The beleaguered fourth-quarter advertising market was looking up ever so slightly before the United States began retaliatory bombing of Afghanistan on Oct. 7. But in today’s ever-shifting ad landscape, that was a long time ago.
Wartime advertising is proving to be a daily roller-coaster ride, reflecting the volatility and unpredictability that will grip the U.S. economy, stock markets and ad marketplace for the foreseeable future. As a result, the earnings and financial dynamics of all media companies will be negatively reshaped not just for the most important selling quarter but for the foreseeable future.
“There are conflicting signals in the marketplace. It’s too early to know where things are going to be eight weeks from now, let alone six months from now,” said Tom Staggs, Walt Disney’s chief financial officer, expressing a frustration shared by his media peers.
The unsettling events that began with the Sept. 11 terrorist attacks on the World Trade Center and Pentagon have exacerbated already weak advertising trends. It all contributes to more dire economic problems rooted in a massive pullback of advertiser, consumer and corporate spending that will push any hope of a recovery into late 2002 and make the fourth-quarter ad market the most unstable in many years.
UBS Warburg analyst Christopher Dixon estimates that broadcast and cable television has lost at least $320 million in advertising dollars since the attacks and that the overall fourth-quarter scatter market could be down as much as 20 percent to 25 percent from a year ago.
Some high-level media executives insist that fourth-quarter ad spending on all broadcast and cable television will more modestly decline between 10 percent and 15 percent and that missing ad dollars will be pushed into the first quarter of 2002. “The big unknown is how much of the advertising that has been pulled comes back into the market. Many advertisers remain out of the market because they are creatively retooling their messages. Re-editing and repositioning the way they promote in this new environment takes time,” Mr. Dixon said.
Although expert estimates about fourth-quarter ad spending vary, there is universal agreement that there will be a double-digit decline in ad dollars spent in what is arguably the most significant selling quarter of the year. Depending on who you are, fourth-quarter ad pricing generally can equal or slip slightly below upfront pricing, putting an even more negative spin on media company 2001 revenues and earnings. Others like CBS have made it a point to say some of their scatter is selling above upfront pricing levels.
“We believe the scatter market will run weaker than the upfront and there will be some level of upfront contract cancellations beginning in the fourth quarter,” said Morgan Stanley Dean Witter analyst Richard Bilotti.
“We believe that in the fourth quarter, sellout ratios will be down, scatter pricing will remain weaker than upfront pricing, and upfront cancellations will increase,” said Mr. Bilotti, who recently reduced his 2002 forecasts to reflect declines in advertiser spending across all forms of television.
But none of that can take into account all the significant unknowns, including increased pullback by advertisers in response to ongoing news developments and tensions.
A new survey by Jack Meyers indicates advertisers are cutting their fourth- and first-quarter ad budgets an average 12 percent “as a direct result” of the terrorist crisis. Nearly half those polled said they will reduce spending by at least 20 percent, while 49 percent said there would be no change.
Tom Wolzien, analyst at Sanford Bernstein, estimates that broadcast network costs from lost advertising revenues, increased news coverage expenses and savings on regularly scheduled programming that can air at another time could net $5 million and $8 million daily. “The net impact is likely only 1 or 2 cents per company, such as AOL, Disney and Viacom, in fall-quarter earnings per share,” Mr. Wolzien.
On a sustained basis, advertiser spending could decline by at least 4 percent–as it did in 1942, the first year of U.S. involvement in World War II, and as it did after the 1991 invasion of Kuwait during the last economic recession, Mr. Wolzien said.
Every new jolting development–especially any further domestic terrorist attacks–will set off a new spate of advertising cancellations, displacement and repricing that could negate any temporary ad revenue gains. That continuous volleying already has caused a major disruption in media ad revenues and earnings. By the end of 2001, some media companies, such as Viacom and Walt Disney, are likely to face extremely bleak earnings outlooks due to extensive advertising shortfalls despite hefty cost cutting, analysts said.

“We’re at the point where many companies have given up a year’s worth of earnings growth. It has just evaporated,” Mr. Wolzien said.
Global banking group ABN AMRO estimates the impact of the attacks on all forms of television ad spending for the rest of 2001 will result in a total revenue loss of between $750 million and $1 billion out of an estimated $51 billion total annual TV advertising universe. However, experts such as Mr. Dixon make the point that overall, measured media spending this year will hit at least $137 billion, which is not far off last year’s $139 billion, excluding about $8 billion that was mostly a product of inflated dot-com ad spending early in 2000.
Offsetting the losses
Companies budgeting for 2002 must decide if they will cut into the muscle and bone of their organizations with more cost cuts to offset what eventually could be devastating ad revenue losses–or take it on the chin by accepting shrinking profit margins next year as AOL Time Warner appears to have done.
