The short story: The lousy ad market will be even worse than people think.

The longer story: Pali Research’s Rich Greenfield has chopped his estimates for News Corp. (owner of Dow Jones, which owns this site). He expects operating income for the company’s fiscal 2009 (which wraps up this summer) to be down 22 percent; he’d previously pegged the number at -18 percent.

Dragging down the business: The company’s international newspaper and domestic TV operations; he thinks their operating income will drop a staggering 39.6 percent and 60.4 percent, respectively.

And Barclays Capital’s Anthony DiClemente takes a similar whack at Viacom: He had previously forecast that Viacom’s operating income would drop by 1.9 percent in 2009; now he figures the decline will be eight percent.

DiClemente predicts that advertising at Viacom’s cable networks, which power the majority of the company’s financials, will drop seven percent in the coming year. That’s worse than the three percent drop he thinks that cable TV in general will see, in large part because MTV’s target audience has been disappearing as of late.

Check out the following chart from Barclays, which tracks ratings for the core demographics at Viacom’s biggest cable channels (click to enlarge):

Notice that MTV’s 23.9 percent decline has happened amidst tons of press for its reality shows, notably “The Hills,” which is supposedly a sensation among the kids these days (that’s some of the cast, at the top of this post). (UPDATE: An earlier version of this post reproduced inaccurate data that Barclays sent out regarding Viacom’s Noggin channel; Viacom points out that the channel registered a 64 percent increase in its core demo from the fall of 2007 through the fall of 2008).

Meanwhile, did you know that MTV has followed up “A Shot At Love With Tila Tequila,” a reality show/dating game hosted by a bikini-wearing bisexual pin-up girl, with “A Double Shot At Love,” which is…well, you can probably guess.

If you need it spelled out, here’s a promo clip:

The Wall Street Journal reports that Redstone’s National Amusements holding company has sold its 87 percent stake in Midway (MWY) for $100,000, plus the assumption of $70 million in debt, to Thomas. On Friday, that stake was worth something like $30 million.

The real upside for Redstone, the paper says, will be a tax loss of some $800 million, though it’s unclear how he will be able to use that to help restructure his debt. Over the years, Redstone invested an estimated $500 million in the game maker. Redstone still has a few other assets that aren’t CBS (CBS) or Viacom (VIA), but those are by far his most valuable properties.

What does Thomas get out of this? It’s not entirely clear. Midway is best known for its “Mortal Kombat” franchise, which was once considered controversial because it allowed players to rip out the still-beating hearts of their opponents. But that’s old hat these days, and even new iterations like “Mortal Kombat vs. DC Universe” haven’t been able to sustain the company, which has lost $494 million in the last five years and has been under constant threat of losing its NYSE listing in recent months.

Like most of Wall Street, Pali Research’s Rich Greenfield is sure that Sumner Redstone will have to sell big blocks of CBS and Viacom shares in order to resolve a looming debt dilemma–even though that will beat down the price of the battered stocks even more.

Unlike most of Wall Street, though, Greenfield is sure that Viacom (VIA), at least, is a media business that’s well-positioned to survive the econalypse.

And his thesis makes sense: A big chunk of the cable company’s revenue is guaranteed, no matter what happens to ad rates, because it comes directly from cable operators, who pay Viacom a fee for each one of their subscribers. So unless millions of people stop getting basic cable (not going to happen), that’s going to remain a reliable source.

Add in the fact that the company’s Nickolodeon brand remains dominant, even if other franchises like MTV are showing their age, and the company should be okay for years to come, Greenfield argues.

The problem: It’s become increasingly clear that Redstone is going to have to unload big blocks of his holdings in CBS and/or Viacom, a move he insists he won’t do. But there doesn’t seem to be any alternative. Redstone’s National Amusements holding company has $1.6 billion in debt, $800 million of which comes due next month. Some of the CBS and Viacom holdings will have to go, and they should go sooner than later, Greenfield says in a note today:

While a block trade by the Chairman and Founder cannot be looked at as a positive, we believe investors are already assuming it will happen. We would simply like to see Redstone and NAI get the trade out of the way, so that investors can focus on the compelling value offered by Viacom’s stock price. With NAI in breach there is no timetable for a remedy (in discussions with its lenders), which we believe makes it critical for NAI to at least explain to investors what its current asset and debt situation is.”

