Media strains in disaster’s wake

Sep 17, 2001  •  Post A Comment

Still reeling from the devastating human toll of last week’s tragic attacks, media companies-and the financial and advertising entities that support them-are coming to grips with the economic fallout of the extraordinary events.
To be sure, the financial implications of last week’s tragedies were far from most minds as media companies worked tirelessly and often heroically to provide uninterrupted, prudent, insightful information on the disaster that befell New York and Washington.
A high-level media executive expressed sentiments shared by many, saying to me, “Everybody is losing a lot of money due to the loss of commercial advertising and the increased cost of operating. But this is not about money. It’s about people; it’s about tragedy. It’s about doing our job and providing a public service.”
Media companies collectively incurred hundreds of millions of dollars in increased costs and lost advertising revenues last week. If retaliation, new terrorist acts or outright war prolongs the situation, the financial impact on media companies could be more severe.
Broadcasting-related media companies in particular find themselves facing a double-edged sword. There is the increased cost of around-the-clock news coverage that industry experts estimate can run a broadcast network an additional $500,000 to $1 million per day. One analyst estimated increased daily news costs could be twice that.
There also are disaster-related costs that can include the replacement of transmitters and other property destroyed in last week’s blasts, employee overtime, hiring back formerly laid-off news personnel and support provisions such as food, changes of clothes and shelter for staffers who are working nonstop.
More than a half-dozen media companies, including NBC and ABC, must rebuild and relocate their transmitters, antennas and transmission facilities that were lost atop the collapsed World Trade Center towers. In the New York market, transmitters can cost between $5 million and $10 million, and antennas can cost between $2 million and $4 million each, analysts said.
WNBC-TV is relocating its transmitter to Alpine, N.J., at the cost of about $10 million, sources said. However, more financially strained broadcast companies face an even greater challenge. Paxson Communications, for example, will have difficulty covering the cost of replacing the antenna and tower it had on top of the WTC-equipment that analysts say is not covered by insurance.
“There are dire implications to the loss of the transmitters, antennas and communications facilities. You are talking about tens of millions of dollars of capital expenditures to replace those things,” said Tom Wolzien, analyst at Sanford Bernstein. “It does do a number on the HDTV and digital plans at this point with so many companies having lost their primary site.”
New York TV stations were able to continue telecasting last week because of their carriage by local cable operators.
On the revenue side of the ledger, the decision to provide advertising-free news coverage of events resulted in the average daily loss of more than $10 million in revenues per broadcast network, said Laura Martin, analyst at Credit Suisse First Boston. Companies such as Disney and NBC, which provided advertising-free news coverage on their cable channels as well, may have lost nearly $30 million in advertising revenues per day.
No holiday rebound
But the worst blow to TV advertising may be yet to come, analysts say. If last week’s horrific events send the United States into a full-fledged recession and undercut consumer spending, advertisers most surely will reduce their already curtailed media spending. Fourth-quarter advertising, which many broadcast and cable networks and TV station owners had hoped would rebound because of the holidays, now is expected to be lackluster. “The broadcast networks like CBS that held back inventory out of the upfront to sell in the scatter markets could really get hurt,” an analyst said.
The delayed start of the prime-time season and the delayed broadcast of major sporting and entertainment events also will shift corresponding ad spending on those events out of the third quarter and even possibly out of the fourth quarter, hurting overall advertising revenues for the year, analysts said.
“There’s almost nothing you can do about so much of this,” Mr. Wolzien said. “These companies are all doing a great job, and they just have to do what they have to do. Right now, these aren’t money issues.”
However, the increased investment in news has historically paid off for the broadcast and cable networks during times of national disaster.
“This is the kind of time that makes franchises you can play off of for years,” Mr. Wolzien said. “This puts CNN back on the map.”
AOL Time Warner, which has CNN and CNN Headline News, ran news on its TNT and WTBS Superstation cable outlets and transformed its AOL service-the largest Internet service provider, with more than 31 million subscribers-into a clearinghouse for disaster-related news and service information.
Media companies lacking bona fide cable or Internet news outlets last week found themselves disadvantaged and will be prompted to buy, partner or launch their own 24-hour cable news outlets in the near future. Disney, which owns ABC and used its ESPN sports cable network as a quasi-news outlet during the crisis, and Viacom, which owns CBS and used its VH1 and MTV networks as quasi-news outlets, will surely step up such efforts, sources said. At the very least, ABC News and CBS News will likely pursue the oft-discussed alliance with CNN in the short term, as it is a means of better amortizing their news-gathering costs.
“This is the time for news. This is the time people build their brand names and equity. How well your news department performs now is how well you build the image and equity of your entire company. But most immediately, this is a situation where these media companies’ value as public service outlets has been paramount,” Mr. Wolzien said.
