Media bracing for tough times

Sep 24, 2001  •  Post A Comment

When Viacom last week warned of much-lower-than-expected 2001 earnings, it was all industry analysts and investors needed to confirm that television’s advertising and profit woes are intensifying.
Broadcasters especially are struggling for economic footing in an advertising recession now exacerbated by the terrorist crisis. Recent events have made it difficult for skittish advertisers to quickly rethink and reposition their commercials to break free-falling ad revenues.
Viacom President Mel Karmazin, a master marketer who has been the industry cheerleader for a fourth-quarter advertising recovery, conceded in prepared remarks that his company now faces a “significant loss of revenues.”
His most promising statement: “Most companies we spoke with believe they will return to normal advertising levels but are uncertain about timing.”
As a result, Mr. Karmazin said Viacom’s full-year 2001 earnings before interest, taxes, depreciation and amortization will barely match last year’s $5 billion, rather than grow the originally forecast 13 percent to $5.6 billion.
That half-billion dollar difference means there is little hope for much of an advertising rebound in the fourth quarter, when Viacom had planned to begin rigorously selling the 60 percent or so of upfront prime-time ad inventory it withheld from the market last summer. It’s not that Mr. Karmazin’s strategy was so wrongheaded, although his more conservative broadcast network peers consider it a “bold” bet. But no one would have dreamed such disaster would befall a nation and shake up the advertising marketplace.
Even though half of Viacom’s revenues are generated from conventional advertising, the gloominess of the company’s earnings warning caught many analysts by surprise.
“This is a lot worse than we thought,” said Tom Wolzien, analyst at Sanford Bernstein & Co. “I would assume [media companies] will just write off the third quarter and maybe all of 2001. The question is what comes back at the end of the year?”
Surprisingly, many media executives I spoke with last week believe that fourth quarter will only slightly miss previously declined ad spending projections (from fourth-quarter 2000 levels) as long as terrorist attacks and retaliations quickly abate. The only certain development is an economic recession, experts said.
Sources at NBC say its 2001 earnings could be off 10 percent (from an earlier forecast of $1.6 billion) if there is sustained advertising disruption and news coverage of a war. Clearly, all advertising-supported media companies are going to be hurting.
The Walt Disney Co., which remained mum most of last week as its theme parks stood virtually empty and its stock price sank, was preparing to revise guidance before media companies begin reporting third-quarter earnings next month. Even with only 25 percent of its revenues coming from advertising, Disney will suffer a double whammy with 40 percent of its business coming from theme parks, hurt now by a decline in consumer confidence and travel.
Still, Disney Chairman Michael Eisner a week earlier tried to put a more promising spin on things, saying, “The potential economic cloud that’s hovering is way too pessimistic-I think it underestimates the strength of the American system … and of the great American brands.”
General Electric Co., the world’s largest conglomerate, which owns NBC, was the first to warn of lower-than-expected third-quarter earnings and $400 million in after-tax claims that are insurance-related.
Among the large affiliate-related TV station groups issuing third-quarter and full-year earnings warnings last week were Tribune Co., Knight Ridder, Scripps Howard Broadcasting, Gannett Broadcasting, Dow Jones, The New York Times and even Barry Diller’s USA Networks, which operates Home Shopping Network and USA.
Hefty toll
Even AOL Time Warner, with only 24 percent reliance on advertising but sustaining heavy losses on CNN’s continuous terrorist coverage, is soon expected to concede that it, too, will miss its original targets of $40 billion in revenues and $11 billion in earnings for this year. Paul Noglows, analyst at JPMorgan, now says AOL Time Warner’s 2001 earnings will more likely be $10 billion on $38 billion in revenues for 2001.
Analysts, who have been aggressively downgrading and lowering earnings estimates for most media companies, expect a new round of industry cost cuts and job eliminations at all media companies-but none that collectively can offset the losses being incurred. Even the media company efforts to seek insurance coverage for some of their heavy losses-coverage that, surprisingly, includes advertising-won’t be much substantial long-term help.
Jefferies & Co. analyst Fred Moran said having cable networks or other businesses with subscription revenues (AOL Time Warner derives 40 percent of its revenues from a broad range of subscriptions) will help some media conglomerates soften the bottom-line blow.
Robertson Stephens analyst James Marsh estimates that all television and radio broadcast media lost nearly $1 billion in advertising revenues the week of the terrorist attack due to nonstop news coverage and the disruption in ads. Some experts say losses of up to one-half that amount could subsequently occur in any given week for broadcast and cable networks, TV and radio stations. Generally speaking, networks each lost about $10 million daily, factoring in lost ad revenues and increased news coverage costs, when no commercials were being aired.
Taking into account their broadcast and cable networks, TV and radio station and other media holdings, Mr. Wolzien estimates the first four days of disaster coverage cost Disney $50 million to $70 million, Viacom $55 million to $75 million and AOL Time Warner $35 million to $55 million.
The months ahead
Industry executives and analysts are hunkering down for the worst-case scenario. The Myers Report’s revised projections now call for a 6.6 percent decline in 2001 ad revenues and a 7.4 percent decline in 2002-more than three times the decline previously forecast. CMR Research says overall spending on TV commercials could be down 5 percent to 8 percent this year-more than twice what was originally projected.
