Haves and Have-Nots

Both Judy MacGrath and John Sykes like music. They both worked at MTV. And now they both run hip units of Viacom. But in this earnings quarter, that's where the parallels end.

McGrath, chairman of MTV Networks, may be having more fun these days, with 13% revenue growth, while Sykes, chairman of Infinity Radio, is faced with pumping life into sales that grew only 3% last year.

A sharp contrast among different sectors of the media business is one of the things that stands out as this quarterly earnings season draws to a close. (Weary Harris Nesbitt broadcasting analyst Lee Westerfield grouses that he had eight earnings conference calls in a single day.)

Despite the slack economy, some sectors of the businesses—particularly cable networks—are roaring, growing revenue and earnings at a strong 10%-15% annually. Others—sometimes competitors, sometimes siblings in the same company—are stuck in the lowlands of single-digit percentage growth.

The economy aside, some sectors are posting big gains because the winds of consumer demand are blowing their way (think DVD divisions of movie studios). Some seem to have what Wall Street calls “secular” problems that will continue even if the economy turns around. At the moment, the radio business is hurting from a combination of iPods, too much competition and skittish advertisers.

What unifies some of the strongest performers is that they have a clear sense of mission and what their audience wants. That's certainly true for Fox News, which helped drive big gains at News Corp.'s U.S. cable-networks unit. The networks posted a fat 16% increase in revenue and a 35% jump in operating cash flow. Fox News Channel Chairman Roger Ailes has a lot to do with that, riding the election to new ratings and advertising heights. Credit also goes to FX President Peter Liguori, who is on a similar growth curve.

Many cable networks are on that track. Among them: Viacom growth engine MTV Networks. Discovery Communications' U.S. networks are growing so strongly that earnings jumped despite ratings woes at TLC and its cornerstone Trading Spaces.

Similar clarity of vision can be found at broadcaster Univision (although it's having problem selling ads in a weak scatter market), as well as at Comcast and Cox Communications (VOD is a hot product, and both are improving customer service).

Conversely, the laggards seem to have lost their way. For example, Fox-owned stations can really do only as well as the Fox network, which suffers when American Idol or Major League Baseball aren't in season. Sales and operating income at Fox stations dipped about 1% during the quarter, even as the election showered hundreds of millions of dollars on other broadcasters. Fox stations were largely passed over in the spending frenzy because political-ad buyers focus on the two top-rated newscasts in a market; Fox stations' rarely hit that mark.

AOL has a similar problem of finding a clear path to its customers. The division's 20% earnings growth came about largely from cost-cutting, rather than strong sales; revenue grew a measly 1%. The online service is in the throes of an identity crisis, and AOL has little chance of expanding its subscriber base until it figures out who it is.

But a tight focus on a specific audience doesn't guarantee profits. Broadcaster Radio One caters primarily to black audiences, but its 4% sales growth was no better than that of other radio-station groups.

Perhaps the most confounding report this quarter came from DirecTV. The DBS service's revenue and operating cash flow are moving dramatically, but in opposite directions. Revenue soared 38% as the News Corp.-controlled service continued to embarrass cable operators by stealing nearly half a million subscribers.

But that subscriber growth comes at a huge cost. To lure customers away from cable incumbents, DirecTV is spending so much in advertising, commission and subsidies that operating cash flow plummeted 38%. The company's cash-flow margin plunged from 18% at one point last year to just 6%.

At some point, DirecTV CEO Mitch Stern will have to curtail the heavy spending. When he does, the big question is whether the company's growth will look like Judy McGrath's or John Sykes'.