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In a mere five words, Google chief executive Eric Schmidt has pointed to an uncomfortable truth: "All of us are vulnerable." He was talking about media companies, though he could just as well have been referring to every company and, arguably, every individual living in the credit-crunched West.
Even before the recession bites, companies are battening down the hatches, and the first budgets to suffer cuts are those for advertising and marketing. The axe has fallen swiftly, and nowhere has this been more marked, after several years of rapid and often phenomenal growth, than in online display advertisements.
In the last quarter, Google's profit growth slowed to its lowest level in a year as some key advertisers, especially finance companies offering mortgages and car loans, decided to pull their adverts.
Google's shares have fallen by 45% this year, although the company has just posted a third-quarter rise in profits of 26%. Anyway, it is in far better shape than its beleaguered rival, Yahoo, because most of its income is derived from from search-related advertising.
Yahoo is much more dependent on display advertising. The drama is illustrated in its own third-quarter results, announced yesterday, which revealed a 64% drop in profits compared with the same period last year.
As the San Francisco Times noted, it was Yahoo's "day of the locusts". Against the dire background of those results, it is hardly a surprise that the company is making 10% of its worforce redundant, at least 1500 employees, having already laid off 1000 staff in January this year.
Of course, Yahoo has a host of special problems of its own that are unrelated to the advertising downturn. In February this year, its founder and chief executive, Jerry Yang, turned down Microsoft's $45 billion (£28 billion) takeover offer on the grounds that it "substantially undervalued" Yahoo.
A war of words between the two rumbled on until Microsoft formally withdrew its bid in May. Meanwhile, Yahoo's stock price has fallen away month by month, down from $33 a share to $12.86. Its value is therefore now at 2003 levels.The decline has prompted two pension companies to sue Yahoo's directors, arguing that by opposing the Microsoft bid the board breached its duty to shareholders.
To make matters worse, much worse, a potentially lucrative - possibly life-saving deal between Yahoo and Google appears to be coming apart at the seams. The companies announced in June that they would form a search advertising alliance.
Under the agreement, Yahoo's search result pages would also include ads from Google's advertisers, a wheeze from which Yahoo hoped to generate about $800 million in revenue in its first year alone.
Advertisers did not care for it. Many high-level Yahoo executives disliked it and resigned. Wall Street was sceptical. More importantly, federal antitrust regulators immediately stepped in, and it now looks as if they will block the deal altogether.
So Yahoo's fate was already in the balance before the great advertising retreat was sounded, threatening the company's lifeblood. But Yahoo is far from alone in looking over the abyss.
According to a prediction by Collins Stewart, we can expect a $6.7 billion drop-off in internet advertising up to 2010. If that forecast is correct, it would leave a big hole in every media company's finances. US newspapers, already suffering from newsprint advertising declines, are now facing the fact that, after 17 successive quarters of ballooning growth in online advertising revenue, it has slowed to a crawl. The Newspaper Association of America reported that the $777 million revenue in the second quarter was down 2.4% on the same period last year.
To put that in context, it was the only year-on-year drop since the group began measuring online revenue in 2003. A British-only survey, conducted by the research group Enders, confirms a similar trend in the UK.
It reported that in the three months up to the end of September, the situation was, at best, flat. That gloomy news follows double-digit growth rates for almost three years beforehand. All may not be lost, however. A joint study by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers puts a positive spin on the latest set of ad spend figures. It argues that the net may be more resilient than newsprint.
The report, while conceding that "online is not immune from the economic downturn", claims that the internet is still experiencing "an incredible increase and is propping up the entire advertising market".
The IAB points to the fact that the net increased its overall market share of the total UK advertising spend by 4%, to 18.7%, which places it less than 1% behind print display advertising's 19.3% share and 3% behind TV advertising's 21.7%. On that basis, it remained "cautiously optimistic" that UK internet spend will overtake the amount spent on TV next year, despite the economic downturn.
Maybe it will, but without wishing to pour cold water on that hopeful forecast, it is clear that we are only seeing the beginning of the effects of the recession. Darker times lie ahead and some media companies will undoubtedly not survive.
It would be easy to single out several traditional newsprint-based companies as likely failures. However, taking at face value Schmidt's words about everyone being vulnerable, my hunch is that the largest casualty of all may be a new media company, namely Yahoo.
