Whether you expect 15 percent fewer upfront ad dollars to be committed to only 55 percent of the networks’ prime-time inventory or expect an economic rebound to revive ad spending in the second half of 2001 depends on where you stand on Wall Street.
Leading industry analysts are squaring off on wildly different scenarios for the upfront and beyond-the outcome of which will radically reshape ad-supported media companies.
The only consensus among analysts appears to be that Viacom and AOL Time Warner will thrive despite the current economic environment.
Echoing the grim forecasts of economists at Morgan Stanley Dean Witter, the firm’s entertainment analyst Richard Bilotti recently downgraded the entire sector and individual companies such as News Corp., Fox Entertainment and The Walt Disney Co. on lower revenues and earnings estimates for 2001 and 2002.
Mr. Bilotti’s rationale: What he says will be the weakest upfront market in a decade (at least a 15 percent decline in spending on, at best, 5 percent price increases) comes at a time when annual 5 percent audience erosion is occurring not only in broadcast TV but also, for the first time ever, in cable TV. There no longer is anywhere to hide for cover, he says.
Broadband will turn the Internet into an entertainment competitor during the next three to five years. The pricing of Internet advertising at one-fourth that of television will hasten that process, mirroring the way cable TV put pressure on broadcasters two decades ago.
Fewer viewers, fewer dollars
“The decline in audience will continue to accelerate, not decelerate,” Mr. Bilotti said. “The Big 5 [the Big 4 networks plus The WB] are losing control of the TV pie. … There is no more eroding in one spot and gaining in another.”
Hence, broadcast networks could wind up selling only 55 percent to 65 percent of their prime-time inventory compared with 80 percent to 85 percent in last year’s upfront, which could minimize the negative impact on pricing and lead to a classic supply-and-demand scenario.
Premium pricing for efficient delivery of highly desirable demographic groups, even by mass-market broadcasters, could provide a bit of a revenue boost in a down year.
But without an overall economic recovery in the second half of 2001, media and entertainment companies will be forced into more cost-cutting-delaying new tech-based services-and less deal-making.
“We are witnessing a deeper, wider downdraft in the ad market than commonly suspected,” Mr. Bilotti said in a March 2 conference call with clients. That notion was reinforced last week by bad news from both ends of the media spectrum.
Numbers dropping
Ad-driven newspaper publishing companies, many of whom own TV station groups, acknowledged industrywide ad lineage has declined 25 percent to 30 percent so far this year, causing earnings estimates to be slashed. At the same time, ad-dependent Yahoo! jolted the markets with dramatically lowered financial estimates that have it barely breaking even on less than half of its revised revenue estimates for the current quarter and the year.
“We see revenue growth at two-thirds its former level,” Mr. Bilotti said. “Television is slowing from a vehicle that traditionally has gained share of ad dollars spent to being flat. That will be exacerbated by television’s delayed response to an eventual recovery. For instance, a fourth-quarter economic snap-back would not be fully reflected in TV ad spending until the second quarter of 2002.”
A “flat, anemic recovery” will pressure entertainment company valuations back to pre-1998, 12-times-cash-flow levels, he said. Viacom and AOL Time Warner are exceptions.
Mr. Bilotti also said he decided to “underweight” the entire entertainment sector, in part due to the unlikelihood that the top 50 television advertisers (accounting for 60 percent of the broadcast ad market and 30 percent of the cable ad market) will increase spending this year while facing only 4 percent sales growth and 6.4 percent net income growth.
Morgan Stanley economists say an anticipated 11 percent decline in overall corporate profits this year will delay a rebound in ad spending. Companies also will be impacted by midyear accounting rule changes that-in a healthy market-could boost profits and acquisitions, especially for companies such as Viacom and General Electric Co.’s NBC.
Still, Mr. Bilotti concluded, “The entertainment group as a whole is botched,” not only because of faltering economics and a fundamental shift in core revenues, but because of lost business opportunities in international markets and new technology by all players (noting Rupert Murdoch’s News Corp. as the exception).
Revenue is elsewhere
For instance, Mr. Bilotti estimates that the growth of incremental revenues from pay-per-view, video on demand, digital video discs and VHS outlets will exceed the incremental advertising revenues entertainment conglomerates will extract from television over the next five years. “That stuns people,” he said.
The only way out is for companies to invest in the Internet, interactive television and international markets, he said.
While leading analysts agree that interactivity will jump-start media and entertainment company prosperity, there is a growing rift among analysts on short-term prospects.
Merrill Lynch analyst Jessica Reif Cohen, an early bear on the ad market, now says ad-supported media have hit bottom and ad spending is about to “turn up.”
She expects single-digit upfront ad price increases, unless there is a strike by writers and actors.
“The signs point to a down upfront market, but no one knows yet what [costs per thousand] will be,” Ms. Cohen said. “A lot depends on the economy, whether there is a strike, and further reductions in interest rates.”
Because variables and uncertainty abound, traditional and new media companies refuse to provide guidance about their financial performance even for the next six months, citing rapidly deteriorating consumer confidence, advertiser spending and general economics.
Even the most skilled, seasoned management people are hedging in the face of volatility.
“Our view has been all along that after two years of back-to-back double-digit rate increases, we probably will see single-digit price increases anyway,” Ms. Cohen said.
Eye of the storm
“It’s amazing how brutal the first quarter has been. It’s been pretty bad, and second quarter only looks a tad better. That makes the comparisons easier in 2002. The question is how bad it gets in the meantime.”
However, Ms. Cohen echoes many of her peers in pointing out that media and entertainment conglomerates were never better-positioned to weather the economic storm, and she assumes an economic recovery later this year in all of her research reports.
“These companies are bigger-more diversified-and have better, more deleveraged balance sheets,” she said. “Each of these companies-like Viacom, Disney-has $20 billion to $30 billion-plus of borrowing capacity. They have great cross-promotional platforms and great brands. There are new international markets to sell to and new technologies to sell through. I actually think the industry in general is pretty healthy and can sustain this better than ever before.”
Last week, she reiterated her only entertainment sector “buy” ratings for Viacom and AOL Time Warner because of their franchise brands and “must-buy” platforms.
Broadcasters in trouble
Ms. Cohen also said investors in a down market should steer clear of pure broadcasters, some of whom may actually be forced to file for bankruptcy.
Because they function as a leading economic indicator, ad-dependent broadcast stocks were in a free fall three to six months before the markets plunged. Conversely, they will rise three to six months before the economy and ad spending pick up.
Cable companies are generally considered recession-resistant-and an even safer haven for investors in light of the recent federal appeals court ruling easing the ownership cap.
Major broadcasting and cable players could be help
ed by a strike. Although some advertising sales would be deferred and pricing would be weak in the absence of new programming, TV programmers would save hundreds of millions of dollars in program production costs.
The strike could turn out to be a massive cost savings and a jump start for ad spending. A summertime strike and a season of favorite reruns viewers may have missed the first time around could result in a scatter market that could be up 25 percent to 30 percent.
“Anyone could be right about what happens six months from now,” said Christopher Dixon of UBS Warburg/PaineWebber. “Anyone who thinks they have a clue about what a media company’s operating results are going to be like in June in this market environment is not paying attention. The companies don’t even know what’s going on.”