Even before most TV broadcasters announce their latest quarterly earnings, Wall Street analysts are revising their forecasts for deeper industry 2001 revenue and earnings declines and more modest 2002 gains.
They now concede that things are going to get worse before they get better and that some long-standing rules governing cyclical rebounds simply won’t hold true this time around.
As advertising-dependent broadcasters begin budgeting for next year, they face the need for additional cost cuts and more skillful mining of their local markets to offset what experts say will be a belated and more gradual economic recovery.
But even as analysts expect next year’s Olympic Games and congressional elections to provide a much-needed revenue boost, there is a growing share of national and local ad dollars forever disappearing from TV station coffers as a result of consolidation among retailers, financial service providers and other major advertiser categories.
The remaining local ad dollars are more scattered than ever before among competing radio, television, cable, outdoor, newspapers and other media. Broadcast and cable networks and print and Internet publishers are in a fierce fight for every national ad dollar at a time when advertisers not only are pulling back on their spending but rethinking their craft.
So the bottom line is that TV broadcasters’ bottom line and market share are gradually shrinking against a rising tide of costs, competition and uncertainty. And that is making it more difficult for them to weather economic lulls and emerge unscathed at the other end.
Last week, veteran analyst Niraj Gupta of SalomonSmithBarney uniformly reduced his 2001 and 2002 revenue and earnings estimates for most of the broadcasting companies he covers. This came even as major advertisers such as General Motors and Coca-Cola said they would increase their ad spending (the key of course remains how much) during the second half of 2001.
He now estimates local television ad revenues will decline by at least 5 percent this year (far more than his previously forecasted 1.5 percent), and 2002 revenue growth will strain to hit 4 percent rather than a previous forecast of twice that, as long as an economic recovery occurs. Otherwise, all bets are off. And his are among the more upbeat of Wall Street forecasts.
Spot and local television revenues will be down 9 percent in 2001, he said.
Swap meet
However, Mr. Gupta is optimistic that the recent tax cut and rebate will stimulate consumer spending, which will jump-start advertiser confidence and economic recovery.
“The problem is the environment. It’s hard to have your revenues decline 8 percent to 10 percent every quarter, which has been happening for broadcasters the better part of two years,” Mr. Gupta said. “But these aren’t the 1990s, when everything was overleveraged and whole companies were being sacrificed.”
Today troubled broadcasters can and will sell or swap single television stations to get through tough times after more favorable loans and covenants have been finagled out of lenders. A spate of TV station sales is expected within the next year, fueled by local broadcasters wrestling with loan defaults and even bankruptcy and by more solid consolidation players spurred by impending deregulation.
But right now, even the well-situated, aggressive larger broadcaster has nowhere to hide.
Hearst-Argyle Television, which has been as proactive as any in creating new revenues, commanding local ad sales and cutting costs, is being adversely impacted by the ABC Television Network’s poor performance in every daypart.
With 51 percent of its revenues generated by its ABC affiliates, Hearst-Argyle could take a major hit to its bottom line over the next year. Very little can be done to offset the damage, according to a new report from Bear Stearns analyst Victor Miller.
Likewise, more than one-quarter of Young Broadcasting’s revenues, 19 percent of Scripps’ revenues and 14 percent of Belo’s revenues are being adversely impacted by ABC affiliate weakness. Even 17 percent of The Walt Disney Co.’s total revenues are being negatively jolted by the shortfall at its owned ABC TV stations.
The difference-and it’s a big one-is each company’s overall revenue dependence on television. That’s only 17 percent of Disney’s $25.4 billion in annual revenues, one-quarter of Scripps’ annual $1.7 billion, 44 percent of Belo’s $1.6 billion, but a full 100 percent of Hearst-Argyle’s $747 million and Young’s $373 million in annual revenues, Mr. Miller said.
But the damage is even more widespread, said Mr. Miller, who estimated that the second-quarter ad pacings of all ABC affiliates are at least 10 percent below other networks’ affiliates. Mr. Miller estimates that local TV advertising and the “top line” in the second quarter was down 10 percent to 15 percent from a year ago, with national spot advertising (which comprises about half of a local TV station’s revenue base) down 15 percent to 20 percent.
Third-quarter results likely will be every bit as grim, with the added problem of difficult industry comparisons with last year’s politically charged third-quarter spending, Mr. Miller said.
