• by Diane Mermigas , November 27, 2007

The greatest impetus for a settlement is the reaffirming signs that the writers' strike is taking a big bite out of declining TV advertising that for the broadcast networks could exceed $500 million in lost revenues and exacerbate 4% negative growth at TV stations.

Television executives fear the ad spending lost during the strike to the Internet and other fledgling interactive platforms will be difficult to recoup, given the Web's steady double-digit growth momentum and the overall economic downturn.

Whether advertisers contractually opt out of the upfront or stick it out and seek maximum makegood time, the broadcast networks face hundreds of millions in losses. They still owe advertisers for last season's audience deficiencies and face continued erosion of their leading age 18-to-49 audience demographic, down 8% so far this abbreviated season. The offset savings from not having to invest in original comedy and drama is strictly temporary, as broadcasters begin scrambling to fill their schedules with reality, news, special events and sports.

Collectively, the strike and related-circumstances could cost the broadcast networks as much as $600 million in ad revenues--or the modest 3.2% growth forecast for 2008, according to advertising guru Jack Myers. Worst case, a sustained strike into next summer would literally flatten broadcast network ad revenues (with losses being offset by reduced original production costs), but increase cable revenues to 8% from a projected 7%, representing as much as $250 million in spending shifted from broadcast TV.

The bigger problem: Advertiser could move at least $425 million--perhaps permanently--to the Internet, out-of-home options, such as elevators and retail store video kiosks, video games and even old standbys, such as newspapers and radio, Myers said.

However, Bernstein Research's latest Ad Tracker, which provides a bottoms-up quarterly analysis of U.S. advertising trends, says only the Internet and cable networks will post any meaningful growth this year. A 1% decline in traditional ad spending this year "could likely portend more weakness in the quarters ahead--especially in local media."

Bernstein notes that overall ad growth has trailed nominal GDP, which was 5% in the third quarter. The exceptions were the Internet, cable networks and cable system operators. While the 1% decline in traditional advertising may not sound like much, it is mostly comprised of newspapers, television and radio, which account for 57% of all traditional advertising and nearly half of all advertising. The three traditional media platforms collectively declined 5.5% in the third quarter, led by a 7.7% decline in newspapers, a 4.3% decline in TV stations and a 3% decline in radio, Bernstein said in a report released Monday.

Broadcast network TV posted its second-consecutive quarter in decelerated growth, mostly as a result of ratings weakness. That can only spell steeper declines ahead for the broadcast networks with a continuing pullback by major categories, such as the auto manufacturers (down 7.5% this year), alcohol and cigarettes (down 6.8%) and computers and software (down 6.2% so far in 2007).

Television stations also have seen nearly across-the-board declines in ad spending, amounting to a 2.3% decline year-over-year in the third quarter, Bernstein said. The two exceptions were Tribune Broadcasting (up 3.9%) and Belo (up 1.8%).

The fourth-quarter comparables will only grow more severe, despite primary election and holiday ad spending countered by writers' strike losses and the continuing migration of ad dollars from so-called old to new media platforms.

Even without factoring in writers' strike-related losses, Bernstein estimates fourth-quarter ad spending in traditional media will decline 2%, while online spending grows 28%. Even as the scatter market remains tight, driven by broadcast-ratings decline, broadcast networks could still grow 2% in the fourth quarter, when television stations are expected to decline 8% and cable networks grow 10%.

That means all the major media concerns that own television networks will feel the financial squeeze going into 2008. The only manageable relief is settling the writers' strike and zapping original scripted product back into a rapidly deteriorating system. Thus, the intensified pressure to devise a more equitable formula for sharing revenue returns from new media devices and platforms--from online downloads and streaming video to DVDs.

But even the major media players are confronted by other economic challenges to their core businesses. Time Warner Cable faces increased competition from telephone companies/fiber rollout and competing video services--and a possible price war. The execution risk with Time Warner's AOL continues, while its content business--like its peers'--remains temporarily challenged by the writers' strike. All film studio owners (including Time Warner, News Corp., Viacom and Walt Disney) also run the risk of declining margins as the DVD cycle matures. This is a particular problem for News Corp.--27% of whose earnings are generated by filmed entertainment, compared with 7% to 13% for other of its media conglomerate peers.

About 30% of News Corp.'s earnings are tied to TV advertising. With advertising comprising 41% and home video comprising 18% of Viacom's total revenue, the company is particularly sensitive to an economic slowdown. ABC Television's revived ratings are quickly dissipating in a prime-time season hurt by an absence of new hit series; the strike abbreviated runs of veteran shows like "Desperate Housewives" and "Lost."

Most exposed is CBS, with 34% of its earnings and 72% of its revenues tied to advertising, making it especially sensitive to an economic downturn and ad makegoods as a result of the strike. Even Disney, which has reliably been rescued in the past by its ESPN powerhouse, is vulnerable. Bernstein expects Disney's cable network margins to take a hit over the next two fiscal years as a result of rising sports costs that can only be offset by raising ad rates, which may be difficult to achieve in the current climate. If it worsens, Myers' well-regarded forecast calls for a possible shift of $300 million to $400 million in ad dollars out of television if advertisers conservatively hang onto or play it in other media platforms.

Perhaps what is most troubling about such declining advertising forecasts is that they do not fully factor in the potentially devastating impact of a writers' strike that stretches into 2008--at a time when broadcast television is in a financial vice created by other factors.

In years past, the broadcast networks and their corporate parents have skimmed over the bottom-line impact of advertising makegoods, only to have any major correction show up in later quarterly earnings. This time is notably different. The broadcast networks still suffer from a loss of prime-time ratings and key demographics--for five years running. The important annual push to retard that slide was interrupted by a writers' strike. At the same time, advertisers and consumers continue their double-digit spending shift to the Internet and other digital platforms. The writers' strike is approaching the point at which it makes a bad situation worse. Nothing weighs more heavily on the minds of broadcast negotiators this week.