Nathanson: Wall Street Soured On News Corp., Viacom

by David Goetzl, Feb 12, 2009, 2:13 PM

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It's not just the economy. While the roiling ad market has contributed significantly to the downturn in major media companies' stock prices, an influential Wall Street analyst said Thursday that family control has also soured investors.

Sanford Bernstein's Michael Nathanson said investors are deterred by Sumner Redstone's control over both Viacom and CBS and Rupert Murdoch's influence at News Corp. Redstone, who is in his 80s, heads the board at both Viacom and CBS. Murdoch, who is about to turn 78, is Chairman-CEO at News Corp.

Speaking at an Association of National Advertisers annual event, Nathanson said that Wall Street has concluded: "I don't want to own these companies because I can't stand the people who own these companies."

He said investors feel that family control inhibits their ability to halt major company initiatives, citing Redstone's frequently criticized decision to split Viacom and CBS in 2006, and News Corp.'s acquisition of Wall Street Journal publisher Dow Jones. If Redstone or Murdoch are determined to make a consequential move, investors simply can be hamstrung, Nathanson said.

In Viacom's case, Nathanson added that "the Street looks at ... Sumner as a negative," and "the company is held back by his ownership."

During the past year, Viacom's Class B non-voting shares have tumbled from $42.54 to the $16 range, while CBS has sunk from $25.83 to the $5.70 range.

Over the past 52 weeks, News Corp. has gone from a high of $20.49 to about $7.

Still, other major media stocks have tumbled as well, with Time Warner down from $16.90 to around $8.50, and Disney dropping from the $35 range to around $18.

On a separate topic, Nathanson offered a bullish outlook for cable networks, largely because their increased investment in original programming is driving more ad dollars--albeit somewhat stymied nowadays--and higher fees from affiliates.

In contrast, he suggested that broadcast networks may face choppy waters even when the economy recovers because one of their selling points--that they offer advertisers the greatest reach--is losing steam. The reach levels between broadcast networks and fully distributed cable ones is narrowing, and Nathanson said that trend is likely to continue.

To an advertiser in need of the wide, fast reach of a broadcast network, Nathanson said the decline "should make [them] very nervous."

Cable networks are expected to continue to cut into broadcast viewing, largely because of a heightened investment in programming. Over the past few years, figures show that broadcasters have increased investment by 2%, with fully distributed cable networks, the TNTs and USAs, bumping their outlays by 9%.

Cable networks have focused on developing expensive shows, such as TNT's "The Closer" and USA's "Burn Notice," because they have increasingly realized that ratings growth must come from the programming itself--not simply expanding distribution by 5 million to 10 million homes a year. The top-notch programming, Nathanson said, also helps them "justify" the large affiliate fee increases they seek.

Still, programming investments are likely to contribute to profit declines even as revenues rise.

Nathanson added that broadcasters can find new growth paths by charging cable operators to carry their fare--something that CBS has been successful with. One argument that broadcasters can make to get cable companies to pay them: Operators are increasing revenues by charging consumers about $10 a month for a DVR. Those ad-skipping devices cut into broadcasters' revenues, yet the networks are not getting a cut of the $10.

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