Media Forecasters Struggle With Valuing The Future

Cautious optimism from media executives and analysts about the modest uptick in advertising fails to take into account two wild cards that could spoil the recovery party and is already causing a rift on Wall Street.

How much advertiser spending will eventually come back, and where will those dollars land? What sources of organic revenue growth will sustain a media recovery after cutting costs?

Neither of these critical unknowns is adequately taken into account in revised 2010 forecasts last week, although most said a recovery is within reach. The fatal flaw is assuming a return to the status quo.

The continuing radical change of transitioning to digital interactivity has been compounded by the deep declines in 2009 ad spend. Consumer spending cannot be restored while high unemployment and tight credit markets persist. As entire industries and major advertising categories (such as automotive, financial and real estate) reinvent themselves, no one can be sure how much and where surviving companies will spend their marketing dollars.



General Motors is planning a major comeback campaign, but many of its brands and car dealerships are gone. It will reach out to reluctant consumers in new ways that are impossible to forecast.

Such unprecedented uncertainty is why Cowen & Co. analyst Doug Creutz has downgraded ad-dependent News Corp, CBS and Viacom, claiming that "impaired consumer spending could keep a lid on any advertising recovery" until 2011. His pessimistic forecast released Friday is for more than a 13% decline in overall U.S. advertising this year, a 1.3% decline in 2010 and a 1.2% growth in 2011.

Also last week, Goldman Sachs and Barclays upgraded their outlook for large-cap media. Barclays Capital analyst Anthony DiClemente asserts that the U.S. advertising recovery will more than offset the radical structural concerns in 2010 and 2011. Goldman Sachs analyst Mark Wienkes raised his entertainment sector outlook to "attractive" based on a "stronger than anticipated rebound in national advertising" the second half of 2010.

Some analysts have adopted new assessment standards they say more accurately predict a chaotic, recovering marketplace. Rather than the historic use of GDP, Creutz's conclusions are based on personal consumption expenditures and industrial production "as more direct measures of the demand and supply we believe drive advertising spending," he said.

DiClemente has introduced a 10-point scorecard that (in addition to the usual earnings, EPS. PE comparisons) assigns ratings to companies on international expansion, cyclical rebound exposure, brand and asset quality, incremental return on all capital and invested capital, and EPS surprise price impact.

Still, in anyone's media forecast, there is no metric for weighing the impact of systemic change. Ad-dependent broadcast TV stations and networks continue to lose ground to cable networks as well as to digital. Many media companies shift their reliance between national versus local advertising, even as they increase the income generated by more steady affiliate and subscription fees. The schism that is emerging in forecasts will only get worse before we know the new norm, circa 2011.

Wienkes contends that a mixed, flat advertising market in 2010 will feel like a big improvement from this year's 15% decline in overall ad spending. National ad spending should grow 3% in 2010 for broadcast networks, cable networks, online and magazines. Both cable and broadcast networks should see a 6% rise in national ad spending next year.

Local media will decline 2% collectively for newspapers, radio and outdoor), while TV stations could enjoy as much as a 7% ad boost from next year's election spending and the continuing recovery of autos and other sectors.

An aggregate 2010 forecast (incorporating estimates from more than half a dozen industry experts) released last week by the Television Bureau of Advertising was not quite as upbeat, but still bullish on spot advertising, projecting 2.5% gains for local station spot ad sales and 4.6% growth for national spot sales.

So, at best, we're talking about stabilization in the context of this year's economic disaster. So far in 2009, some analysts say cable network ad spending will decline 4% and the broadcast TV networks could be down nearly 10%, while TV stations' ad spending could decline 26% and newspapers could be down 28%. Overall this year, national ad spending will decline at least 8% and local ad spending will fall 23%.

Projections and assumptions are becoming even trickier with individual media companies.

General Electric's NBC Universal is expected to lose $1.5 billion in revenues and nearly $1 billion less in profits, according to JP Morgan analyst Stephen Tusa. Cable networks will generate the lion's share of earnings with $2.34 billion in operating income compared with $893 million from NBCU's broadcast network and stations, slightly less than that from its film studio and theme parks, and a loss of $160 million from digital.

NBCU's 2010 outlook minimally improves, since half of its overall revenues coming from advertising are tied to auto, financial, real estate and other businesses hit by the economic crisis, Tusa said.

Likewise, CBS -- which relies on advertising for nearly 70% of its revenues -- is causing a rift among analysts. DiClemente estimates that if CBS can reclaim half of the $600 million to $800 million in auto ad revenues it lost the past two years, it could boost the company's overall earnings by 20% from a dramatically reduced cost base.

Creutz has downgraded CBS to "underperform" forecasting that it will have, at best, flat revenues and earnings for the next two years.

With the 2010 budgeting process begun, companies and industry analysts will have a new challenge to conquer: assigning value to the unknown.

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