Is there a Silver Lining to Media's Perfect Storm?

Looking back at 2008 and towards 2009, there's no question that media stocks are facing a perfect storm.

It's the nasty coinciding of cyclical and sector challenges — media giants are trying to transition to a new digital future and build new revenue streams, while the economic downturn is sending ad revenue off a cliff.

So is there a silver lining to those storm clouds?

As we near the end of the year I'm hearing more and more from fund managers and analysts about the opportunity — not in content creators, but in the distribution companies, cable and satellite TV.

Larry Haverty, the head of Gabelli Multimedia Fund, spoke with me about his media strategy for 2009. When it comes to the content creators, his fund owns stakes in Time Warner and News Corp.. His biggest holding is Grupo Televisa, the dominant television broadcaster in Mexico. This company totally dominates Mexican television, its market share always in the 60- to 70-percent range.

And while U.S. TV broadcasters struggled with a drop in advertising this year and an even bigger fall next year, TV advertising is a lot less cyclical than Mexico, so Grupo Televisa won't be as affected. And it's not just a content provider, it's vertically integrated, the dominant satellite provider in many parts of the country. And Haverty likes the fact that it has plenty of free cash flow, using it to acquire more TV companies.

Haverty's other strategy is to pick content distributors. His picks are Cablevision (Gabelli Funds own 8.2 million shares or 2.78 percent) and DirecTV (his fund owns less than 1 percent of the stock outstanding).

Across the board, Haverty says media is undervalued, the stocks battered more than cash flow merits. And Haverty points to the fact that cash flow at the distribution companies are actually up, but these cash flows are valued at very minimal values by Wall Street. For Cablevision, he points out that newly low interest rates should benefit the companies.

DirecTV has fared quite well over the past year — down just about 10 percent, far less than the Dow. Its investment in high def content and sports programming has helped it in its competition with Dish Network's Echostar, whose stock has plummeted over the past year. Haverty isn't the only one to like DirecTV; earlier this month, Morgan Stanley analyst Benjamin Swinburne issued a report on the company saying the stock is his top pick in the media space. With fewer people buying new homes and upgrading, it seems like the company's new subscribers are sure to drop off in the recession. We'll see how much this affects DTV next year.

Here's my question: Sure, in the last recession people might have been unwilling to give up their premium cable services. But has the huge amount of content available online changed things? If people can watch their favorite shows on their laptops and rent seasons of HBO shows on Netflix, do they need to pay for premium services?

Questions? Comments?