The world’s largest media company recently backed off its lofty 2001 targets and is expected to make more conservative 2002 projections to protect its ability to reinvest in growth areas such as broadband and international expansion. Analysts said AOL Time Warner may have to settle for less than $10 billion in earnings before interest, taxes, depreciation and amortization (compared with $11 billion originally forecast) on about $38 billion in revenues (compared to $40 billion originally forecast).
The hybrid media concern that owns The WB, the Turner cable networks and Time Inc. magazines has been more deeply impacted by weak advertiser spending than it originally said it would be, claiming that advertising contributes only 21 percent to its overall revenues.
“It’s a bigger deal to them than they would have you think. It’s as much as 30 percent to 40 percent of their earnings,” said Merrill Lynch analyst Henry Blodget, who recently lowered his earnings estimates for all the Internet-related media companies he tracks. Deteriorating ad revenues also prompted News Corp. and its Fox subsidiary to slash in half its initial fiscal 2002 earnings guidance. News Corp. said fiscal 2002 earnings will be in the high-single, low-double digits instead of 20 percent to 26 percent originally forecast. Fox Entertainment earnings will grow in the low to mid teens instead of 31 percent to 37 percent.
“We are now looking at a global-altered advertising market; a tough environment with limited visibility, great volatility and recessionary pressures,” News Corp. President Peter Chernin said at a Goldman Sachs media conference in early October.
“Until a few weeks ago, we expected to capitalize on additional ad dollars in a market turnaround we thought would be in the not-so-distant future. But today, because of the events of the last few weeks, I’m not sure we’re quite as optimistic anymore,” Mr. Chernin said. “The big question is what will be the trends going forward? The truth is nobody really knows.”
How bad is bad? Educated guesses are emerging.
For the full year ABN AMRO estimates ad spending on national broadcast TV will decline 11 percent to $28 billion and local broadcast TV ad spending will decline 10 percent to $12 billion, which together comprise nearly 80 p
ercent of all TV advertising revenues.
National cable television will decline 6.6 percent to $7.5 billion in 2001, with local cable ad spending rising 4 percent to $3.3 billion, ABN AMRO predicts. Overall, all forms of TV ad spending will drop 9 percent this year.
Though Viacom was overly optimistic going into this year’s upfront, recently the company has reversed gears and may now be delivering the most pragmatic picture. Viacom Chief Operating Officer Mel Karmazin has confirmed that the company, which is dependent on advertising for about half its overall revenues, will come up short by $500 million this year–$300 million of which will come in the fourth quarter.
Fourth-quarter crash
At the same annual Goldman Sachs conference, broadcast and cable networks executives were guardedly optimistic about fourth-quarter ad sales, but they all resisted giving any 2002 earnings guidance.
Some industry analysts and executives said they have simply written off the fourth quarter–and all of 2001–as disastrous. Some broadcast and cable operators are straining to sell off remaining inventory through special pricing and packaging in what normally is the strongest and most important advertising quarter of the year.
“Nobody wants to be out there, because no one knows where bottom is,” Mr. Wolzien. “The uncertainty of the overall economy, and the terrorist activities and overcapacity in the media universe are at work. Media inventory exceeds demand. Media companies will be slower to come back than the economy,” he said. “This is not just a fourth-quarter phenomenon. We’re in this for the long haul.”
Walt Disney President Bob Iger said ABC could see “upside” in the fourth quarter if ratings improve, even though it is straining to meet upfront unit prices. Disney officials declined to quantify fourth-quarter scatter sales or fiscal 2002 earnings forecasts.
“Buying is extremely short term,” Mr. Iger said at the conference. “As a result, reading the strength of the scatter marketplace into 2002 is difficult at best.”
Some industry experts speculate ABC could be hit worst of all, facing between $35 million and $40 million in revenue shortfall out of the fourth- and first-quarter scatter markets because it must assign so much of its inventory for make-goods to advertisers due to poor ratings that fall below guarantees. Some analysts predict Disney could see its overall fiscal 2002 earnings decline 15 percent due to the ad purge.
“Obviously the effect on the business has everything to do with the negotiation and the process. We have no difficulty today in selling out,” Mr. Karmazin said at the Goldman Sachs conference.
“As an example, the CBS Network was sold out (the last week in September), and we sold off the NFL at higher rates. Last week we wrote $40 million of scatter business at CBS–and the scatter pricing was above the upfront pricing,” he said.
“We’re cautious, and we think that we’re probably going to have to pre-empt a lot of commercials again,” he said.
Although CBS has the most fourth-quarter inventory to sell, much of it at older-skewing demographics, it has such popular programs as “Survivor: Africa” working in its favor, at least for now. Analysts believe such reality shows will have a short life in a warlike environment. CBS sold only 65 percent of its inventory in the upfront.