“The question is what happens when you have been doing what you have to do for three weeks?”
Indeed, a prolonged crisis to be covered daily could prove as disconcerting to media companies as a protracted economic recovery.
A weakening economy and the already weak advertising market, expected to linger through 2002, will make it difficult for media companies to budget for growth and expansion next year, analysts say.
Eventually, midsize and smaller media companies that cannot survive on weak advertising revenues may be forced to sell assets. Many of these companies already have refinanced their existing debt or negotiated modified debt payment pacts with lenders. However, the increased demand for capital, especially by companies in New York, will make it more difficult for smaller media players to access the financing they need just to pay their bills, analysts say.
Even as TV station values continue to gently decline, a new round of economically driven industry consolidation appears inevitable by next year as smaller broadcast and cable companies find it difficult to survive in a prolonged weak advertising market.
The decision to air news coverage advertising-free out of deference to what was unfolding was not as great a hardship to the broadcast and cable networks as it might have seemed, since companies have so much unsold advertising inventory on hand, some analysts said.
Prime-time delay
But a delay in the prime-time season and the rescheduling of major sports and entertainment events that garner higher advertising rates and revenues could create even more hardships for broadcast and cable companies. Given all the complexities, media companies already are finding it difficult to reconfigure advertising placements for the next several weeks.
“To the extent that the economy was already weak and the advertising space across multiple platforms was under a lot of pressure, these events will put short-term pressure on the markets and will undercut consumer confidence-and therefore advertiser spending. So we will have a m
ore grim macroeconomic environment. The question is for how long,” said John Corcoran, an analyst with CIBC World Markets.
The broadcast network companies, especially, have little leeway for long-term bottom-line strain. For instance, the ABC Television Network last year generated nearly $4 billion in advertising revenue against about $3.3 billion in costs. Stocks that include Disney recently have been trading at new 52-week lows as the companies continue to provide downward revision of their 2001 and 2002 earnings.
That may be compounded for some media conglomerates that find additional core businesses also are hurt by a drop in consumer confidence and further economic decline. For instance, Mr. Corcoran said continued economic decline or a drop in consumer confidence will lead to damp attendance and returns at theme parks owned by Disney and Vivendi Universal.
Content producers such as Disney, Time Warner and NBC will incur tens of millions of dollars in costs from having to table or modify television programs, films and on-air promotions due to their sensitive creative content-dealing, for example, with terrorism-industry experts said.
Media companies will need to replenish or supplement news-gathering equipment and facilities as these extraordinary events continue to unfold.
In short, earnings and revenues for the remainder of 2001 and into 2002 are going to be worse than expected, analysts said. The financial impact of disaster-related expenses and losses will cause companies to mask their financial performance in pro forma cash flow for at least several quarters. Many media company stocks, already hurting, will be further strained.
“We might not get a true picture of how media companies are doing financially until the second quarter of next year,” said Bishop Cheen, analyst at First Union. Still, Mr. Cheen believes there may be a “short-term squeeze” in advertising for some media companies.
“There could be a spate of patriotic advertising. Surely securities firms will want to reassure Americans it’s business as usual, and they may well become the advertising force that telecoms once were,” Mr. Cheen said. “Telecom companies or cellphone companies may come roaring back with the marketing of special emergency services.”
As companies in different industries directly impacted by the New York and Washington blasts, from financial to telecommunications firms, begin to reinvest, they also will begin new marketing efforts, many of them involving television, Mr. Cheen said.
Still, media companies will not manage their affairs for the short term, analysts say.
To be fair, it was only with reluctance that many New York-based media analysts and media company executives contacted last week discussed the financial implications of the disaster. Many remained shaken and solemn about the loss of colleagues and friends, their workplace in some cases, and the devastating carnage all around.
“The irony is that the government wants desperately to make things appear that it is business as usual-that the U.S. cannot be stopped. But it’s going to be anything but business as usual for a very long time,” said one high-level NBC executive, whose situation was not unlike that of many of his media peers.
Analysts and investment bankers were immersed in the losses sustained so deeply by the financial community.
“You cannot underestimate the emotional toll this is taking on the financial services community and the media and telecommunications companies,” said one prominent media investment banker. “People I have known for 30 years are gone. Some of the best are gone. This is awful.”
Another investment banker said, “This is an abrasion to the face of very human businesses. This was an attack on our economic way of life that struck at everyone, but especially our two industries.”
“These are resilient companies. If you know the men and women in the entertainment and communications business, they are like the people who work in the financial services business. They will make any adjustments necessary to go on and come back stronger,” he said.
“Your nose might be broken, but you’re still in the ring.”I don’t think you manage a company like AOL Time Warner and others by leaning on a lot of different levers as a result of these extraordinary events,” Mr. Corcoran said.