media companies can only go one way — down.

That warning, coming from a guy who made a fortune on conventional media assets like The Washington Post and ABC, seemed as good a reason as any to forget about old media. But then a funny thing happened: Other investors completely ignored him.

After three years of doing nothing, the S&P 500 media index, which includes such moribund names as CBS, Walt Disney and Time Warner, rose nearly 20 per cent in the second half of 2006. Canadian media stocks had a good run as well; the S&P/TSX media index was up 15 per cent last year and beat the market average for the first time in five years.

They're up another 6.4 per cent in the first two weeks of 2007. What's behind the resurgence? Merger activity is one catalyst, as shown in this week's $2.3-billion takeover of Alliance Atlantis. But it had started before that. When two private equity firms stepped up to offer $19-billion (U.S.) for Clear Channel Communications last year, the largest U.S. radio broadcaster, it was a signal to the market that media assets had become too cheap. (Last summer's purchase of CHUM by CTVglobemedia, which owns this newspaper, may have had a similar effect in Canada.) Deal making is only part of the story, however, and it fails to fully explain the rally. There's little prospect of the Péladeau family selling Quebecor Inc., for example, yet the shares are up 68 per cent since July 1, one of the best-performing media plays on the continent. So other factors must be at work, two in particular.

One is that the future for traditional media was never as bad as the pessimists made it out to be — just as was never as good as the Pollyannas believed when media valuations were driven to new and absurd heights during the technology-media-telecom bubble at the turn of the century. Podcasts and satellite radio may proliferate, yet somehow Corus Entertainment still manages to squeeze 30 cents in EBITDA out of every dollar in revenue at its radio stations. You can download Desperate Housewives for free (Heaven knows why you would want to), yet Astral Media's pay-TV service continues to gain subscribers. The two companies were the losers in the Alliance Atlantis bidding, yet both reported strong financial results this week.

The second factor has to do with the economy, and the hope for a slowdown that avoids recession yet removes any threat of inflation or high interest rates. A lot of investors seem to believe that the magic "soft landing" is at hand, and it so happens the media sector may be one of the better ways to profit from it. That was the case in 1995, when the U.S. Federal Reserve steered the American economy to a soft landing with interest rate cuts; the S&P 500 media group gained nearly 24 per cent that year.

No one's quite sure why a mild slowdown might be good for media stocks, but there are theories. One — and there's statistical evidence of this — is that when inflation cools, companies increase their advertising budgets to "combat consumer belt-tightening," says BCA Research of Montreal. Another is that slower growth encourages investors to turn away from groups that prosper in boom times, namely commodities, and look elsewhere, favouring firms with stable profit growth and rising dividends. "These media businesses were fine," says AGF portfolio manager Keith Graham, "but they weren't oil companies or copper companies or uranium companies."

Now it's those oil stocks that are taking a beating, and media stocks that are rising from the grave. If this is what death looks like, investors in media shares hope they'll be dying for a while yet.

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