Preparing for the recovery

Apr 16, 2001  •  Post A Comment

The catalysts that can initiate a recovery in a weakening economy, a volatile stock market and a soft advertising environment, seem elusive. But if history is any indication, all it takes is one good push to get the ball rolling.
Paradoxically, experts say things have to get worse before they can get better, and that isn’t likely to happen until the fourth quarter-at the earliest.
Wall Street, Madison Avenue and Hollywood are focused on where the bottom is to the current free fall and how they can minimize the damage while waiting for it. Unfortunately, there is less attention being paid to how companies should position themselves now to take advantage of an eventual upturn.
No matter how you cut it, climbing out of the current abyss is all about one thing: the economy. Right now, the economy will be lucky to achieve half the 3 percent growth originally forecast. But when an economic recovery is finally under way, advertiser spending, investor sentiment, deals and growth initiatives will follow. Much hinges on restoring consumer and corporate confidence.
Just how hungry are investors for some good news?
Yahoo! last week posted a slight first-quarter profit but slashed its estimates for 2001 revenues and earnings. The company announced its first-ever 12 percent work- force reduction (or 420 jobs) and $30 million in quarterly savings needed to break even for the full year. Yahoo! is also expanding on adult-oriented products to boost revenue.
All that pushed Yahoo! stock to $17 a share from a new 52-week low of $11.53 a day earlier. A year ago, Yahoo! was trading at $153 a share.
Yahoo! has a long way to go to resetting itself for survival under new management leadership. For the first time in its history, Yahoo!’s top management last week did not stubbornly insist that the company remain fiercely independent in the face of major advertiser and management defections in recent months. Yahoo!, now worth $6.5 billion, reported a 22 percent decline in first-quarter revenues and has lost key executives.
I’m OK, you’re OK
Eventually, a traditional media player such as Viacom could figure out a way to create more value with Yahoo! in its fold than the two companies could accomplish apart-something AOL Time Warner is now demonstrating.
Also, media players are seeking to reinvent themselves by carefully embracing the best of the Internet and interactivity-a catalyst for change already at work.
Companies are focused on how to use the Internet cost-effectively as a logical extension of their core businesses and brands. They also are seeking to gracefully back out of stand-alone online ventures-the most recent example of which was last week’s NBCi announcement.
There have been traces of other catalysts in the works that could eventually rekindle advertiser spending, growth initiatives and media deals.
The complete spinoff of Liberty Media from AT&T Corp. this summer certainly will be a deal catalyst. Once Liberty Chairman John Malone has his autonomy, there will be no stopping his acquisitions and strategic equity investments, which could inspire other deal-makers to come out of hiding.
Sources say Liberty could use its independently traded stock to make strategic investments and acquisitions in more global content or media distribution platforms, and even re-enter cable system ownership. Liberty’s broad media alliances-which span from News Corp., USA Networks, AT&T Corp., AOL Time Warner and Cablevision Systems in the United States to UnitedGlobalCom internationally-means that its deal-making will have broad industry implications.
Deregulation, in whatever form
The Federal Appeals Court ruling that gives Viacom a reprieve on selling TV stations to stay within regulatory ownership caps is an encouraging sign for all broadcasters who are eager to break the lull with TV station deals based solely on economic considerations rather than regulatory mandates.
A further easing of regulations would close the persistent price gap between buyers and sellers and create billions of dollars of new value by allowing the merger of operators with strategic and geographic interests. Viacom, News Corp., The Walt Disney Co.’s ABC and General Electric Co.’s NBC are among the major consolidators that would move quickly to snatch up more middle- and small-size broadcast groups.
Media executives say pending goodwill accounting changes also will make acquisitions more attractive. Last week, News Corp. received antitrust approval for its proposed $5.3 billion acquisition of the Chris-Craft Industries TV stations on the condition it sells KTVX-TV in Salt Lake City.
