Although Goldman Sachs analyst Mark Wienkes has initiated U.S. entertainment coverage with a bold "sell" rating on CBS and a "neutral" view on conglomerates in general, he takes an enlightened deep dive into some of the challenges of Big Media's disruptive technology shifts and the protracted economic malaise. One of his rapid-fire predictions is that the power shift to tech-enabled consumers will slow by 2010, when big media companies will have more aggressively moved content online and built out monetization frameworks.
Contrary to popular belief, consumers are spending three times more money on consumer-supported media as on ad-supported media--opting for convenient, cost-effective access through mobile TV, online streaming and downloads. Marketers will learn to respond to such media consumption with smart social media tools. With broadband adoption having gripped 70% of Internet households, social networks are gaining momentum.
Even so, TV remains the most critical consumer outlet and media asset as the largest driver of half of large-cap media revenue and as the dominant time-consuming media (3 to 1 over time spent online) with consumers of all ages, Wienkes notes. Broadcast television's accelerated viewer erosion and switch to commercial-based ratings will be offset in the future by digital tier growth, increased DVR use and online viewing. Although cable networks enjoyed a slight 5% lift in year-over-year growth as a result of the writers' strike, a potential actors' strike could seriously disrupt all TV networks' new season.
Advertiser spending will remain flat and be saved from further deterioration over the next 18 months by the general strength in corporate profits and the ability to maintain marketing spend in tough times. Although the television networks managed to repeat $9 billion in upfront sales, those commitments could be undercut by advertiser cancellations and increased makegoods on missed ratings guarantees.
CBS is the most vulnerable, due to its "sub-optimal relative asset mix," its continued audience erosion, a peaking content cycle, the drag of radio and outdoor properties, and a potential overall 1% ad spending decline in 2009, Wienkes says.
The five entertainment conglomerates are expected to average 4% revenue growth and 7% operating income growth in 2008, slowing to 3% revenue growth and 4% operating income growth in 2009. Flat 7% ROI could be whacked by diluted acquisitions, aimed at boosting a dismal average aggregate revenue growth of only 3% through 2011 for all big media.
But there is plenty of offsetting good news.
About two-thirds of the companies' revenues are somehow linked to video, which is growing everywhere. Consumers' time spent with television still outpaces time spent online by about 3 to 1. Although online and mobile media consumption will continue to grow, they will only be "negligibly cannibalistic" to primary revenue sources near-term, Wienkes said. Even with rapid consumer behavior shifts, major media companies' aggregation of hit content (through digital cable, DVR, VOD, broadband online and mobile) provides a strong offset to original Internet content that resonates with consumers.
The key to traditional media conglomerates remaining relevant to consumers and advertisers is distinctive branded content that can be monetized across all interactive platforms. Concerns about advertiser spending may abate as media consumption becomes more non-linear. Although online video is gaining traction faster than streaming audio, it will not have a material impact--only low-single-digit percentages on overall viewing levels, Wienkes says. For instance, YouTube, which has said it places advertising in a mere 3% of its online videos, averages the same number of viewers per minute as a mid-tier cable network such as SoapNet.
Brands, franchises and games (where time spent and revenues are growing faster than for any other media) will be increasingly important. Cable network, online and theatrical end markets should remain stable through 2009, depending on content. About half of big media revenues are skewed toward content, which is supported by consumer discretionary spending and by industry licensing fees, except for CBS, which is 70% dependent on advertising.
With only about 5% of big media revenues being generated online, the only meaningful immediate offset is return on invested capital in which Viacom leads in with 12% in 2008--four times better than CBS and three times better than Time Warner. That said, the media companies' merger and acquisition activity will continue to move from binge to purge, despite uncertain valuations. However, buyers eventually will pay premiums for companies such as Viacom, which offer double-digit earnings per share growth, the highest returns on investment and minimal secular challenge versus low-growth, low ROI and advertising-dependent CBS. Overall, large-cap media is trading at a 38% discount to the S&P 500 and faces more weakness.
The good news is there are as many diverse factors that can bolster as can pummel big media over the next 18 months. Advertisers will continue to follow consumers and shift to interactive promotional spending, sponsorships, product placement and branded entertainment. They will embrace more measurable and targeted interactive media in what Wienkes forecasts as " a slow and measured transition."
Traditional media will be reinforced by four stable factors: 1. The intrinsic scarcity value of mass media and free media is entrenched in many consumers' lives. 2. Traditional media will likely continue to control the best mass content regardless of platforms or device. 3. Not all news media will be ad-friendly. 4. The power of brands will continue to prevail against online search gaining share of transactional advertising. Those aren't terrible odds.