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Media holding back on bad news

Oct 8, 2001  •  Post A Comment

Hard answers remain in short supply from media companies-dependent upon a healthy economy and advertising market-about how they intend to make it through a protracted slump.
A majority of the media executives making presentations at last week’s annual Goldman Sachs Communacopia conference in New York acknowledged the financial ravaging of their companies. But they did little to frankly address the drastic measures they inevitably must take in the fourth quarter and in 2002 to survive these tough times.
The fact is few media players have begun to deliver the bad news-maybe because they don’t know just how bad it’s going to be. There’s simply too much in flux.
Companies have been re-examining their financial assumptions and adjusting their earnings guidance. Plainly put, “The altered state of the advertising landscape has caused us to lower the bar,” News Corp. President Peter Chernin said last week.
News Corp. and its Fox Entertainment subsidiary have provided the most dramatically revised outlook for fiscal 2002. Mr. Chernin last week said Fox earnings will grow in the low to mid teens, or less than half the 31 percent to 37 percent growth originally expected for earnings before interest, taxes, depreciation and amortization. News Corp. earnings also will grow at a more modest high single-digit or low double-digit rate, or less than half the 20 percent to 26 percent rate originally expected.
Merrill Lynch analyst Jessica Reif Cohen estimates Fox Television will be hit hardest, with earnings down 13 percent on flat revenues. Much of that will ride on Fox Network losses doubling to nearly $100 million on flat revenues.
The underlying strength of Fox’s syndication backlog, consolidator and duopoly economics from the Chris-Craft TV stations acquisition and cable network growth will not offset such stunning advertising revenue losses.
Mr. Chernin, who warned of increased advertiser cancellations, conceded only that the situation will require “millions of dollars of cost cuts.”
Viacom President Mel Karmazin also generally referred to the continuing need for aggressive cost management in response to the company’s recent warning of a $500 million ad revenue shortfall in 2001-$300 million of which is expected in the fourth quarter.
Mr. Karmazin explained his uncharacteristically bearish forecast by saying, “Most people believe there is going to be some form of retaliation, and we’re being cautious that we’re going to have to pre-empt an awful lot of commercials again.”
Of Viacom’s estimated $200 million in third-quarter losses, $85 million was from advertising revenues lost at the CBS TV Network, and $40 million was ad dollars lost at the CBS TV stations as the result of the Sept. 11 events.
Even Clear Channel Communications last week reported losing about $50 million in radio ad revenues due to the terrorist attacks, but the company avoided addressing some of the steep radio revenue declines industry analysts are forecasting for 2002.
The Walt Disney Co.-which, like Fox and CBS, tried to sound upbeat about the business-steadfastly avoided revising its earnings guidance for the year.
Even Barry Diller’s USA Networks, billed as the media company of the future with 65 percent of its revenues transaction-dependent and representing 9 percent of all on-screen interactive retail commerce, recently lowered its 2001 earnings forecast.
But every media company skillfully sidestepped the issue of damage control: What form will it take? How deep will it go? When will it come?
The best they could do is to generally promise more cost cuts as they wait-as little as six months or, more likely, 12 or more months-for the economy and the ad market to improve.
In fairness to these media players, it was never more difficult to forecast spending and growth trends, especially with the uncertainty surrounding so many leading economic indicators and drivers. The willingness of consumers, advertisers and companies to spend and reinvest changes the equation daily.
Advertisers and agencies are making their buying decisions much closer to when they buy television time. With a larger-than-usual percentage of TV inventory still unsold at the national broadcast and cable networks and at local TV stations, it is too early to know where fourth-quarter pricing and sales levels will go.
News Corp. and Disney last week said fourth-quarter scatter pricing so far has matched upfront levels, while Viacom indicated some scatter prices are exceeding upfront levels.
“Advertisers are back,” Mr. Karmazin said, citing $40 million in scatter business written a week earlier at prices exceeding upfront levels. “These businesses will come back stronger than ever.”
But for now, advertising executives on both sides of the aisle underscore that spending trends that are true today may be radically different tomorrow. “It’s a little like the stock market these days,” one high-profile executive said.
Media companies that were taking a conservative approach to 2002 budgets before the terrorist attacks have since returned to the drawing boards determined to hack away at across-the-board costs.