NBC is pushing to sell its remaining 9 percent inventory at just below upfront prices and like ABC has followed CBS’s lead and begun to aggressively sell cross-platform packaging and pricing to advertisers under its NBC Connect moniker. High-level executives such as NBC President Andy Lack and Mr. Iger are making personal calls to advertisers and agencies.
“All of these terrible events have just slowed down the selling process,” NBC TV Network President Randy Falco told Electronic Media. “People in the advertising business, whether on the client or the agency side, find it more difficult to make commitments in the future, so it’s harder for us to gauge where the marketplace is going to be,” he said.
Network executives said retail, automotives (especially foreign) and technology advertising are showing signs of strength. There is predictable weakness in travel, airlines and financial services advertising.
Although most fourth-quarter time is being sold without cancellation rights, new ways are being sought to write business and stimulate advertising.
Jessica Reif Cohen of Merrill Lynch said all broadcast networks will be aided by the fact that upfront advertising commitments in the fourth quarter “have no cancellation rights, and pre-empted ad spots might be shifted into alternative time slots to reduce the glut of unsold advertising inventory in the general marketplace.”
The good news is that an estimated 90 percent of that yanked advertising has shifted from the third quarter to the fourth at unit prices generally matching or just below upfront pricing. The bad news is there’s not a lot of new business.
Ms. Cohen estimated the major broadcast networks will post a 15 percent decline in third-quarter revenues and that CBS could even post some revenue gains in the fourth quarter, “helped principally by the broadcast of `Survivor III’ in October-November, which did not air the prior year period.”
Because Fox sold at least 80 percent of its upfront inventory at essentially flat prices, it is feeling “less exposed in a tough scatter market,” Mr. Chernin said. Fox’s cable channels, led by Fox News, which has commanded price increases, are holding their own. However, deteriorating ad sales and pricing on baseball and football have caused broadcasters such as Fox to return to the NFL in recent weeks, seeking to renegotiate their costly, long-term licensing agreements, sources said.
Squeeze hits stations
Although overall the networks’ fourth-quarter advertising situation may not prove much worse than had been expected before Sept. 11, media analysts and executives said these company-owned TV stations also are now vulnerable after benefiting from what was a fairly stable local advertising market.
The call-up of military reserves and intensifying unemployment are hurting the local advertising market.
“The one thing that was holding many of these companies up was local ad sales, which was basically flat to up slightly. With this going from a corporate national ad recession to a real local recession, that means consumer spending and ad spending go down, and then these companies will have some very significant problems,” Mr. Wolzien said. “The biggest unknown right now is what happens to local ad sales.”
Ms. Cohen estimates fourth-quarter television station advertising could decline 10 percent to 15 percent in light of the slowdown in airline and tourism ads and tough prior-year comparisons with last year’s elections.
Only NBC’s owned and affiliated TV stations are likely to share in the economic benefit of first-quarter Olympics telecasts from Salt Lake City, compared with the NBC network barely breaking even on the event, Ms. Cohen said. Competing television outlets will likely suffer lower ratings and revenues for the 17 nights of competition in February. Belo and Hearst-Argyle will be among the beneficiaries, while Sinclair Broadcast Group and Young Broadcasting will be hurt, Ms. Cohen said.
However, she said she sees a silver lining in the 2002 advertising market, which she thinks will be buoyed by the $75 billion consumer and business stimulus package proposed by President Bush and mid-term political elections. But most experts and executives aren’t very optimistic.
“I don’t think anyone can be too conservative at this point,” said Paul Noglows of JPMorganChase. “You’ve seen the numbers come down for 2001, and there clearly will be a negative impact on 2002.”
Looking ahead to 2002
Media analysts and company executives acknowledge the importance of emerging longer-term trends that will reshape advertiser spending and media economics in 2002 and beyond.
In a recent report dubbed “How Advertising Will Change,” Morgan Stanley Dean Witter’s Mr
. Bilotti said the economic uncertainty and ad agency consolidation prevalent before the Sept. 11 terrorist attacks now will force TV advertising into more of a year-round selling process. Broadcast will follow the lead of cable networks by selling long-term advertising contracts semi-annually, he said. The importance of the upfront selling season will be diminished. There will be increased multimedia deals and intra-company cross-promotion by advertisers seeking to reduce their marketing expenses. But it will “amplify the growth rate gap and capabilities between the mightiest and weakest [media] competitors,” Mr. Bilotti said.
Carried to an extreme, Mr. Bilotti said media conglomerates such as Viacom will form more TV duopolies through swaps and acquisitions to counter the cost of year-round advertising. Revenue shortfalls suffered this year and next year simply cannot be offset by expense reductions. At best, only half of the 2002 revenue shortfall can be offset with programming cost cuts, he said.
