A jaw-dropping plunge in 2009 revenue and earnings forecasts is prompting television broadcasters to brace for the permanent loss of business to digital and economic change that could be more daunting than the recession.
In fact, analysts warn their recently slashed estimates may prove too optimistic. Barclays Capital and JP Morgan nearly doubled their forecast decline in overall TV station local and national spot revenues to a negative -15.5% for 2009, warning it could go lower. The entire TV station business is "in a free-fall," says Pali Capital analyst Richard Greenfield.
Walt Disney's ABC broadcast operating income will decline 76% to a mere $157 million on a 26% drop in revenues to $4.6 billion in fiscal 2009, Greenfield said. For the second time in a week, he also reduced his CBS estimates, saying TV station profits will decline 65% to 70% as revenues fall 35% to 40%.
But CBS has even bigger problems. Its overall earnings will decline 23% in 2009, according to Bernstein analyst Michael Nathanson. That will put its S&P investment grade ratings at risk -- as well as its ability to pay $1.6 billion in debt by 2010, likely causing CBS to discontinue paying its prized dividend.
The culprit is local ad trends that "continue to shock us with imaginable rates of decline," Nathanson said. He forecasts a 26% decline in local TV station revenues (and 6% fall at the broadcast network), a 32% decline for radio, 24% lower for publishing and 23% lower even for interactive. The fallout is rooted in the collapse of major ad categories, such as automotives, which contributes nearly one-third of broadcast station group ad revenues at CBS, compared with 31% at News Corp.'s Fox and 30% at Disney's ABC. All broadcast networks will sustain some make-goods, advertiser option cancellations and a weak upfront this spring.
Dependency on troubled ad dollars and high negative operating leverage will hammer earnings margins and valuations. News Corp.'s Fox also is "at severe risk, given the continued malaise in local ad markets," according to Barclays Capital analyst Anthony DiClemente. He expects local TV station ad revenues to decline 35% in the second half of 2009, and advertisers cancellations to drive entire television segment operating income down 65% to $387.5 million in the current fiscal year. Greenfield has slashed News Corp.'s valuation to a mere four-times calendar 2009 earnings, based on "secular challenges" and resistance to massive cuts at and the closure of money-losing TV stations and newspapers.
Expecting similarly deep losses, NBC Universal is becoming more aggressive with station legacy costs. It is requiring its owned station employees to "reapply" for their positions, which are being redrafted in multiplatform digital terms outside union reach. It also will continue to pool same-market local resources with Fox-owned stations, several of which will slip into the red this year.
NBC Universal will see a 16% decline in overall operating profit to $2.6 billion on a 14% decline in revenues to $15 billion, according to Nicholas Heymann of Sterne Agee. Television broadcast network contributions to overall revenues are 49% for CBS, 50% for Disney and 24% for News Corp. Television Stations contribute nearly 17% of overall revenues at CBS, nearly 14% at Disney and 12.4% at News Corp.
Even as TV advertising declines 10% to 15% this year, crashing through the $67 billion level, it is barely offset by new digital revenues, such as nascent online video ad spending, which is inching above $1 billion annually. Dropping TV commercials into streaming online video does not generate television's historic rich returns. The broadcast TV ad revenue implosion is significant enough to pummel media giant's bottom line when coupled with weaker recessionary returns from filmed entertainment, consumer products, and theme parks. Goldman Sachs points out entertainment conglomerates' 2009 earnings estimates are collectively down 30% from their peak six months ago.
Radical digital restructuring at broadcast TV networks and stations this year appears unavoidable, faced with irreversible fragmentation of consumers and advertisers and the inability to monetize advertising or fee-supported online content. That means reaching beyond headcount reduction to phase out legacy operations and economics.
Even as TiVo CEO Tom Rogers continues calling for "urgent action" to counter permanent TV viewer and advertiser changes, audience fragmentation, content-shifting and ad-skipping are so commonplace that TiVo must expand its business to include user tracking data and e-commerce. (DVRs are set to double its 30 million households in several years. TiVo has 4 million subscribers.)
Here are six proactive moves TV broadcasters can make:
*Go direct for Internet-based download, time-shift and pay TV (including day-and-date) to soften recessionary blows. Netflix's booming new direct to TV downloads are cheap and convenient. Give consumers what they want in a user-friendly way.
*Consider what's working and try it. Digital home entertainment spending (home DVDs and games) rose 3% in 2008 with family genres games contributing more than one-third of the growth to the $11 billion videogames market. Family DVD sales fell 18%. Is there a Wii in your station's future?
*Invest in quality--not quantity--while reducing overall content production, distribution and marketing costs. Cable networks that prove a few good original series go a long way. Hitless broadcast networks need to make innovation and creativity job one. Going digital means more than loading mediocre product online--something YouTube does well and still can't monetize.
*Launch dynamic ubiquitous mechanisms (dashboards) to create, effectively price, sell and coordinate cross-platform advertising. TV stations especially need it.
*Make "local" a star. Craigslist rules because newspapers and TV stations abdicated their community advertiser and consumer ties. Revamp as an enterprising, relevant consumer-centric local hub for all digital interactive platforms and mobile devices.
*Bite the bullet. Begin eliminating and replacing legacy with all-digital structure and costs everywhere on a graduated three-year plan. There is no other way out.