Privately, they concede they will have to eliminate more jobs and assets, more new business initiatives, more investments and acquisitions.
Early estimates offered by some industry executives and analysts are that 2002 spending generally will be reduced by 5 percent to 20 percent-and more in some cases, depending upon the importance of specific operating units to generating increased revenues and their importance to the corporation as a whole.
When details about the damage control begin emerging in greater force, the impact could be staggering.
The third-quarter earnings reports that begin in earnest this week will reflect the immediate impact of the Sept. 11 events in both increased news costs and lost advertising revenues. With many public companies already pre-announcing a shortfall in earnings and revenues, third-quarter results will not be pretty.
The long-range impact of the terrorist attacks on a weakening ad market and economy won’t be fully evident until the fourth quarter. By then, the downward trends are set for the first half of the coming year, when business generally is not as strong for media companies as it historically has been at year-end.
By that time, the squeeze will be on, and chances are the cost reductions clearly in place will make any cuts so far this year look like child’s play.
In fact, a dire prolonged absence of normal advertising and consumer spending levels could mean radical, permanent changes in the way media companies do business.
But as of last week, most media leaders were maintaining the status quo and even talking deals.
Vivendi Universal Chairman Jean-Marie Messier spoke about growing his new global media powerhouse through strategic alliances rather than through acquisition, setting off a new flurry of rumors about an eventual Vivendi merger with its 40 percent-owned USA Networks.
“If they could consolidate our revenue [on Vivendi’s balance sheet], it would be great for them. Whether it can happen or not is dependent upon a whole series of things,” Mr. Diller said.
“It’s possible to do. It may happen. One of tomorrow’s issues for certain is you either have to buy or you’re eventually going to have to sell,” Mr. Diller said. “We are alert and happy buyers. We’d be reluctant sellers. We’re open to anything that allows USA to continue to do what it’s doing.”
Indeed, well-placed industry sources say NBC, which also must achieve greater scale, is resuming talks with USA Networks, Vivendi, Sony Corp. and others about strategic alliances, merger or acquisition, all of which may become options under the leadership of new General Electric Co. Chairman Jeff Immelt.
NBC, Viacom and other interested parties also reportedly placed their first bids on the table for Telemundo. Comcast Corp. reopened its negotiations with AT&T Corp. to buy the telecom’s broadband unit. News Corp. continued its marathon negotiations with General Motors to buy the automaker’s Hughes Elec
tronics unit. And Disney said it has moved a step closer to closing on its acquisition of Fox Family International.
For every big media company presenting last week there are dozens of medium-size and small media companies struggling in the background, listening to the big guys and wondering how and when they will have to make some tough decisions of their own.
Before the end of the year, at least a handful of companies are expected to engage in negotiations to sell outright, begin unloading assets, default on loans or simply file for bankruptcy protection.
The telltale signs are everywhere. Granite Broadcasting Corp. and The Ackerley Group are among the broadcasters selectively selling stations. Moody’s and Standard & Poor’s have lowered credit ratings almost weekly on the debt situation facing media firms of all sizes. Among those mentioned last week were Ackerley and Disney.
The asset diversification that was supposed to save media conglomerates from financial stress in difficult times really hasn’t kicked in.
Disney executives last week acknowledged that the company’s theme parks have been as much of a drag on revenue and earnings as its advertising-supported businesses. News Corp. pointed to the unpredictable, fragile nature of its studio business as being only a possible offset to its ad-related woes. Even AOL Time Warner, which heralded its historic merger as a multimedia marketing insulation to economic chaos, is admittedly stepping lightly on spending and is taking another heavy whack at costs.
Even executives of prominent players in cable, which has proven to be resilient in previous economic downturns, are sounding a note of caution about how fast and how far they can roll out highly profitable new digital services.
While most leading operators can boast the strong balance sheets, cash flow and liquidity needed to maintain investor confidence in these volatile times, they also need additional advertisers and subscribers to support the multibillion-dollar digital infrastructure they have put into place. Much of the talk among cable operators was of the opportunity for more system swaps and strategic partnering.
The alliances, mergers and acquisitions that do continue will render still more of the few things media companies and their constituents can count on these days: more cost reductions, consolidation and asset sales. The ability to streamline operations and balance sheets is, in fact, what drives most deals.
And that is the side of the story media companies aren’t quite ready to be frank about just yet-but it is coming.