Bottoming out
The salt in the wound will come as Disney seeks to maximize its rights to immediately repurpose at least a quarter of its programming on its soon-to-be acquired Fox Family Channel under agreements with its affiliates. At the same time, Disney is looking to end affiliate cash compensation and find ways to seize some of local stations’ newfound digital spectrum for its own national use. Such developments will come concurrent with any economic recovery, analysts said, further eroding any gains TV stations can muster.
“The core television business is off nearly 16 percent for the first three quarters of this year, and the second half of the year is complicated by unfavorable comparisons with 2000’s boon results. Add just those two together and you’ve got big trouble,” said Mr. Miller, who now believes local TV broadcasting revenues will decline at least 15 percent this year, more than double his original estimate of a 6 percent decline.
More cost cuts won’t do enough to deflect much of the problem going forward, Mr. Miller insists, since Young and Hearst-Argyle have each cut $10 million in costs so far this year. All that TV station owners have to fall back on is an uptick in local advertiser spending that will fall short of historical standards.
“Unfortunately, the national television marketplace shows little if any pickup, using the upfront marketplace as a leading indicator,” said Merrill Lynch analyst Jessica Reif Cohen, who does not expect ad spending to outperform the gross domestic product in 2002 (which will grow 3 percent at best). She points out that advertising historically lags behind any economic rebound.
Even Viacom’s bullish President Mel Karmazin conceded last week that the worst advertising market in a decade will cause the CBS owner to realize 13 percent, rather than the originally targeted 20 percent growth in earnings this year-which still is extraordinary in these challenging times.
But Viacom controls enough distribution, content production and advertising levers to astutely steer through troubled economic waters, since its broadcast stations and networks represent a relatively smaller portion of its overall revenue and cash flow base.
“Things have bottomed out,” Mr. Karmazin declared last week.
By comparison, the financial dilemmas faced by pure-play and independent TV station owners in particular-half of whose sales generally come from national advertising-will force a number of dramatic changes for broadcasters at the other end of this economic trough. Those will include nothing less than a rearrangement of ownership, revenue mix, expenses and program/
service offerings.
A growing number of analysts expect the sale or merger of even large independent broadcast groups-including Hearst-Argyle, Sinclair Broadcasting, Young, Granite Broadcasting Corp. and Belo-because being part of a larger, more diversified med
ia company that is vertically integrated is fast becoming a mandate for future survival and success.
Bishop Cheen, a longtime broadcast industry observer, said some stations may take drastic measures, such as eliminating local newscasts and reducing other original local programming or increasing use of barter arrangements. Many broadcasters may have to pursue a second round of renegotiated loan agreements with banks and other lenders that may include some onerous covenants, such as asset sales.
“The good thing about a shakeout is that it makes everyone look to get more bang out of the revenue line, although broadcasters generally seemed fixed on longer-term solutions,” Mr. Cheen said. “The local broadcaster today has to go for the sizzle.”
Mr. Cheen estimates that in a best-case scenario local TV revenues could be up as much as 7 percent to 10 percent in 2002 if all goes well with variables such as the economy and deregulation.
But that’s a big “if.”
Mark Fratrik, vice president of BIA Financial Network, will publish a white paper this week in which he maintains that grass-roots broadcasters can survive and even thrive depending largely on biennial events such as elections and Olympic Games for a revenue boost while cost-cutting in the off years.
Longer-term trends indicate “a slowing down of growth in [ad] revenues going to local television stations,” which could potentially be reversed with the relaxation of ownership rules involving local duopolies and television-newspaper cross-ownership, he said. The overwhelming success of the clustered TV station strategy pursued by broadcasters such as Belo is an example of how effective broadcast deregulation can be.
The only short-term winners could, ironically, be investors willing to buy low-with TV station stocks up a mere 4 percent compared with large-cap entertainment stocks (up 10 percent) and radio broadcast stocks (up 31 percent).
Broadcasters need their stock price to improve so that it can be used as deal security. But that won’t occur as long as pure-play TV station groups face average sales and cash flow declines of about 10 percent and 25 percent, respectively, Ms. Cohen said.
But now more than ever, advertising-supported stocks are lagging as investors question second-half 2001 and 2002 estimates, Mr. Gupta said.
But there are more good reasons than ever why claims of a business-as-usual economic rebound and restoration of historical growth rates should be challenged. TV broadcasters of all shapes and sizes would do well to prepare for the worst-and hope for the best.