In Depth

Earnings Reports Indicate Economy May Be Recovering

Media moguls say they’re starting to see signs of a bottom to the recession and the beginnings of an upturn in the advertising market—just in time for the upfront advertising sales season.

Last week, several major media companies reported they took their lumps in the first quarter, but their top executives were optimistic. It was guarded optimism perhaps, but optimism nonetheless.

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Typical was the statement made by CEO Bob Iger during the Walt Disney Co.’s second-quarter earnings call.

“Our second-quarter performance reflected the weak global economy as well as disappointing results at our movie studio,” he said. “While we are now seeing some signs the economic downturn is stabilized, it is too early to make predictions about the timing and pace of the recovery.”

While still cautious, the media companies said it appears that marketers are wading back into the advertising market.

“Now we are seeing people coming back into the advertising market and spending,” Rupert Murdoch said on News Corp.’s earnings call. “I think they realized that they’ve got to keep their brand in front of people.”

Mr. Murdoch cited a return to the market by Chrysler, one of the U.S. automakers whose problems have hit the media hard, as well as strong spending by quick-serve restaurants such as Wendy’s.

“There’s a lot of activity. It is not in any stage back to the boom days,” he said. “At the very least we’ve hit a floor and we seem to be getting some bounce off it.”

Leslie Moonves, CEO of CBS Corp., noted that his company had seen the volume of scatter sales—those made closer to airtime rather than at the upfront—increase dramatically over the past four to six weeks.

“We are encouraged, as we head into the upfront, that the scatter market is returning,” Mr. Moonves said. “It’s returning at good CPM values, and we’re very pleased by what we’re getting.”

The timing of even a glint of an upturn is fortuitous for the media companies. The broadcast networks stage their upfront presentations next week in New York, and the prognosis for the upfront market had not been strong. Some analysts have predicted double-digit declines in the advertising dollars markers would be willing to commit for the 2009-10 season.

More troubling to the networks was the determination by advertisers that the recession was the right time to adjust media prices downward.

Despite falling ratings at the broadcast networks, price on a cost-per-thousand-viewers (CPM) basis has gone up each year for most of the networks. As clients have shifted their spending to cable, prices have generally risen there as well.

With the prices of most other commodities falling, there is great pressure on buyers to achieve rollbacks in this year’s upfront negotiations.

“They really want to get us this year,” said one cable network executive.

Even when the scatter market was weak, both broadcast and cable networks were able to keep their prices at about the levels they were in the upfront, despite pressure from clients.

Now with the upswing in demand, the networks have more ammunition to fight back on pricing.

“We are going into this year’s upfront very intent in driving as high CPM pricing as possible,” said John Lansing, president of Scripps Networks, speaking on the company’s earnings call. “We will be willing to hold back inventory to achieve that.”

If advertisers hold out for price cuts, the networks will try to sell as few ads as possible in the upfront and gamble that prices will shoot up in the scatter market—a decent bet if the economy continues to improve.

The latest batch of earnings also shined a light on the disparity between the economics of the broadcast business and the cable business, as well as the national and local ad businesses.

At News Corp., Mr. Murdoch said he expected revenue at Fox Broadcasting to be down 6% for the year, stations to be down 23% and cable networks to be up 2%. After November’s election, Fox News Channel had its biggest quarter ever.

At Disney, ad sales at the ABC broadcast network were down modestly, while local stations reported a 30% revenue decline. ESPN, which does a lot of business with companies in the auto and finance businesses, reported revenues down by a high-single-digit percentage, but ABC Family racked up increased advertising revenue.

Scripps Networks said its ad revenue fell 4.6%.

CBS, which is almost entirely in the broadcast business, reported a $55.3 million net loss in the quarter.

Ad revenues fell 8.6% at the CBS Broadcast Network. Including its local stations, ad sales fell to $1.3 billion from $1.6 billion a year ago.