Reality Check For Sustainable Business Models
Time for a reality check. You know your business model is in trouble when ...
--revenues and free cash flow recede and profits evaporate
CBS might survive as a general cable network with a second revenue stream from subscriber fees, but will struggle to stay alive as an ad-supported broadcast network. With Bernstein Research forecasting at least a 6% decline in CBS TV Network revenues, a 26% decline in TV stations' revenues and a 10% drop in syndication and home entertainment revenues, any gains from retransmission fees, Showtime, CSTV and interactive will not fully offset the losses.
Plus, accelerating weakness and changing dynamics in local advertising are killing CBS' TV station, radio and outdoor businesses. Along with publishing, these segments pushed fourth-quarter earnings down more than 40%; CBS is expected to report Feb. 18.
Barclays Capital warns that the resulting liquidity squeeze that could see free cash flow plunge 81% to $133 million in 2009 will require a slashed dividend as CBS strains to refinance $1.6 billion in debt by mid-2010.
For the record, all broadcast TV networks will be losing propositions this year in the face of rising content costs, fragmented audiences and plummeting ad revenues. ABC's broadcast segment operating income fell 60% to $138 million on about a 20% decline in revenues last quarter from the prior year, spurred by lower network ratings and a 15% decline in TV station ad dollars.
The Fox TV Network is expected to post high single- to-low-double-digit losses in fiscal 2009. Surely, the NBC TV Network will be hard-pressed for profits with NBC Universal's overall operating income expected to dive 16% to $2.6 billion on a 14% decline in revenues to $15 billion this year, analysts say. As broadcast network and TV stations go, so goes cable, filmed entertainment and theme parks these days.
--there is no salvation in live big events and national elections
NBC's recent Super Bowl telecast averaged 95.4 million and $206 million in advertising revenues. More than 100 million viewers initially watched all or part of the Super Bowl game and its commercials online--making advertisers the big winner. The networks and other mainstream media are big losers as long as consumers increasingly watch their content on Internet-connected devices and platforms without effective measurement or monetization.
While Nielsen and Disney research deems that consumers must tolerate double the ad load in a full-length TV program online, no one has designed a dashboard for selling, pricing and placing ads across the digital media spectrum and then stretching them into electronic transactions or micropayments.
Likewise, last year's presidential election was a bigger hit on cable and online (where presidential campaigns are won) than on broadcast television. ABC-owned TV stations' ad revenues declined 15% despite the presidential election last quarter, and are expected to decline 21% from the prior year for fiscal 2009, due to lower ratings and the recession. The ABC TV Network ad revenues declined more than 20% (excluding political ads). Even with the political bump, fiscal-year operating income for Disney's entire broadcasting segment will decline as much as 48%, analysts estimate. Broadcast peers tell a similar story.
--content ROI flat-lines or worse in prime time and online
The industry's sky-high production costs and license fees, and the inability to generate enough revenues to more than offset them, create negative operating leverage. New Corp.'s television division lost $356 million in profits and $432 million in revenues for a negative incremental margin of 82% in the first half of fiscal 2009, points out Bernstein analyst Michael Nathanson. TV station advertising is down 30%; network upfront cancellations will top 11%.
Credit Suisse analyst Spencer Wang says that Fox TV stations' revenues will fall 34% and earnings will fall 84.5% due to negative operating leverage (including the sale of eight TV stations). Even Fox Interactive Media display and search sales are flat, which means the company is having difficulty making its content pay on both new and traditional platforms.
Unprecedented advertising weakness at leading cable networks recently reported by Disney, Time Warner, News Corp. and others and the industry-wide collapse of DVD sales supports to film entertainment don't help either. (Yes, Viacom films made only $22 million on nearly $2 billion in revenues last quarter.)
Headcount reduction, operational integration, evergreen libraries and massive writedowns aside, Disney CEO Bob Iger points to the unmanageable "cyclicality of hit-driven content and a lull in the creative cycle." Clearly, the recession's biggest casualty could be the loss of creative innovation and risk.
--major advertisers and categories will never be the same
Auto advertising historically comprised more than one-third of local television ad spending, so a 70% reduction in auto ads is behind the 25% decline in overall TV station revenue, according to Goldman Sachs analyst Mark Winkes. The economic recovery will bring fewer automobile manufacturers, brands, dealerships and overall dollars--already evident in the fourth quarter. Even revenues at Disney's indomitable ESPN, reduced nearly 10% last quarter by the auto and electronics ad pullback, could be down 9% for the fiscal year, compared with a 6% revenue decline for all Disney cable networks.
It's the first sign of the thousand cuts to come from the permanent change in autos, financial services, real estate, retail and other major ad categories.
A significant upset to the network's spring upfront market is unavoidable, given forecasts calling for ad spending reductions of at least 10% for the broadcast networks, 5% for cable networks and 20% for TV stations in 2009.
--emerging deals use existing assets in new ways
Deals are beginning to surface out of necessity, offering new ways to finance, monetize and manage existing assets. Pairing Sirius XM radio with his DirecTV would give Liberty Media CEO and kingmaker John Malone new options to play the satellite card. Liberty would keep Sirius XM out of the clutches of rival EchoStar by assuming its debilitating $3.25 billion in post-merger debt. Under new ownership, the 43 cents-a-day Sirius XM service could get a new test of recession-time pay-for-play.
Similarly, the bankruptcy-related impact on Charter Communications, Midway Games, Clear Channel, Tribune, Young Broadcasting and dozens of other local broadcast companies could also redistribute assets. Alternatively, asset swaps like the one proposed by Nielsen Co. and WPP will theoretically create more efficient business models. Well-funded companies--from Time Warner to Apple and Google--will determine which challenged businesses get a new shot at life. CBS and NBC Universal could be among the next ones up.