Commentary: Market tough on new media

Sirius and XM merger problems illustrate larger issues

At the mid-year point, the S&P 500 is down 13% while The Hollywood Reporter Showbiz 50 is down 15%. And investors trying to hide in new media saw no relief.

Case in point: at the beginning of the year it was tough to find someone bearish on Sirius and XM, given that their merger plans would save them hundreds of millions of dollars and they'd be able to sell commercials that would reach 15 million subscribers for their consolidated company.

On the other hand, most Wall Street analysts and investors didn't even have that other satellite radio company, called WorldSpace, on their radar.

So it figures, if you're a contrarian, that is, that at the half-year mark WorldSpace is one of the few new-media companies trading higher while XM and Sirius have been crushed.

WorldSpace offers satellite radio service to parts of the world far from the Unted States. Compared to XM and Sirius, it has almost no revenue, shareholders or subscribers, but its stock is 11% higher so far this year.

Sirius and XM, on the other hand, have more than $2 billion in annual revenue between them and lots of very bullish investors and analysts boasting of their potential. But Sirius fell 37% so far this year and XM is down 36%.

Beyond WorldSpace, new media winners include RealNetworks and a couple of video game stocks: Activision up 15% and Take-Two Interactive Software up 39%.

Those latter two relied on merger-and-acquisition strategies to move their shares. Take-Two has an offer on the table from Electronic Arts and the shares could sink dramatically if EA were to lose patience and withdraw its takeover bid.

And Activision has agreed to merge with Vivendi Games to create a new company dubbed Activision Blizzard, which it claims will be "the world's largest and most profitable pure-play video game publisher."

Investors seem to be buying that assessment, as Activision far outpaced rival gamers EA (down 24% this year), THQ (down 28%) and Midway Games (off 20%).

As for RealNetworks, it's in both the online games and music business, and it said it will spin off its casual games unit, which is likely the news that encouraged its shares to buck the new-media downtrend. RealNetworks shares are up 8% this year.

The Nasdaq is down 14% so far this year and few new-media stocks fared better than that. Yahoo, which may or may not be a takeover candidate, is only off 11%. And television technology company NDS, which soared 19% on Monday because of a take-private deal that was revealed on Friday, is off only a few pennies for the year. Netflix also is off a relatively good 2%.

Some new media stocks faring much worse are: Apple (off 15%); Hollywood Media (off 15%) Dolby (down 19%); Liberty Interactive (off 23%); Google (down 24%); TiVo (down 26%); IAC/InterActiveCorp. (off 28%); Napster (off 28%) Avid (down 40%) and DivX (down 48%).

Yahoo got some positive comments Monday from analyst Youssef Squali of Jefferies & Co., who says that Microsoft still might "re-engage" takeover talks and, even if it doesn't, the stock is cheap at just 12-times this fiscal year's free cash flow.

The problem with Sirius and XM shares are that, after 16 months of regulatory shenanigans, investors have lost interest in the deal. Technologies that give consumers access to their entire music collections in their cars have been adopted so quickly that pay-radio doesn't seem as necessary as it was a couple of years ago.

Citigroup analyst Tony Wible said in June that there's a 90% chance that the merger will be approved, and he upped his target on XM to $12.75 from $12 and on Sirius to $9 from $7.50, making him the most bullish analyst on Sirius.

But also in June, Goldman Sachs slammed XM and Sirius, reiterating its "sell" recommendation on both. Analyst Mark Wienkes says merger or no merger, shares of both are headed for a fall. Indeed, six days after Wienkes issued his proclamation, Sirius shares had fallen 23%.

TiVo is also suffering from investor impatience, with its years-long patent battle with Dish still dragging on. Much of TiVo's 26% swoon this year, in fact, occurred just in the last month, when a judge put off another important legal decision until Sept. 4.

Todd Mitchell said TiVo shares are worth $9 excluding any benefit from the Dish lawsuit and $12, or more, with a favorable Dish decision. Investors -- at least in June -- weren't buying that analysis.

Investors also worry about competition. In fact, in a letter to shareholders made public Monday, TiVo CEO Tom Rogers wrote: "There will be a plethora of new devices hitting the market that are intended to attach to the television set."

He added his assertion that TiVo is "the one box, one remote, one user interface, one-stop shop for all content that is the easy, elegant and affordable ultimate television experience."

Analysts are all over the map on TiVo, with one calling for a $20 stock price and another for just $5. The bears won that battle handily in the first half of 2008.
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