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Protracted War Exposing Faults in Economy

Mar 31, 2003  •  Post A Comment

The ongoing war in Iraq and the weakening economy it masks are beginning to take a toll on corporate finances, threaten the upfront advertising market and pose other challenges that may not be fully evident for months.
But one thing is for sure. The potency of that financial double whammy is catching the media industry off guard.
Most media company and advertising executives have been focused on tracking the impact of what they hoped would be a brief, victorious conflict abroad, while virtually ignoring the mounting evidence of deteriorating economic fundamentals at home.
Recent weeks have seen significant declines in such critical economic indicators as consumer confidence, consumer spending, new home sales and capital spending. Corporate profits are falling or are stagnant, and reliability of earnings forecasts is at an all-time low. The gross domestic product, closely aligned with ad spending, is limping along at a 1.4 percent gain, far short of original estimates. Experts fear these indicators are even worse than they appear in government statistics that have at least a three-month lag time.
These indicators are important because they reflect the health of the companies that spend the advertising dollars that are media’s lifeblood.
“One of the drivers of the strong marketplace over the last 18 months or so has been the strength in consumer spending. That’s what the ad market is about: appealing to consumers and getting them to spend their money on goods and services,” said Mel Berning, president U.S. broadcast, MediaVest. “When that goes, ad spending also declines.”
The underlying time bomb is the federal government’s trillion-dollar deficit, compounded by war expenses that could run between $200 billion and $500 billion-making economic relief impossible for consumers and corporations.
With so much negative flux, not even Federal Reserve Chairman Alan Greenspan will guess just where the U.S. economy is headed short-term.
How much economic damage unfolds in the coming months, and how much turns out to be a function of war rather than a softening economy, is the kind of uncertainty that will surely arrest both consumer and corporate spending.
So it is no coincidence that in the recent weeks, media concerns as large as The Walt Disney Co. and as small as LIN TV announced they will miss their earnings and revenue forecasts for the quarter and maybe the year.
The first week of the war only rendered an estimated $150 million to $200 million in displaced advertising on the TV networks and their stations, most of which expert Jack Myers says should be re-expressed in other ad time. But it was accompanied by more evidence that overall ad spending is beginning to slow across even more robust media sectors, such as national and network TV.
Many analysts say radio, where ad spending weakness first reared its head last month, may see first-quarter and full-year ad revenues grow only 3 percent, or about half the more aggressive early growth estimates.
“Every company is going to have a very difficult time making their guidance, and most companies may modestly miss their guidance,” said Paul Sweeney, analyst for CSFB. April ad sales in local radio and television have begun to weaken, he said.
There is growing concern among industry analysts that ad spending and corporate fundamentals could decline rapidly. LIN was actually on target for its 4 percent revenue growth until the war began March 19. Other Big 3 network affiliated TV stations are expected to reveal similar war-affected results in the coming weeks, making a bad situation worse, since local TV ad spending was expected to be flat to down slightly this year anyway.
“The market has definitely weakened on the TV side as well,” CSFB analyst William Dreyer said, with the biggest impact in smaller, local markets.
But even media conglomerates are vexed by volatility-some more than others, depending on their asset mix. AOL Time Warner and cable giant Comcast Corp. will be buffered by their heavy dependence on subscription-driven revenues, although service upgrades will be minimal.
Although less than one-third of its overall revenues are dependent on advertising, Disney’s latest fiscal woes are due to declining revenues and earnings at theme parks and retail outlets. Media conglomerates, which have rigorously cut expenses, have been unable to rely on one core business to support another during the cyclical downturn.
Tom Wolzien, analyst at Bernstein Research, estimates Disney’s fiscal second quarter earnings per share will decline 23 percent from a year ago. Although Disney is “regaining strength in its broadcast network it continues to be hampered by terrorism threats and the sluggish economy.”
The Big 4 broadcast networks and their corporate parents could begin feeling the pinch if several weeks from now the underlying economic and advertising weakness prevails and begins to impact upfront psychology and spending. It could throw off financial outlooks for at least a year, especially as the war adds at least 10 percent, or $50 million-plus, to annual network news budgets, Mr. Wolzien estimates.
Mr. Wolzien said it will take at least four to six weeks from the time the war ends to know for sure how much advertising spending recovers on its own. Experts fear that if there is no clear sense of how much advertising money is coming back into the marketplace by late April or early May, the lingering uncertainty could threaten the upfront market.
Even advertisers interested in avoiding the high-priced scatter market will approach the upfront more cautiously than was first expected. Most of the six advertising categories supporting 75 percent of the broadcast ad market are struggling to be profitable and will be price-sensitive, he said.
Little wonder, then, about the sudden stillness to early predictions of double-digit upfront prime-time price hikes, based on an artificially inflated scatter market, in a stunning disconnect with broad, deteriorating economics.
“After 9/11, advertisers didn’t want to come back right away, because they didn’t know how to deal with something that was so tragic on American soil,” Mr. Wolzien said. “The war is different. It’s not here. Just as 9/11 masked an economy already in decline, we are not sure how much of that same thing is going on here, and we won’t know how much of this is the economy until advertising comes back.”
However, Soundview Technologies analyst Jordan Rohan points out that even after the war is over, the threat of terrorism can be as damaging.
“The risk of terrorism will persist, if not increase. Investors ignore it and then are surprised when consumers respond to it. Companies say there is nothing they can do about it,” except damage control,” Mr. Rohan said.
Any regular terrorist activities in the United States could put an estimated $200 million of cash flow per quarter at risk for a company such as Disney, he said. Even the largest overleveraged companies, such as AOL Time Warner with $27 billion in debt and Disney with $15 billion in debt, will struggle to reduce those numbers against declining revenues. All media concerns could experience a severe tightening of available funding to reduce debt or make interest payments. Erratic, weak public markets are unable to support fund raising for all but the biggest media players.
The stock market already is reflecting this sobering process of reconciling unrealistic, upbeat growth expectations with a more pragmatic, grave outlook for the ravages of war and a softening economy. The stock market last week gave back nearly all of the gains it posted March 21 in premature exuberance over a weekend war that would have no economic or political liabilities for a victorious United States. It’s the same illogic that has led some industry executives to predict a $9 billion upfront ad market.