Strike, Recession: 2009 Media Outlook Is Grim
Apple lost $20 billion of its market cap within hours of delivering a more conservative than expected outlook, while reporting fourth-quarter holiday earnings that met analyst expectations. The combination suggested a dreaded cooling of the wild consumer consumption that has driven the sales of iPods, iPhones and Macs, as well as content downloads.
Tech giants Motorola and Intel are also warning about softer-than-expected future results. That is adding to market jitters that have reduced stocks of the most favored players to new or unreasonable lows. Even Google is off its November highs, having shed $40 billion in market cap due to investor concerns over declines in ad-based revenue, despite its continued 20%-plus growth and bundles of cash.
Indeed, there is a growing disparity between what Wall Street analysts and investors have come to expect from high-stakes players, and what the companies say they can deliver in a down market. There is sure to be more head-butting as Internet and media giants report earnings, with the latter fending off growing concerns about other potential negatives.
Morgan Stanley Wednesday led the doom-and-gloom charge with reports that concluded bad times in 2009 for media and entertainment companies squeezed by economic downturn, as well the writers' strike and the digital interactive conversion.
Morgan Stanley analyst Benjamin Swinburne downgraded the entertainment sector to in-line and lowered ad growth forecasts to 3.2% from 5.4% in 2008--which would make it the lowest quadrennial year growth on record. More than one-third of the $10 billion reduction in overall U.S. advertising spending he forecasts will come from national TV, compared to 20% from local TV and 35% from radio. Advertising has declined sharply in previous recession years.
"Perhaps more concerning for the stocks is that the political/Olympic spending in '08 will serve to dampen any 2009 recession rebound. Layering in the long-tail impact of the writers' strike on network TV and a declining home video market further puts '09 estimates at risk," Swinburne said.
As this column has asserted, any upside in political spending could be more than offset by economic pullback and artificially inflate media revenues (and outlooks). While the writers' strike may temporarily boost network margins with lower programming costs, it also wreaks permanent downside, such as losing ad dollars to cable TV and pricing ad time off of strike-weakened ratings (down 12%-plus so far this season). "Lost seasons of key shows will hurt critical home video and syndication profit streams," and accelerate the pace of advertisers shifting their spending from TV to online, Swinburne said.
A mild recession will be particularly acute in local advertising with real gross domestic product (GDP) growth a mere 1%, dragged down by weak autos, real estate, financials and retail. Although 70% of the $2.5 billion to $3 billion in political ad spending this year will flow to local TV, "political spending is not enough to excite in '08 and is just enough to depress in '09," Swinburne said.
The cyclical spike in political ad spending masks underlying weakness from reduced spending by consumers and advertisers. His adjusted 4% growth in local TV advertising, which is less than half that of some other bullish forecasts, factors in an underlying negative 2% growth. As a result, the Big 4 networks could see 2% declines in estimated overall advertising revenues to $14.6 billion in 2007 and $14.3 billion in 2008, Swinburne concludes. So far this season, CBS' ratings guarantees are off by 12%, NBC's are off by 17% and ABC's are off by 2%, while Fox is up by 2%. The six broadcast networks' collective audience share has dropped to 47% to cable's 53% share.
Morgan Stanley also significantly lowered its 2009 earnings estimates and 2008 target stock price for CBS Corp., whose dependence on advertising and broadcast TV will make it a "strike victim." Swinburne gives CBS the benefit of the doubt for 2008, saying, "programming cost savings from less scripted drama programming should more than offset lower network revenues as a result of lower ratings." CBS' revenue and cost declines so far during the strike have both been about 6%.
However, the strike after math and absence of political ad spending in 2009 will result in flat or falling earnings for CBS. CBS TV station earnings will decline 5% to $680 million in a 4% decline in revenues to $1.86 billion in 2009. The CBS TV Network operating profits will be under pressure in 2009 as the strike boost program costs by at least 5% to reinvigorate ratings and revenues. Swinburne also has lowered his 2008 revenue forecast for the network to $4.17 billion from $4.39 billion, and earnings to $370 million from $410 million for the year "due to weakness stemming from a lack of new content." CBS reports earnings Feb. 26.
Although Walt Disney Co. and News Corp. are slightly less vulnerable, and Viacom has its cable network card to play, the saving grace for Time Warner and Liberty Capital will be the restructuring and breakup of their assets rather than performance, he said. So much for creative problem-solving in tough times.