If a wartime economy prevails, the advertising slump will persist. Some analysts said a recovery might not surface until 2003.
But there are some best-case scenarios. Christopher Dixon of UBS Warburg said he still expects media cash flow overall to grow 10 percent to 12 percent in 2002, which is 15 percent lower than prior estimates, assuming recovery begins about a year from now. He said news budgets were set to increase 25 percent to 35 percent anyway over the next several years.
However, Mr. Wolzien wants to keep it all in perspective. “Short-term, this is a real financial problem for them. But in the meantime, these are still good companies with good long-term value. It’s not a question of media companies not making any money-only how much. So many still have cash-flow margins north of 25 percent,” he said.
“These companies are warning they won’t make their forecast numbers. They are not going out of business,” Mr. Wolzien said. “The most immediate impact is on their stock price.”
Indeed, media stocks such as Viacom’s Class B and News Corp.’s American Depositary Receipts last week generally plummeted, along with the markets, 20 percent or more. Disney’s stock fell more than 22 percent to a new six-year low. AOL Time Warner stock has fallen a more modest 10 percent.
Media stock prices, already in a slump this year, could dip still lower as the companies announce dismal third-quarter earnings results and grim revisions for the rest of 2001 and 2002.
Even amid the volatility and uncertainty, media companies can, in fact, bank on the following trends in the months ahead:
* A slowing of deals. General Motors said a sharp drop in Hughes Electronics’ tracking stock is making it difficult to complete painfully slow negotiations to sell the unit to Rupert Murdoch’s News Corp. While the likely sale of AT&T Broadband appears
to be on its own unique track and others such as Walt Disney’s $5 billion acquisition of Fox Family will soon close, there are few other pressing transactions in the works. Mergers and acquisitions could easily be put off for another six months.
* More consolidation. That said, a new wave of industry consolidation in all sectors is inevitable next year as companies resort to pursuing business more cheaply together than they can apart by avoiding redundancies. It may become an economic imperative for a broad range of companies-from NBC to Scripps to Belo and Sony.
* More alliances. Last week, companies resumed what in some cases were dragging yearlong conversations about ways they can align their businesses. For instance, CNN is said to have resumed its talks with both CBS and ABC about a grand news alliance that would extend all of the companies’ basic news-gathering resources while minimizing some costs. There are plenty of areas outside of news where media companies will seek to share costs and profits. Telecoms such as AT&T, whose earnings and stock prices have been long-suffering, are getting a boost from increased teleconferencing and wireless business.
* More cost cuts. More job and other cost cuts will be budgeted for 2002, media executives concede. Because some would mean cutting into the operational heart of some companies, increased asset sales may be an alternative.
* More stock buybacks. NBC corporate parent General Electric is accelerating its ambitious stock buyback plan. Disney announced Sept. 20 that it is buying back 50 million of its shares, and Goldman Sachs & Co. said it also has purchased 85 million Disney shares. Earlier last week, Disney announced a $1 billion debt offering to buy back stock and help pay for its Fox Family acquisition. Many more media companies are expected to buy back their stock at record low prices to boost investor confidence.
* Stakes change hands. The Bass family, longtime investors in Disney, sold 135 million of its shares in the company at $15 late last week. It is expected to be the first of many instances in which longtime investors, including some founding families, begin liquidating some of their media stakes, possibly paving the way for whole company sales. That transaction also has caused Standard & Poor’s to place Disney on a “negative credit watch.”
* Increased cross-pollination. The Internet’s stellar performance as a communications and information platform during the crisis re-establishes its viability as a more traditional media extension.
* Reshaping advertising. Advertisers were rethinking their business before the crisis. In addition to becoming more focused on multimedia platforms, they will resort to more conservative, transaction-oriented marketing and promotions to take advantage of digital interactive capabilities. Moving into 2002 and maybe even into this year’s fourth quarter, some major advertisers may resort to TV ads as a means of stimulating consumer buying, analysts said. Broadcast and cable advertising packages, deals and prices will become more creative.
* Slowdown in globalization. John Malone’s Liberty Media Corp. will build, albeit more cautiously, on its $8 billion commitment to German and Japanese cable television service. Other companies may pursue similar strategies. Content companies may encounter a temporary slowdown in worldwide demand for their product during a prolonged military conflict. Moreover, the economic shock from the terrorist attacks could trigger a global recession. That could be a blow for companies such as AOL Time Warner that are pushing global growth.
* Recommitment to public service. Broadcast and cable networks rediscovered their public-interest mandate. Now they just need to figure out how to turn landslide ratings into profits. CBS News and ABC News will accelerate alliances with CNN and other 24-hour cable news efforts to better amortize and minimize accelerated news coverage. “These companies made a beneficial equity investment in their own brands, image and positioning with television viewers for years to come,” Mr. Wolzien said.
* Strengthening of brands. Media conglomerates will turn to ancillary businesses such as home video rental to grow their brands and profits during these economically trying times. Video games and other interactive pastimes, as well as new digital cable services, also could be beneficiaries of consumer demand for at-home entertainment and escape.
* Accelerated deregulation. Further media deregulation-in the form of cable and broadcast ownership cap revisions and more liberal TV station duopolies-will be a way the Bush administration seeks to stimulate growth in the otherwise depressed media sector.