Big Media Needs Global Growth To Thrive

Walt Disney and News Corp. have it in spades. CBS is getting it. Time Warner and Viacom don't have as much as they should. It is the power of international growth to offset the economic turmoil that's clogging media's advertising engine.

Now that companies have showed their vulnerabilities in recent earnings calls, it's worth taking a closer look at media backstops. There aren't many. So-called new and old media are largely dependent on advertising--all forms are impacted by a slowdown in consumer and business spending. Media-related companies are scrambling for a hedge to declining profit and revenue growth.

Only Disney and News Corp. have the entrenched brand-driven international business that is potent enough to offset economic uncertainty. The strongest case comes from Disney, whose tireless children's and family franchises are being fueled abroad by the growing middle class in emerging countries and the weak dollar. Disney and News Corp. have reduced their exposure to the defenseless local TV broadcast and newspaper sectors.



CBS' pure-play domestic broadcast operations are being rescued by outdoor billboard revenue growth in the U.S. digital and international markets. Its online and new media enterprises also are helping to offset soft broadcast returns, although the company does not break out the operating details. CBS says it will use its free cash flow to acquire more high-growth assets, although analysts say they will need to tap such funds to provide advertising makegoods on missed guarantees.

CBS ratings were down 17% in the fourth quarter and are down more than 30% in the current period. Analysts expect CBS to engage in cost cuts as net income declines. Goldman Sachs estimates 2008 earnings growth of 2% for CBS, compared with 6% to 7% for its peers. Despite what was an artificially strong scatter market, CBS reported flat fourth-quarter returns compared with 10% growth for Disney and for News Corp.

To be sure, Wall Street sees growing risks for all TV-based companies. Analysts expect the economic slowdown will more than offset the temporary revenue boost from political advertising and the Olympics this year. The weakness evident in local advertising will eventually encompass national ad platforms, resulting in the "ultimate impact on a reduced pilot development slate and new show launches this fall across all the networks," according to Morgan Stanley analyst Benjamin Swinburne. "Given the current ratings slide and subsequent 10%-20% CPM growth, we are concerned advertisers will look for cheaper and/or more effective ad buys in '08 and beyond," he said.

With most companies making what new media gains they can (generating upwards of $1 billion in new revenues annually), additional revenue growth must come from global markets. CBS' outdoor operations are second in revenues and earnings to the company's television operations, which generally have been flat-to-declining. Even with accelerated operating leverage for its European and Asian outdoor operations, and growing international content sales, CBS generally remains the industry's most pure domestic media play whose secular trends are exacerbated by the economy.

Without more of a buffer and 70%-plus exposure to traditional advertising, CBS risks a huge macroeconomic swing between 2007 and 2008 of more than half a billion. It could gain a mere $44 million in net income in a modest ad downturn or lose an estimated $574 million in the case of a "very deep ad downturn," according to Citibank analyst Jason Bazinet.

Bigger media conglomerates have offsets to the same broadcast TV, advertising and macroeconomic risks. News Corp. is king, with about half of its annual consolidated revenues and about one-quarter of its corporate profits generated outside the U.S. All of Disney's core businesses--from evergreen film and television franchises to consumer products and theme parks--span the globe. With only 22% advertising revenue exposure, Disney's mix of businesses may prove more economically resilient over time.

Although overall growth is expected to slow at theme parks, media networks and the film studios, Disney's overall branded assets will attract foreign consumers in a weaker domestic economy. It is far less hinged than in previous recessions to its theme parks, contributing nearly one-third of Disney's revenues and 22% of cash flow. Cyclically challenged ABC (like all broadcast TV) now contributes less than 10% of Disney's cash flow, compared to 45% from its cable networks.

Nathanson estimates Disney's earnings per share could swing from a 27% gain in the case of an economic uptick to a 6% decline in the case of a recession, which would be bolstered by global franchise strength across most of its core businesses.

By comparison, Viacom has about 35% exposure to advertising revenues, and Time Warner has even less. Both continue to make international gains, although they are far from matching those of Disney and News Corp. For instance, Viacom's branded cable networks are expected to grow its total international operating cash flow 31% on a 7% gain in international revenues in 2008, Swinburne estimates.

All this points to widening valuation gaps among media companies that have adequate revenues and earnings buffers to economic and cyclical downturns, as well as to labor strikes and mainstream technology shifts. The slower growth dynamics, without enough of an international, new media or other revenues backstop, will eventually pose serious issues for even the most viable media players.

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