Advertising and Marketing

Worry Colors Second-Half Outlook

After clear skies, TV business now faces challenges from economy and shifts in technology 7/16/2012 12:01:00 AM Eastern

Two recently published numbers are raising big
questions about how good the second half of 2012 will
be for the national television industry.

The first number came in a report from
the Labor Department, stating that the U.S.
added only 80,000 jobs in June. The figure
was taken as an indicator that the economic
recovery in the country was slowing down.
The stock market fell 124 points, or almost
1%, the day the number came out, taking
nearly all of the major media stocks down
with it. Worries about the economy have already
contributed to an upfront advertising
market that was less robust than expected.

The second number came from Netflix,
once the industry’s scary Death Star for providing
a cheap streaming alternative to cable.
It became a cash machine for most media
companies by writing billion-dollar checks
and opening a new digital video syndication
window. But when Netflix said that it exceeded
1 billion hours of online video views
during June, it sent a chill down the spines of
traditional TV followers worried about cannibalization
and lower ratings.

Olympics and election years are generally
buoyant ones for the television industry. But
will the second half of 2012 end up being as
strong as originally forecast in terms of revenue
growth and corporate profits?

“Once we finish worrying about the shortterm,
then we can get to worrying about the
long-term,” says Brian Wieser, analyst at Pivotal
Research Group and a former media agency
forecaster. “There are still a lot of dark clouds
that over time need to get worked through.”

Wieser says it appears that revenue growth
for the industry will be decelerating in the
second half of the year. While some observers
see advertising as a trailing indicator of
economic activity, Wieser believes advertising
moves concurrently with the times. “To the
extent that what we’re seeing now is going
to be negative, then the second half will be
bad,” he says. “If it’s not as bad as we fear,
then we turn to the longer-term issues.”

0716 Cover Story chartWorrying and Waiting

With advertising becoming a smaller
chunk of their revenue streams, and with
cost controls remaining tight since the recession
started, most media companies will
probably still have healthy earnings in the
second half of the year, even if the ad market
tanks. “It would take a really cataclysmic
event for pro! ts to lose steam,” Wieser notes.

Indeed, until recently, worries about the
economy had been to the TV business like
water off a duck’s back.

In the first quarter, every category of TV saw
increases in advertising expenditures, according
to Kantar Media, which pegged TV media
growing at a 7.6% clip compared to advertising
growth in all media of just 2.6%. The biggest gainer, according to
Kantar, was Spanish-language TV, up 20.7%,
but cable TV showed a 7.4% gain, broadcast
was up 7% and syndication jumped 15.7%.

Even while noting worsening economic
indicators, media agency ZenithOptimedia called for generally increasing television
spending in its most recent
forecast for 2012. In fact, Zenith
saw cable TV as one of the healthiest
media segments, forecasting
10% growth.

According to Zenith, while cable
is expected to grow by double digits
in 2012, network TV is forecast to
show a 1% decline. Historically, the
Olympics have given broadcasters
a boost, but Zenith says live events
from London are more likely to be
viewed on cable or over the Internet.

Analyst Michael Nathanson of
Nomura Securities noted last week
that most media stocks showed big
gains in the first half. Then he cut
his second-quarter earnings estimates
for most of the companies in
the sector because of a slowdown in
advertising revenue increases. Media
companies will start reporting Q2
earnings later this month.

Short-term economic conditions
will make it tough for companies in
the TV business to beat Wall Street
forecasts for the rest of the year, and
that’s what makes the stock market
happy, according to David Bank,
managing director for global media
and Internet research at RBC Capital
Markets. “I think things are fine. But
the ability to outperform is going to
get harder and harder,” Bank says.

“You could take your cue from the
upfront market, which was fine,”
Bank adds. “Pricing was probably
in line with expectations. Volumes
were a little lighter. So it’s not that
it was a disappointment, but it certainly
wasn’t outperformance, and it
doesn’t really set us up for great outperformance”
in the next TV season.

But he notes that the TV business
is probably still doing better than
anyone would have thought.

“To be honest, it shouldn’t even
be this good. If you described the
broader [macroeconomic picture] and then
you described the general business conditions
right now, it’s shocking that it’s this
good,” Bank says.

In a recent report, Anthony DiClemente of
Barclays Capital writes that “despite muted
global growth expectations given the ongoing
challenges in Europe, the U.S. ad market
remains relatively resilient. Our global ad
forecast calls for below-consensus advertising
growth of 3.5% this year, while our U.S.
ad forecast calls for above-consensus growth
of 4.6% in 2012, boosted by tailwinds from
political and the Olympics.”

DiClemente notes that prices on a
cost-per-thousand basis and sellout
levels during the upfront “came in
slightly below our expectations, which
we believe was largely due to macro
concerns from ad buyers. Nevertheless,
we believe that the broadcast and cable
networks’ ability to lock in mid-to-highsingle-
digit pricing increases is evidence
of the resiliency of TV advertising.”

DiClemente adds that if macroeconomic
trends manage to improve during
the second half of 2012, the “scatter
market could see robust pricing
premiums.” He points out that during
2010, concerns about a double-dip
recession and European banking issues
were in the news while upfront
negotiations were going on, hurting
demand. “However, when macro
concerns subsided and the economic
outlook improved in 4Q10 and 1Q11,
scatter pricing premiums went as high
as 25-40% above upfront levels,” Di-
Clemente says. “Additionally, potential
ratings shortfalls at certain networks
could reduce available scatter inventory
and therefore inflate scatter pricing.”

