Signs of ad recovery don’t tell whole story

Mar 11, 2002  •  Post A Comment

Diane Mermigas
A little good news goes a long way.
The beleaguered media industry last week was quick to seize on a surprisingly upbeat reading from Peter Chernin, News Corp. president and Fox Entertainment Group chief executive, and then clung tightly to it for a wild ride in a rebounding stock market.
Mr. Chernin told the London press there has been an advertising “uptick” of 4.5 percent to 5 percent in most of News Corp.’s diversified U.S.-based businesses, mostly falling under the Fox Entertainment Group banner. “It is really positive to see growth after so many months of consecutive falls. But U.S. advertising has not grown enough to make up for the downturn,” Mr. Chernin cautioned.
For weeks, media companies of all sizes have hinted about signs of life in first-quarter ad sales. Some say spending has been much stronger than expected while conceding that ad sales occur much closer to airtime, which obscures real growth from impulse or as-needed ad sales.
National and local broadcasters admit it is difficult to know how much of the pickup is Olympics-induced or driven by pent-up demand. Has the advertising downturn hit bottom, or are we in limbo and vulnerable to more ebb and flow? Are CBS and NBC enjoying increased advertising demand and pricing primarily due to ABC and Fox’s lack of salable inventory?
Now anything looks good
Lest euphoria run amok at this early stage, it’s worth remembering: What matters is how real and how steep the advertising and overall economic recovery will be.
Business has been down so far for so long that any measure of an upturn is going to not only look good but also look significant. In fact, we’re still struggling to understand how bad things have been. There was confirmation last week that overall advertisers’ 2002 spending declined worse than originally thought, down some 10 percent to $94.3 billion, according to the ad-tracking service CMR.
When accelerated spending and economic recovery finally occur and are sustained, there will be new and real growth. Even then, broadcasters will never see the levels of ad spending and pricing they once enjoyed.
When prosperity-in whatever form-finally comes, what will media companies do with it?
The first partial answers may come during the traditional upfront market, during which the Big 3 broadcast networks seek to make about half their combined $15 billion in annual advertising sales. Even then, there will be no telling just how big advertisers’ budgets will be for the year or what portion will be allocated to broadcast and cable television. Chances are the upfront will be a steady, prolonged string of complex deals that still will find advertisers setting aside considerable dollars for closer-to-air buys.
But clearly, we are at some kind of inflection point.
Numbers are up
Last week, the volatile stock market was buoyed by a string of positive economic indicators that strengthened the backbone of the ad-supported media-things like the Federal Reserve’s cautiously optimistic report card on the economy, improved factory orders and reduced job claims, which drove the Dow Jones industrials to three consecutive days of triple gains. Media and entertainment stocks spiked more than 10 percent, although most are still way off their 52-week highs.
But there is good reason for guarded optimism-mainly the nagging dichotomy tugging at media companies and sectors.
“I don’t know where the optimism is coming from,” said ABN-AMRO’s Spencer Wang, who is as concerned about Fox’s declining ad revenues and ratings-and increasing make-goods-as he is about threats to its off-network syndication gold mine.
Mr. Wang said that even as Fox management mentioned positive advertising signs during a recent earnings call with analysts, it lowered its own 2002 expectations to mid- to single-digit operating income growth. Consequently, Mr. Wang lowered his 2002 earnings forecast for Fox, “which had already been below consensus and management’s expectations,” by a steep 10 percent to $1.14 billion.
One of his big concerns is that TV stations and networks have been reticent to pay high fees for off-network syndicated shows. Some buyers may be asking for a higher mix of barter advertising instead of paying cash license fees to shift some risk to the syndicator-both are bad news in a weak advertising market. The networks’ growing tendency to repurpose first-run shows can also have an adverse impact on Fox’s off-network syndication, which will generate about $100 million in incremental earnings this year.
Just last week, Morgan Stanley Dean Witter analyst Richard Bilotti upgraded Fox’s stock to “outperform” and upgraded corporate parent News Corp. to a “strong buy,” based primarily on News Corp.’s upside potential and realizing operating leverage across all of its businesses by 2003.
The Fox network, Fox TV stations and cable channels will be key, generating a combined estimated $325 million in cash flow by 2003.
The Fox network especially will make gains enough to slash its anticipated $180 million in losses this year to $45 million in 2003, he said.
Mr. Bilotti estimates total 2002 earnings before interest, taxes, depreciation and amortization for FEG will be $1.13 billion, with the Fox network growing ad revenues by at least 3 percent this year.
Those wide swings between long-term and short-term perspectives are just as dramatic at other media companies and in entire media sectors, leaving much of the media and entertainment industry hamstrung over what to expect and how to proceed during the remainder of this calendar year.
On things Viacom and Disney
In recent weeks, Viacom has been subject to the same kind of contrasting assessment from analysts. Merrill Lynch’s Jessica Reif Cohen recently cited CBS and Viacom’s improved first-quarter scatter pricing in March. Analysts uniformly agree Viacom is best poised to benefit from a turnaround ad market, and it effectively spent much of the slump reducing costs, streamlining divisions and creating a better-integrated media concern.
The same 45 percent exposure to advertising that made Viacom’s revenues vulnerable in 2002 could quickly turn positive in 2001, “with potential incremental [earnings] margins on advertising revenue reaching 85 percent, given the fixed-cost nature of many of the company’s businesses,” according to Bear Stearns’ Ray Katz.
But those same metrics applied to The Walt Disney Co. render a very different story.
Some analysts who suggested Disney’s earnings woes had hit bottom last quarter are not warning that the company could report as much as a 50 percent decline in earnings the next fiscal quarter. It will take more than an advertising turnaround-which always lags behind a more sweeping economic recovery-to turn things around, with all of its core cyclical businesses being adversely impacted and less than one-third of its overall revenues directly tied to advertising.
Still, Salomon Smith Barney’s Jill Krutick was the latest analyst to declare Disney “well positioned for a turnaround” in 2003, when it will likely have more “normalized” free-cash flow.
But the schism doesn’t stop there. In recent weeks, analysts have published outlooks with widely contrasting forecasts for grass-roots broadcasters, which are not expected to do well even with a slight advertising improvement, and cable companies, which will enjoy dual benefits from a recovery on both advertising and subscriber fees.
Of course Mr. Chernin had both industry sectors in mind and then some when he referred to early positive signs, since FEG is as invested in cable and in filmed entertainment as in broadcasting. That is why even the best-intended guarded proclamations of optimism have to be carefully weighed. You can start by considering the bearer of good news.