AT&T Corp. last week confirmed it will sell its 30 percent stake in Cablevision Systems, which could be acquired by rivals Time Warner Cable or Charter Communications, and even Cablevision itself. AT&T is expected to continue to whittle down its $56 billion debt through piecemeal asset sales.
AOL Time Warner would benefit from access to Cablevision’s contiguous New York and other East Coast systems to advance its own cable content and AOL Internet interests. Sale of the AT&T stake could also lead to the eventual outright sale of Cablevision and what would be the last leg of major cable consolidation.
Enough bad news
Last week, Motorola epitomized how bad things can get while reminding the market that the fallout from advertising and economic weakness is not confined to media companies. It is likely to be the first of many support product and service players to report their own ripple-effect bad news.
Motorola attributed its $265 million loss in the first quarter, its first such loss in 16 years to slower sales of handsets and semiconductors. It is eliminating 4,000 jobs and slashing computer-chip-related capital spending. Debt payment and borrowing pressures, compounded by eroding earnings, overshadow any broadband gains the company may be making in areas such as advanced digital set-top cable boxes.
With quarterly earnings in full swing this week, many media and media-related companies are expected to deliver worse-than-expected performance and more negative adjustments to their 2001 outlook.
The first to blink
Advertisers, which already are in their own recession, are by all reasonable measures looking for a way out. It may come in the upfront season-or not. More than at any other upfront in recent memory, negotiations between advertisers and agencies and cable and broadcasters will be fluid and reactionary. If just one advertiser can break the ice with a deal that presents value for both sides, the advertising logjam will begin to ease.
“Right now, no one wants to say what they will do, because no one really knows,” one high-level buyer confided last week. “But that can all change in a heartbeat.”
Advertisers and television executives could use this year’s upfront to consider other long-promised change such as converting TV ad sales season to a calendar year, refining bundled multimedia platform sales and establishing more competitive pricing tiers.
By late summer, media companies on a calendar year will begin mapping out their 2002 budgets. Some smaller players will simply decide that mandated digital upgrades, advertising softness and cable competition are just too much to bear. The affiliate groups that chose to sell under the right circumstances could be the ultimate winners.
An improved outlook for 2002, which calls for 6 percent growth in advertiser spending and an infusion of biennial election revenues, could cause a pop in broadcast TV station prices and present a graceful exit strategy for broadcasters struggling with debt payments.
When company valuations and downside risks sink low enough, well-funded investors and lenders will see nothing but upside and enthusiastically back a new wave of mergers and acquisitions in lieu of stock deals.
Cable industry executives and analysts insist that the rollout of cable modems and advanced digital set-top boxes have not been adversely impacted by teetering economics. In fact, 40 percent of digital cable subscribers are opting for premium program and servi
ces packages priced at more than $85 a month, one leading investment banker said.
There is overall caution about how strong discretionary spending by cable customers will remain in a prolonged economic slump. But on the upside, if video on demand, digital cable programming, high-speed Internet access and other new services prove immune to economic turmoil, it could pave the way for faster industry growth-in both content and distribution-in better times.
We’ll know in another quarter or two whether the power of branded products and services is stronger than faltering economics. Aggressive efforts by AOL Time Warner and Viacom especially will demonstrate how effective bundled brand advertising and marketing sales can be, especially in the worst of times. This will provide a powerful barometer of what’s to come.
Such efforts present a redefinition of traditional advertising and marketing, and represent one of the few sure ways to generate new revenues.
In a no-growth environment, the key to running successful companies is cost management. But at some point, well-managed companies have nothing else to cut. The smart media players are working to reposition themselves and their core businesses to capitalize on economic recovery when it comes.
Other catalysts that will likely contribute to reversing the fortunes of the media marketplace and individual companies include the mass-market availability of portable Internet-connected devices; the competitive pricing and use of digital spectrum; and globalization supported by healthier international markets.
You see, there is lots to look forward to.