Tech Is All the Talk

The advertising market isn’t the TV
business’ only concern.

The industry’s economic ecosystem is
under assault from Barry Diller’s Aereo,
which retransmits broadcast signals
over the Internet without consent or
payment (and which had a good day
in court last week), and Charlie Ergen’s
Hopper digital video recorder, which
subscribers can program to wipe out
ads from recorded broadcast programs
with the touch of a button. At the same
time, the question of whether Netflix is
friend or foe is resurfacing.

“Thematically, in the second half,
this feels like the first time in the last
two to three years when the technology
doesn’t feel all on our side,” Bank says.

BTIG Research analyst Richard
Greenfield figures that with 1 billion hours
viewed in June, Netflix would have ranked No.
7 among all TV networks and No. 2 among cable
networks, behind Disney Channel. Adjusting
for distribution, Netflix would have been
No. 1 among all television networks.

And yet, despite the clouds, the media industry is in good shape fiscally and TV
executives are mostly upbeat.

David Levy, president of ad sales, distribution
and sports for Turner Broadcasting, says
Turner finished at the high end of the industry
during the upfront in terms of volume
and pricing. But he says, “there were a few
categories that were definitely down. I don’t
think it had anything to do with the economy,”
but with changes in those industries.
Other categories, such as quick-serve restaurants,
auto, retail and technology, were up.

As for the second half of the year, “I’m already
seeing third- and fourth-quarter scatter
relatively stronger than first and second of
this year,” Levy says. “I actually think scatter
is going to be strong because I don’t think
people put as much of their scatter money in
the upfront as they have in the past.”

Levy says he’s not adjusting his budgets for
the second half. “I still think that people have
to sell product during Christmastime,” he says,
adding, “Obama and Mitt Romney are raising
more money than I’ve ever seen in my life,
which will tighten up the marketplace.”

Joe Abruzzese, president of advertising
sales at Discovery Communications, says that
while some advertisers may have pulled back
a little during the upfront, he is not seeing
many completely pulling back.

“We had two years of 40% and 20% volume
growth, so to get growth on top of those
years is still pretty good,” Abruzzese says.
“But I don’t really see a lot of clients totally
pulling back. And I also don’t think this is all
the money we’re going to see. This is just the
money we’re seeing for now.”

At Crown Media, which runs the Hallmark
Channels, “we’re con! dent in the way
the upfront went, and all signs are we’re going
to have a very strong fourth quarter and
the third is a little softer than we’d like,” says
CEO Bill Abbott. “Once the upfronts are
written and with the 4th of July passed, we’re
hopeful that activity will begin at more of a
pace that we’re accustomed to.”

All Eyes on Washington

The election has the potential to pour billions
of dollars worth of political advertising
into both broadcast and cable. And contractual
terms are in place that call for year-by-year
increases in subscriber fees for cable networks
and retransmission fees for broadcasters.

“It makes the fundamentals relatively attractive,”
says Bank. “There is all this great secular
trending for things that are contractual, things
that are hard to see them go wrong.”

Pivotal’s Wieser warns that business might
get even more conservative as the end of the
year nears because unless things change in
Washington, a combination of spending cuts
and tax increases is set to kick in.

“I think with these macro headwinds that
are present and looming
larger, especially as we approach
the fiscal cliff, that
there’s increasing chances
of numbers being missed
towards the end of the
year,” Wieser says.

Concern about what’s
happening in Washington
will encourage businesses
to withhold spending until
the last minute, Wieser
adds. “It feels like uncertainty
is going to be the
name of the game, and I
don’t know that there’s
anything the CEOs of media companies will
be able to say that can persuade investors
that things are certain.”

While there has been a great deal of concern
about technology in general and cord-cutting
in particular, RBC’s Bank says Wall Street types
are joining TV executives in looking at a familiar
metric. “I’ve never seen the investor base
so laser-focused on ratings,” Bank declares. “I
think the wild card in the second half for a
lot of companies is almost more about content
cyclicality than economic cyclicality.”

Ratings are becoming increasingly important
because they pack a one-two punch. Lower
ratings not only translate into lower ad revenue,
but they also indicate increased program
development spending in the future. “Companies
are keenly aware of that, and there’s a lot
riding on these schedules,” Bank says.

That means analysts hang on Food Network
ratings to see if Scripps Networks Interactive
has the right recipe; they look at the
turnaround on TBS and wonder if Time Warner
can find similar magic on TNT; and they
question whether Discovery can keep pumping
out monster ratings gains at some of its
networks, and if Viacom can arrest slides at
Nickelodeon and MTV.

“Those are things that are going to be more
impactful over a longer period of time than the
economic cycle right now. The content cyclicality
is very powerful, and it drives what you
have to invest in content,” Bank says. “I also
think it drives long-term value—if you have a
hit show, it eventually becomes syndicatable.”

Predicting ratings isn’t any easier than
predicting the economy. So, will the second
half be one the TV industry can look back on
with a smile or a shake of the head?

“This is what it boils down to: When we
look at what’s coming in the second half, is
it more likely to make bulls more bullish or
bears more bearish?” says Bank. “And I think
the jury is kind of out on that one.”

E-mail comments to
jlafayette@nbmedia.com and follow him
on Twitter: @jlafayette

 

Alert to All Users of the Disqus commenting system:
Because of a recent global security issue, the Disqus website recommends that all users change their Disqus passwords. Here's a URL about the issue:
http://engineering.disqus.com/2014/04/10/heartbleed.html

 

April
May