In the words of one industry analyst, there aren’t so much trends in the Canadian media and entertainment sector as there are events that change everything.

Before you choose investments here for 2007, it’s worth reflecting on how regulatory intervention — such as the federal government’s recent move on income trusts — can change an
industry’s landscape.

The Canadian Radio-television and Telecommunications Commission, for example, could change or drop foreign-content media ownership restrictions, which stand at 20 per cent in direct equity. It happened in Australia, and there’s a slim chance it might happen here. “It’s being talked about a lot, and it could come down in 2007,” says Doug Stadelman, a fund manager at Cypress Capital in Vancouver. The CRTC will decide within the next year on two items that could materially affect earnings in the sector. Radio stations want to relax Canadian content quotas, and some conventional TV stations, such as Global and CTV, have asked whether they can charge cable companies for their broadcast feeds, which are currently provided for free. The fees would likely be passed onto consumers in the end. “I’m not betting on it happening,” Mr. Stadelman says of the TV decision.

Regulation is a major player in the Canadian media industry, which means it can be tough to make bets. As well, the tune that analysts are singing is one of slower global economic growth next year, with a risk that U.S. growth could decelerate quickly, affecting global advertising.

Without that risk, advertising in 2007 looks healthy, led by growth on the Internet, radio and specialty TV, according to the latest report from RBC Dominion Securities Inc.

Among the laggards are conventional TV and newspapers; in slowing conditions, auto companies and condo developers buy fewer ads in newspapers. Publishers such as Quebecor Inc., owner of the Sun chain, and Torstar Corp. are already feeling it. Quebecor and Transcontinental Inc., publisher of The Hockey News and owner of printing presses, see less demand in a competitive industry as well.

“The businesses we are avoiding are declining businesses, or ones threatened by U.S. competition,” Mr. Stadelman says. “Plus, newspaper readership is declining.”

Regional newspaper publishers, such as Glacier Ventures International Corp., are generally less vulnerable to advertising trends because their small papers operate outside urban centres, where competition drives down ad prices.

From the same perspective, radio broadcasting has strong regional appeal and revenue in Canada, and is seen as a complementary medium to the Internet. You can surf the ‘Net and listen at the same time, says Ted Macklin, managing director of Guardian Capital LP in Toronto. “Everything I’ve read suggests that radio ad-growth rates are still favourable,” he says, pointing to Astral Media Inc. and Corus Entertainment Inc., which own both radio and TV properties.

In fact, specialty TV owners such as Astral, Corus and Alliance Atlantis Communications Inc. are analyst favourites. The companies sign up more cable subscribers every year, and some advertisers prefer the lower rates and defined audiences attached to channels such as Showcase and History Canada.

“For 2007, it’s still probably the fastest growing part of the media,” Mr. Stadelman says of specialty TV.

The slowdown in advertising applies to the conventional television industry, too, but especially to such broadcasters as CanWest Global Communications Corp. and CTV Inc., owned by Bell Globemedia Inc. (which also owns The Globe and Mail).

Astral, which is flush with cash and unencumbered by debt, is a name that comes up a lot when analysts consider merger and acquisition activity, another factor bound to shake things up in 2007. CanWest, said to be “turning the corner” by RBC Dominion, has been divesting itself of business lines lately. It has also been publicly looking at specialty TV properties, which are fairly valued today but below takeover valuations.

Over the long term, it’s tough to predict where consumers will turn for news and entertainment. CBS Corp. and Time Warner Inc. now sell TV episodes and films over Apple Computer Inc.’s iTunes, and advertising models for new media are problematic, Mr. Stadelman says.

Video and networking websites such as MySpace and YouTube, owned by News Corp. and Google Inc., respectively, are a phenomenon worth watching, but a host of similar sites exist with no original profit model.

“Can [such sites] be commercialized?” asks Duncan McKie, president of Toronto-based Pollara Inc. and an industry consultant. “It’s like a virtual bulletin board, and the quality is not much better. Plus half of [the content] is ripped off.” Site owners looking to build legal businesses would need to pay big fees to copyright owners, he notes.

Nevertheless one analyst suggests a way to invest in the growth of Internet ad spending is with Canada’s Kaboose Inc., the sixth-largest media company in the online kid-and-family space. It’s a relatively pricey stock but maybe worth it considering the growth in the area, he notes. Kaboose competes with the likes of Disney and Viacom International Inc’s Nickelodeon.

The other approach to investing in this sector is to forget about a yearly outlook and trends altogether and approach a growing industry with confidence.

Mr. Stadelman notes that, in general, the Canadian industry is protected or subsidized, and media companies are generally well-managed franchises with good cash flows and the ability to move on new trends.

“At times people have been worried about the outlook for this industry and we took advantage to buy the stocks,” he says. “I think people spend too much time thinking about yearly outlooks, and they can’t see the forest through
the trees.”

Special to The Globe and Mail