But the layoffs that Hollywood blogger Nikki Finke predicted would get announced today have not materialized.

Gawker did get its hand on a memo from Bob Bakish, who is president of Viacom’s MTV International unit, in which he tells everyone that the group has stopped hiring and has “instituted significant restrictions on discretionary items such as on travel, entertainment, consulting, third party services and the like.”

This comes a day after Viacom told all of its workers it would be nixing holiday parties but was giving everyone two extra vacation days off instead, which is a great idea.

Finke was correct in thinking that this would be an excellent day to shovel bad news out the door, though. Hard to imagine that anyone is paying attention to anything that doesn’t have the word “election” in it. But for the record, here’s Bakish’s memo:

From: Alexander, Linda-LA
Sent: Tuesday, November 04, 2008 2:29 PM
To: All at MTVNI O&O
Cc: [A bunch of people]

Subject: On behalf of Bob Bakish – IMPORTANT

Team:
We are living in a time of unprecedented economic challenges. It is clear that the global economic slow down is real and will take us into next year. With that in mind, we need to dramatically reduce our spending for the balance of the year and for 2009.

Senior managers across the regions and strategic services have been given this message and are in the process of identifying savings opportunities. As you know, we have suspended all hiring (including staff, temps and freelancers) and instituted significant restrictions on discretionary items such as on travel, entertainment, consulting, third party services and the like.

I know these actions are not pleasant and delivering this message is not easy. However, it is the right thing to do. We, like others around us in media and the general business community, have no choice but to respond quickly to this difficult environment. It is only with this type of response that we can ensure our Brands will continue to prosper and provide our global consumers the innovative content they want and our partners the unique value they expect.

In addition, as many of you read in Philippe Dauman and Tom Dooley’s e-mail, our company will be forgoing all divisional, regional and corporate holiday parties and instead giving all employees, including everyone internationally two additional vacation days to be used during your respective holiday season as coordinated with your respective supervisor. We feel in times like these, giving our employees the extra time to spend with family and loved ones is much appreciated.

Again, I know this is not easy but we are not alone and we will make it through. Thanks as always for focusing on driving us forward–even in this period where going forward means spending less.

Bob”

Redstone altered the standard introduction he makes at the beginning of each quarterly earnings call to address his recent sale of $233 million worth of shares in CBS (CBS) and Viacom (VIA). Those sales, made to appease lenders to Redstone’s National Amusements Inc. holding company, were a one-time event, he insisted: “This was not something NAI wanted to do, nor is it something that NAI intends to do again … NAI has no intention of selling a single share of Viacom or CBS.”

National Amusements, which is both a movie theater operator and Redstone’s personal holding company, is  trying to renegotiate some $1.6 billion in loans. A debt covenant triggered the share sales earlier this month, and investors have been wondering whether Redstone will have to unload even more shares.

CBS shares are down more 50 percent over the last year, and Viacom’s price has dropped nearly 70 percent.

Note that Redstone couldn’t definitively promise that he wouldn’t sell another share in his companies. And CBS officials wouldn’t let analysts ask him about his debt issues during the conference call.

CBS’s Interactive division, run by M&A maven Quincy Smith (pictured), posted revenues of $140.7 million, up from $35.9 million last year. That year-to-year comparison doesn’t mean much, since the CNET numbers aren’t included in the 2007 numbers. But CBS (CBS) says that if CNET had been around last year, the division would be recording a six percent increase in revenue, pushed up by a 12 percent increase in display ads.

Back in the good ol’ days, like earlier this year, a big Web publisher would be flayed for posting six percent revenue increases. And in fact, that’s just what happened to CNET’s old managers, who were hounded by a group of activist investors for delivering single-digit growth while the rest of the Web was booming.

But given the cratering economy, six percent doesn’t look that crappy, especially compared to the results posted by the likes of Time Warner’s AOL (TWX) and Yahoo (YHOO). And the display ad boost should be heartening for CBS, which would very much like to be able to tell investors that it has a growth engine.

Next up: Getting Interactive to contribute a profit. It recorded an operating loss of $15.2 million this quarter.