To Survive, CBS Needs Biz Makeover

Just as CBS chief executive Les Moonves was putting the best face on his company's $12.5 billion third-quarter loss Thursday, the Commerce Department declared the U.S. economy DOA on a 3% annual decline in consumer spending and a negative GDP. There is no way a pure-play, advertising-dependent CBS can escape more deadening blows based on where things are headed.

CBS' prudent cost management, recouped prime-time ratings leadership, attempted sale of slow-growing assets and late-to-the-party interactive media-building will not be sufficient to offset sustained revenue decline at its television stations and other local media businesses.

A $14.1 billion third-quarter writedown reflected the declining book value of its more secularly than cyclically challenged TV and radio businesses. CBS masked the recessionary impact on its owned-and-operated TV stations by reporting a 2% rise in overall television revenues to $2.1 billion that also included television license fees bolstered by a 41% increase in cable syndicated sales of "CSI: New York."



TV station revenues continued a steep decline of -14% in the quarter--pushing overall television operating income down -15% to $414 million, according to Barclay's Capital analyst Anthony DiClemente. Radio revenues declined -12% to $392.5 million. The cyclical advertising weakness disproportionately impacts local advertising platforms (TV, radio and outdoor) from which CBS derives about 30% of its overall ad revenues, according to Pali Capital analyst Richard Greenfield. Heavy cost cuts this past year do not alter broadcasting's expensive, inefficient legacy structure.

CBS managed to blunt investor and press response to its third-quarter results by pre-announcing the bad news several weeks ago. Excluding the write-down and other items, the company reported adjusted earnings from continuing operations of $290.3 million, or 43 cents per share--compared with $357.8 million, or 50 cents per share, a year earlier. Revenues rose 3% percent in the quarter to $3.38 billion on higher TV syndication revenue and the addition of CNET, acquired in July for $1.8 billion--or about one-third of CBS' current overall value.

CBS says its total sales and operating profit this year will decline by a percentage in the "mid-teens" compared with 2007. Analysts say that implies roughly a 27% decline in operating income in the fourth quarter.

Its only growth engines, such as hit-driven program license fees, Showtime and CBS Interactive, cannot generate revenues to offset its rapidly declining traditional ad revenues. CBS Interactive's overall sales (while relatively small) increased fourfold to $140.7 million, but it posted $2.5 million in operating profits, compared with an $11 million loss a year ago. Growth was mainly attributed to CNET, whose revenues rose 6% on a 12% gain in display advertising. CBS Interactive's branded portfolio also includes,, GameSpot, BNET and Its CBS Audience Network has more than 300 partners, including AOL, Microsoft and Yahoo.

Although the CBS television network is dominating all of the top prime-time ratings categories for the first time in 20 years, and CBS Interactive now ranks No. 7 in Web traffic, it is unlikely that the corresponding financial gains will be able to offset the loss of ad revenues, some of which may be permanently shifted away from traditional media to the Internet and digital platforms. Many major ad categories will be lost or permanently disrupted in this recession.

Although Chairman and controlling shareholder Sumner Redstone seems determined to sustain CBS's high 11.5% dividend (the highest among media peers) and resist selling the companies, analysts say the permanent decline and change in the company's core businesses may be too potent to overcome. Consider Redstone's recent loan covenant woes at National Amusements Inc., which holds his controlling shares in CBS and Viacom. The debt problems were triggered by the plummeting stock price of CBS and Viacom, which were used as collateral for a $1.6 billion loan due at year's end.

Some analysts still believe that Redstone will eventually have to sell CBS or re-merge it with Viacom--even as CBS' market cap has dropped to around $6 billion on a 65% decline in its stock price in the past year. Greenfield has been pressing for more transparency on National Amusement's finances and their potential impact on CBS and Viacom, since Redstone was forced to sell $233 million in non-voting shares when both companies' stock recently nosedived. Redstone Thursday said they were "extraordinary circumstances" and "atypical action" that he does not intend to repeat.

Some on Wall Street believe he may have no choice.

From a pure numbers standpoint, it is difficult to see how CBS can weather the storm for 12 to 18 months without major asset sales, dividend cut or a merger with another media entity--even a Viacom merger. The $1.4 billion in cash flow that CBS has accumulated in the first nine months to support its healthy dividend may be difficult to sustain in the wake of rapidly declining revenues and earnings. Moonves acknowledged the difficulty of trying to sell some or all of CBS' 140 radio stations in a market vexed by ongoing credit woes.

Even the CBS TV network has its potential vulnerabilities, given the uncertainty of prime-time programming hits and national advertising, that Moonves says is not showing signs of weakness--yet. Meeting or exceeding upfront ratings guarantees has so far saved the network. "We do not have that fear of falling off the cliff. Big tent advertisers realize they cannot do without (us). Advertisers have pulled back on the spending and are going where they get their biggest pop for their dollar," said Moonves, ever the salesman. That is the corner into which CBS is being boxed by deteriorating economics, the relentless shift to digital and the steady deterioration of broadcast television.

The cost cuts, the attempted asset sales, the interactive developments, even the prime-time ratings may prove too little and too late for CBS to deliver what Moonves says is "a stronger position on the other side of the challenges we face today."

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