Viacom's second-quarter earnings report has been the most telling so far in a steady flow of "don't know what hit me" admissions that advertising fall-off will only get worse. Industry analysts had expected Viacom to weather the economic tumult better than its peers on the strength of its popular cable networks. What really happened here? The damage would have been worse had it not been for Paramount Studio's "Iron Man" and "Indiana Jones" box-office hits. Lehman Brothers analyst Anthony DiClemente expects more dramatic margin pressure in the future from increased content investment and a deeper national advertising downturn.
What's worse, straight-talking Viacom CEO Philippe Dauman declines to estimate how far ad revenues will plummet--reflecting the befuddled sentiments of many media companies in the print, cable, and telco and Internet sectors. Viacom began the year forecasting 7% advertising growth, which it then lowered to 3%. It came in at just 1% in the second quarter. "Given the state of the economy, it's just very hard to predict," Dauman said.
That's the challenge for many public companies: If you cannot accurately forecast revenues (and therefore earnings), forecasts become less reliable, and valuations begin drifting. It's already happening.
Analysts Wednesday lowered estimates for News Corp. and Walt Disney ahead of their quarterly earnings reports, based on declining ad and consumer spend concerns. Morgan Stanley analyst Benjamin Swinburne nearly halved his estimate for News Corp. fiscal 2009 pro forma earnings to 9.6% from the prior year. Pali Research's Richard Greenfield lowered his fiscal 2009 earnings estimate to just below consensus ahead of Disney's reported fiscal third-quarter results. He cited weakening consumer travel, deteriorating television ad sales and challenging studio entertainment comparisons.
Disney's better-than-expected reported earnings late Wednesday underscored the vulnerability of its theme parks (bolstered by international travelers), film studio (suffering difficult comparisons to last year's hits), and domestic ad weakness at its ABC (although its cable networks are thriving in international markets). One of the biggest jolts just materializing is the realization that media companies will not be able to rely on Internet-related revenues to offset their shifting or declining traditional revenues. An Integrated Media Measurement study suggests that half of the 20% of viewers who watch TV programs online are using the Web as a replacement for traditional television--not just as a catch-up. A majority of those are not looking for prime time TV shows online.
While it is the first study showing a significant number of people watching TV content online without first viewing any part of it on conventional television, there is no standard accepted measurement or pricing of TV programs specific only to Web platforms or digital devices. So the trend cannot be immediately monetized as consumers migrate from static to digital interactive and Internet media faster than anticipated.
That said, the online ad spending believed to be immune to an advertising pullback is proving to be just as vulnerable. While there are no historical comparisons for media-related online advertising, the meteoric growth of online ad revenues, and display advertising in particular, trends downward.
The bleeding is accelerating everywhere. Newspapers struggling with declining print revenues have recently faced stagnant or falling online advertising growth despite a 12% rise in Web audiences so far this year. Some companies, such as Belo, sustained double-digit declines in Net ad revenues from a year ago. Local TV political-year income generally cannot keep pace with the 25%-plus quarterly declines in automotive spending. Even Comcast, the largest cable operator, saw a 2% decline from the year-ago in ad sales, which comprise a nominal part of its overall revenues.
Plus, the $9 billion in upfront commitments represent intentions--not money in the bank. Some advertisers are likely to renege on their orders as the economy worsens. Less than two weeks before the Summer Olympics in China, NBC Universal and Gannett concede they are struggling to sell out their Olympics-related inventory. The weakness reported by companies such as Gannett, Belo and Viacom as well as many other data points suggest that "national advertising is finally cracking," local advertising is weaker and the overall ad picture "is pretty grim," according to Bernstein Research analyst Drew Borst.
Accepted measurements of consumer and advertiser spending lag behind behavior, so we are bound to see more dire evidence in the coming quarters. That explains why Interpublic is hedging a bit on meeting its full-year forecasts even as it beat second-quarter estimates. Indeed, many companies have nowhere to run, having dramatically cut jobs and overhead expenses, and resorted to asset sales despite deflated and confused valuations.
From a broader economic standpoint, this recession is complicated by an unprecedented financial crisis in which the solvency of major investment firms and banks is being artificially engineered. The disruption of entire industries, such as media, automotive and airlines, is compounding the steep decline in housing values, the rise in unemployment and the deepening credit crunch. Mounting corporate bankruptcies represent lost ad dollars. Contracted consumer spending also has been adversely impacted by plummeting home values, increased unemployment and the inflated cost of goods and services.
Media analysts have been slashing forecasts and continuously lowering overall ad spending growth estimates to flat or even down until 2010. BMO Capital Markets' Lee Westerfield was being generous when he forecast a 1.8% increase in 2008 and 1.9% in 2009, which could be wiped out by continuing price decay in spot TV and radio and in premium Internet display. "The U.S. ad cycle has worsened," he said, "not troughed."