CBS Searches For The Upside To The Downside

CBS' financial problems reach beyond what to do about its money-losing news division. Recessionary strains on its core ad revenues will push the pure-play media company to further reduce costs and risks, dramatically alter its business models, and expand into cable and films.

Such action is imperative for CBS, which has the highest industry exposure to ad revenues (72%) and little or no offsetting income from cable, online and other complementary businesses. Depending on the length of the recession and its creative luck in prime time, CBS' days are numbered in the old broadcast model. That means major restructuring from within--not just conventional head-count reduction. That also means reinventing--or sharing more of the risks and costs of operations, such as news-gathering.

While CBS issued a statement Tuesday that it has no new plans to further outsource its news operations with CNN, it doesn't preclude CBS, CNN and even ABC from rekindling talks to collaborate, given broadcast networks' irreversible declines in news ratings and ad revenues and no way to monetize costly news-gathering.



NBCU excels in such amortization across its hybrid broadcast-cable-online news operations--valued at about $11 billion, and generating an estimated $640 million in operating income this year on $1.6 billion in revenues, or about 15% of the parent company's total. Its varied revenue streams include cable and online affiliate fees, advertising, syndication and shared subscription revenues. And this year, it's got a combined Olympics-elections haul.

In stark contrast to the declining fortunes of broadcast and print news, cable news is soaring. CNN's first-quarter prime-time ratings (live, AA 18-49) increased 86% from a year earlier, and its contribution to parent Time Warner grew nearly 9%, while MSNBC ratings increased 55.6% from the prior year and its contribution to parent NBC Universal grew 5%.

Television stations, like networks, are losing their content and advertising potency to the Internet. They are reinventing themselves as interactive local conduits that are more effective online and across new digital channels. In that case, local news and information becomes more critical than the national and global news that digital consumers can get anywhere. Even the political ad spend is mostly local. Morgan Stanley estimates that 90% of the $250 million in gross political ad revenues will go to the TV station group. Without it, TV stations' revenues will decline at least 4%, and earnings will decline at least 5% in 2009.

CBS' overall cost base must come down as its revenues are sure to fall--especially if CBS hopes to meet its forecast of 3% to 5% earnings growth in 2008. The fourth quarter of 2007 was a portent: CBS' television operations reported a 7% decline in operating income, a 22% decline in radio and a 26% decline in publishing--only offset by a whopping 29% increase in its outdoor billboard business. Television, which represents two-thirds of CBS total revenues, and outdoor--the second-largest revenue business--also dominate CBS' rising capital expenditures as a result of extensive digital upgrades.

This is why CBS executives are entering the unpredictable business of making movies. CBS Films plans to produce four to six movies annually, for $10 million to $50 million each, primarily to feed its Showtime premium TV channel. CBS also may tap its still-healthy balance sheet and free cash flow to aggressively bid for the Weather Channel, which will sell for between $4 billion and $5 billion. TWC provides a necessary and logical foray into the world of dual cable revenues, and is complementary to its TV stations.

It looks like CBS is creeping back toward the Mothership and the film and cable assets that went with Viacom after the combined company split in 2006--but as the current Viacom and Disney exemplify so well, they are brand extensions, and complementary businesses needed to balance the financial scales. Viacom will enjoy a gain of more than 11% in its earnings per share this year from growth in its MTV, Nickelodeon and other branded cable networks. As the lowest-rated broadcast network show reaches parity with the highest-rated cable networks' programs, and advertising prices and revenues begin to even out, a pure-play CBS is in trouble.

A recent 10% headcount reduction at its TV station group came on the heels of cost and investment cuts at CBS Interactive, including CBS and, College Sports Television and CBS national news--much of it related to restructuring and reorganizing. On the upside, CBS recently launched a hyperlocal ad network, is more closely tying CBS Radio and its new social music site, and hit new highs with its March Madness video streaming. Little wonder that CBS is pushing for collaborative audience reach across its platforms as a new way of selling to advertisers. It can't move fast enough.

CBS is trading at about 6.5 times its 2008 earnings estimates at a discount to its entertainment peers, as well as to pure-play TV, radio and outdoor players. Its 11 times PE is 30% below what it was for the combined Viacom, according to JP Morgan.

Before the year's end, industry analysts may question how long or whether CBS should remain independent--even in this era of deconsolidation among media giants. The combination of declining old business lines exacerbated by hard economic times, not being able to ramp up revenues from new digital business lines fast enough, and having no cable television back stop could collectively prove to be CBS' undoing. Against these forceful headwinds, with diminishing firepower, CBS needs to move boldly as if its life depended on it. Because it does.

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