The new economics of terror

Three weeks ago, the big question in the TV and radio business was "When's the recovery?" Now that station and network executives feel the shock waves the terrorist attacks delivered to advertisers, the new question is "Where's the bottom?"

The attack on the World Trade Center and Pentagon promises to rock the media business, crushing what was already a weak ad market. Executives and analysts last week went back to their existing gloomy models to see how much worse they could get. Investors didn't wait and slammed most media companies' shares.

There are three concerns. First, major broadcast and cable networks not only went several days without advertising but have unexpected costs of covering the attacks. A second, broader concern is the economic aftershocks created just by the single day of attacks.

The third, broadest concern—and unanswerable question—is what kind of war the United States might be headed for and what kind of long-term economic disruption it might create.

"It was bad before, and now the bottom has disappeared," said Alan Frank, president of Post-Newsweek Stations.

"I think everybody is in a state of shock," said Jeff Smulyan, chairman of Emmis Broadcasting. "Advertisers aren't sure what they want to do. Nobody is."

To put it another way: "What had stabilized in the advertising environment has been shattered," said UBS Warburg media analyst Leland Westerfield. "We could see an unprecedented two-year downswell in advertising spending." He and Sanford Bernstein analyst Tom Wolzien said that has never happened in the history of the television business.

The first-week losses are the easiest to take a stab at. Ad tracker Competitive Media Reports estimates that $320 million in advertising sales disappeared during that period. Wolzien estimates that losses at each of the major broadcast networks totaled $35 million to $55 million, with the absence of revenue partly offset by savings from not airing prime time sitcoms and dramas, which can be aired later. CNN incurred $24 million to $36 million in losses, partly because it remained free of advertising longer.

A major-market TV station would have lost $2.5 million to $3 million a day.

Before the terrorist attacks, analysts and ad-buying execs were predicting that the ad market might rebound as soon as first quarter 2002. Now ad-buying execs are looking further into next year for a recovery.

"We're going to see conservative fiscal management taken to a higher power," Marc Goldstein, president of media buying firm Mindshare, said Thursday at an industry luncheon in New York.

Top executives from MediaVest, Mindshare, Zenith Media and Magna Global said it's going to take two or three weeks to assess any new economic damage.

"There's no certainty what will transpire in the coming days or months," said MediaVest President Mel Berning.

The executives said clients intend to honor their upfront agreements, but, in the current market, they have leverage to pull their ads with little consequence.

Another unanswered question: Where will clients want to put their money? If the reality-TV trend fizzles, advertising dollars will race to follow the next trends. That's always true, of course, but how to read what a stunned and shell-shocked public wants? "The current environment will determine what we want to watch," said Zenith Media Executive Vice President Peggy Green. "Will it be sweet, non-confrontational movies? Dramas that make you think?"

Some companies had answers, and they weren't positive. Viacom had been projecting to finish 2001 with a double-digit percentage gain in cash flow, to around $5.6 billion. President Mel Karmazin now says that cash flow will be only "slightly higher" than last year. That would be $450 million to $500 million less than projected.

"As a result of the attacks," he said, "we incurred a considerable increase in costs at CBS News, our local television-station news operations, especially in New York, and at our major-market all-news and talk radio stations." Karmazin also said in a statement that he expects "significant loss of revenue" from Viacom's cable networks and radio and TV stations.

Station group Hearst-Argyle said Friday that, because its stations went ad-free for four days, third-quarter results should be even worse than the 14% drop predicted two weeks ago. Now revenues should come in 18%-20% lower.

USA Network also forecast problems from a sour ad market and slower sales at its Home Shopping Network unit.

But many companies were holding back on detailed revisions. Expectations that AOL Time Warner and News Corp. would issue new forecasts didn't materialize. Disney sent out a bulletin headlined "Cast Member Commitment, Brand Value And Fundamental Business Strength Cornerstones Of The Walt Disney Company's Long-Term Outlook" (Disney refers to its employees as cast members). Not surprisingly, the announcement was devoid of a single number that investors might find helpful in figuring out where the company was going.

Before the stock market reopened Monday, some politicians and talk-show hosts exhorted investors to show some financial patriotism—a sort of "terrorist-be-damned" act of defiance in which investors wouldn't sell and might even buy. By the closing bell, the market had suffered its largest point drop (though not percentage drop) ever. Some kind of patriotism: The worst media stock was one called USA—that is, USA Networks.

That set the tone for the week. The Walt Disney Co. was the weakest of the major media stocks, dropping 30%, in part because major shareholders, the Bass brothers, had to dump $2 billion worth of shares into the market (they were worth $4 billion in July). USA was down 22%, Viacom dropped 21%, Charter Communications fell 16%, AOL Time Warner fell 13%. The Dow Industrial Average fell about 13%. Travel stocks dropped 25%-30% while defense and mining stocks rose 15%-20%.

The attacks have clearly spoiled the strategy of Viacom's Karmazin, media's top bull. Unhappy that CBS wasn't getting enough action in the upfront market, he witheld inventory from the market, betting that he could get better prices in the scatter market in the fall and winter.

"That blew up," said one media analyst. "He bet that he could outlast the advertisers."

A Viacom executive said that was unfair, because no one could have predicted a terrorist attack that cripppled the economy.

But the stock downdraft could suck some deals down. After diddling around on a deal to sell Hughes Electronics and its DirecTV division for 18 months, General Motors is now watching the DBS division get hammered, from $20 a few weeks ago to $12.50. That complicates plans to sell the unit to News Corp.'s SkyGlobal unit, because valuations have to be carefully matched to keep the deal tax-free.

News Corp. said talks with Hughes are continuing.

The same goes for AT&T's efforts to find a buyer or partner, other than hostile bidder Comcast, for its AT&T Broadband unit.

The company's board was to meet Friday to ponder the sale, although analysts said they had difficulty believing that Cox Communications or Disney would make a multibillion-dollar acquisition—no, not now.