That said, Mr. Bilotti–like many of his analyst peers–expects the advertising markets to resume “normal growth” in the second half of 2002–an optimistic forecast by anyone’s standards–but has lowered his 2002 ad spending forecasts. Broadcast networks, which will muster only 2.5 percent revenue growth over the next five years, will struggle in 2002 with a 4 percent decline in ad spending (or a 6 percent decline without the Olympics) in 2002. Broadcast TV stations will see ad revenues decline 3 percent next year. Cable networks will see a 6 percent decline in ad spending in 2002, though they could average 6 percent ad growth through 2006, which would be only one-third the growth they have enjoyed the past five years.
Clearly, all media companies are bracing for new advertising dynamics characterized by advertisers buying even closer to the time their spots air and negotiating harder for better pricing and packages. It is estimated broadcast networks were down 12 percent to 13 percent for the 2001 upfront season, compared with 12 percent increases the prior year. Mr. Bilotti said the lower upfront numbers generally were driven by weak costs per thousand, lower ratings guarantees and tighter inventory. Cable network upfront revenues were down 20 percent to 30 percent, with smaller cable networks unable to sell any advertising in the upfront, he said.
Eventually, this will substantially hurt the overall growth rate of the entertainment conglomerates that own these networks. So it is no surprise that even the biggest media concerns are pulling out all the stops to create new initiatives to stimulate advertiser spending, although they insist they are resisting discounting airtime.
Out of the malaise may likely come new ways to do business with advertisers, to reshape and reprice their marketing and promotional campaigns.
Broadcast network companies all have accelerated their efforts to bundle the broadcast, cable and online platforms under their umbrella to better stimulate and serve advertiser needs during this time of re-examination.
Executives of media conglomerates that own both broadcast and cable networks said they are heartened by advertisers gravitating to the power of their leading brand platforms in these troubled times. “The one thing we have seen a glimmer of is a greater sense of the recognition of the network television and branded cable properties as effective ways to reach consumers. The four days of steady news coverage woke up people to the strength of those network businesses,” Disney CFO Mr. Staggs said.
And none too soon, given media companies’ susceptibility to advertising weakness. Even the biggest media players are susceptible to a protracted advertising downturn, which will become even more obvious in their third-quarter earnings results.
Viacom’s estimated $3.8 billion in advertising revenues this year will make up about half of its overall revenues, while Disney’s $6 billion in 2001 advertising revenues represents only 24 percent of its total revenues. By comparison, USA Networks’ anticipated $597 million in ad revenues makes up only 13 percent of its total 2001 revenues, and AOL Time Warner’s $8.1 billion in advertising revenues makes up only 21 percent of its total 2001 revenues.
Other smaller media concerns even more dependent on healthy advertising may not be so lucky. Several quarters or one year of strained ad revenues can pose hard questions about whether to remain in business. Case in point: Ackerley Communications’ recent purchase by Clear Channel. Many analysts believe other small broadcasters will also agree to sell under the pressure of protracted weak advertising.
While companies can use scale to get through a sustained economic squeeze, they cannot avoid adverse impact altogether. The vulnerability of pure broadcast companies can be seen even in Disney’s diversified declining numbers: ABC TV network’s overall advertising revenues to $3.4 billion in 2001 from nearly $4 billion last year, and its owned TV stations to about $926 million in total ad revenues this year from $1.1 billion in 2000.
Analysts said Disney’s financial predicament has been complicated by other factors: ABC had 8 percent to 10 percent CPM declines in the upfront contracts, compared with a 3 percent decline overall for the industry, and ratings guarantees were off by as much as another 10 percent. Sports CPMs, which generally declined 15 percent to 25 percent, will begin to improve slightly for Disney’s ABC Sports and ESPN in the fourth quarter.
So far, the advertising slump and subsequent revenue and earnings falloff have not taken the edge off of deal-making, which analysts said may opportunistically pick up in 2002 as media companies seek ways to spread reduced operating costs across a broader base of assets that will generate increased advertising dollars. Such reinvesting often can be the first line item eliminated to offset declining ad revenues.
For instance, sources said Disney has been looking into renegotiating the $5 billion it is paying for Fox Family, based on a decline in performance standards. It is still expected to close the deal, which will strengthen its cable presence and advertising base.
Then again, it may just be an indication that business must go on even in the midst of what many media experts are calling an advertising recession, analysts said.
“At some point, some kind of stability has to return–short of some cataclysmic event. Maybe that is just normal growth settling into a more modest pattern,” Mr. Wolzien said. “Life goes on … changed … but it goes on.”