Numbers Game: Earnings Reports Don't Tell Whole Story

Do not expect a clear reading on the negative impact a troubled economy and shifting advertising dollars will have on media balance sheets this year from companies' most recent quarterly earnings reports. Financial results for the three months ended December 2007 are too soon to reflect the brunt of the three-month writers' strike or the consumer-led economic slowdown. Those factors are surfacing in the first quarter of 2008, which will not be reported until April or May.

The result: things look a lot rosier now for media conglomerates than they might be later this year. At the end of 2007, the broadcast networks were in an uncommon limbo. They were running original series episodes they banked before the writers went on strike, and filling in with reruns and reality shows. Some of the networks were missing ratings guarantees as a result and having to provide makegood time and cash payments. That situation has exacerbated for want of original series programming so far this year, although special event and live sports are a big draw. On the flip side, the broadcast networks point to their much-lower program licensing and production costs during the strike, even as they lose viewers and ad dollars to cable, the Internet, video games and other interactive pastimes.

The broader economic impact is just as confusing. Although consumer spending declined during the holidays, even if advertising did not, a general pullback in spending on goods and services so far in 2008 will affect advertising allocations and media revenues. Even if the writers' strike is settled soon, the economy will remain a drag on consumer and advertiser psychology. The bad news is sure to surface in future reports.

It is anyone's guess how wide and deep the cracks will be in broadcast networks and corporate media concerns. A sense of "no harm done" supported by network profits from these atypical, jumbled fourth-quarter returns could provide a false sense of security later. It is one reason that some media executives say they see no recessionary-like backlash in their numbers--yet. On Monday, News Corp. Chairman and CEO Rupert Murdoch said he has not seen signs of national slowdown in his businesses, although several months earlier, he warned 2008 could be "rough." Time Warner, CBS and Viacom have yet to report. p> On the other hand, it's sometimes difficult to tell where the numbers are headed. Two weeks ago, NBC Universal CEO Jeff Zucker said his network would stop paying for costly series pilots as he sounded the economic alarm, saying the company must "manage its business accordingly" during a recession. Earlier this week in a call with JP Morgan analyst Imran Khan, Zucker said he sees no signs of economic slowdown or a recessionary environment in NBCU's advertising or theme parks. The weakness in autos is offset by strength in other advertising categories.

So far, Disney's core assets have thrived on the global value of its franchises and the strength of consumer spending at theme parks and resorts, movies, plays and Web sites. Analysts remain at odds over how recession and strike-proof Disney will continue to be. CitiGroup analyst Jason Bazinet recently downgraded Disney stock to "sell" on the belief that a slowdown in parks and advertising will "push Disney earnings well below consensus in 2008 and 2009." At the same time, Pali Research analyst Rich Greenfield has increased his earnings estimates and rating on Disney to "buy" on the strength of ESPN, its other cable networks.

Disney CFO Tom Staggs offered a note of caution during the company's earnings call Tuesday. "We're not going to forecast the economy. The trends don't tell us enough about how the current year will unfold," he said.

There is reason to hedge even the most optimistic forecast when it comes to media companies that own broadcast networks. Whenever the writers' strike ends, they will begin ramping up spending on new fall programs. Accelerated program spending will coincide with what could be a pullback by advertisers. The impact may be partly distorted by the broadcast networks' tight prime-time ad inventory as well as a slew of advertiser makegoods.

Other factors will come to impact media company financial results, such as the continuing shift of ad dollars into cable and the Internet, partly as a hedge in uncertain times. Also, cracks are beginning to show in online portals and social networking sites. While News Corp. reiterated its forecast for $1 billion revenues and a 20% profit target this fiscal year for its Fox Interactive Media, Google last week warned that its monetization of ad inventory of News Corp.'s MySpace has proved "challenging."

The complex scheme at media conglomerates means there are plenty of wild cards to be played in this year's earnings game, although that's hardly evident in comments about their preserved status quo. That's why a valid reality check cannot go unnoticed. To hear venture capitalist Tim Draper tell it at this week's OnMedia conference in New York: "A typhoon is wreaking havoc on big media... This whole industry is being completely reinvented," he said, referring to new digital content and distribution ventures that are giving traditional television and film a run for the money. And there'll be no hiding from that in the months ahead.

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