Economic downturn notwithstanding, Bear Stearns found other reasons to cut its ratings on the entertainment sector for 2008.

Bear’s Spencer Wang — led by the double whammy of declining TV usage and a DVD market expected to log its first year-over-year decline this year — cut the sector to “market underweight” from “market weight,” which means Wang expects the sector to underperform the S&P 500 in the next 12 months.

That’s bad news for companies including Time Warner, News Corp, Walt Disney and Viacom. The latter, owner of MTV, is seen as the bank’s top pick for next year on the back of a sharp recovery in ratings and higher affiliate revenue growth. Time Warner, battered by shareholders worried over uncertainties about the future of AOL and the overall structure of one of the world’s biggest media companies, is also seen as a good pick for next year, given its low valuation relative to its peers.

Adding to the bad news is Wang’s belief that despite all the hullabaloo over international and digital revenue growth, neither is expected to have much impact given its small contribution to these companies.

Keep an eye on:

• Universal Music Group on Monday said it signed an agreement with music-based social networking Web site Imeem Inc to provide free, on-demand streaming of its digital music and videos that will be supported by advertising. (Reuters )
• Microsoft began to place advertisements on its U.S. MSN Mobile page, moving into the nascent mobile phone advertising business. (Reuters )
• Hollywood studio bosses and the writers union broke off contract talks again on Friday after four days of negotiations ended in acrimony. Hundreds of film and television production workers, joined by florists, caterers and dry cleaners, marched through Hollywood on Sunday to urge both sides in the screenwriters strike to settle the 5-week-old strike. (Reuters)
• Martha Stewart Living quietly let go a half dozen employees in several departments and staffers fear that more layoffs could come today. (Women’s Wear Daily)
• NBC has begun reimbursing advertisers for fourth-quarter prime-time ratings shortfalls, averaging about $500,000 per advertiser, according to media buyers. (Mediaweek)

(Photo: Reuters / Customers selecting pirated DVDs and CDs in Beijing, 2007)