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Media executives' new boast

Faced with increasingly gloomy ad-sales forecasts, they focus on recession-resistant subscription revenue streams 10/07/2001 08:00:00 PM Eastern

After years of bragging about how their networks and stations are ad-sales machines, backpedaling media moguls have a new boast: how little they depend on advertising for revenue.

Emphasizing any other source of revenue is clearly the new vogue among recession-battered media executives, whose gloomy ad forecasts became even more dismal after the Sept. 11 terrorist attacks. And a slew of top-media-company executives reaffirmed those forecasts at the Goldman Sachs-sponsored "Communicopia" media conference in New York last week.

The scary part: They all admitted they haven't a clue when the upturn will begin. The new buzz phrase for the ad outlook, heard repeatedly at last week's gathering, is "poor visibility."

Disney President Bob Iger cited what he called a "key trend" that has been gaining momentum for the past year among advertisers. "Buying is short-term," he said. "For the last year, agencies and advertisers have shown a reluctance to commit long-term advertising budgets largely due to economic uncertainty." And most media mavens agree that, as he put it, "if anything, the events of Sept. 11 contributed greater uncertainty to an already uncertain market."

AOL Time Warner executives were the first to start trumpeting subscription revenue streams and downplaying ad revenue streams when, earlier this year, they started emphasizing their take from online, cable and magazine subscriptions. They contend that those are more recession-resistant than the ad sales at AOL and at Turner networks TNT, TBS Superstation and CNN, which they used to brag about.

AOL Time Warner Chairman Steve Case did it again last week at the Goldman Sachs conference, contending that only 25% of his company's revenues come from advertising: "We take some comfort in the fact that we are the most diversified company in media."

Barry Diller actually boasted that advertising make up a mere 14% of his USA Networks Inc.'s revenues, particularly since his core cable networks generate license fees from cable operators. But look at what the USA Chairman counts under "transaction revenue": A third of the company's sales come from Home Shopping Network, and another 10% come from Internet travel agent Hotel Reservations Network—neither one a soothing business in a recession.

Even Viacom President Mel Karmazin, who frequently and publicly reminds his sales people that he expects year-to-year sales gains regardless of business environment, reminded investors last week that only about half the company's revenue base is to tied to advertising. Even so, most of his talk at last week's media conference addressed the advertising side of Viacom's business.

He also spent a good deal of time explaining why the company recently revised its earnings outlook for this year—downward by about $500 million. The company lost about $200 million in lost advertising and additional news expense in the wake of the terrorist attacks. That reduced Viacom's cash flow for the third quarter to about $1.3 billion, he said.

Karmazin said the best guess now for fourth-quarter earnings is about $1.3 billion, or $300 million less than previously forecast. If the projections hold—and they are the company's most "bearish" estimates—that will bring total EBITDA for the year to about $5.1 billion, approximately $500 million lower than previously expected but slightly higher than last year's $5 billion total.

News Corp. likewise downgraded its earnings expectations for fiscal 2002. The company now expects to see a cash-flow gain of about half the original estimate, or from the high single digits to the low double digits. News Corp. lost about $100 million in lost advertising and added news expenses following the attacks, according to Chairman and COO Peter Chernin.

"We are now looking at a greatly altered advertising landscape," he told attendees at the Goldman Sachs conference. "It's a tough environment with limited visibility, great volatility and recessionary pressures."

Still, despite the gloomy near-term outlook, executives said it is only a matter of time before the ad market bounces back. No one seems to know how much time, though.

There are some signs of activity in the network scatter market. John Dooner, chairman of the Interpublic Group of Companies, the big ad-marketing holding company, said its media-buying arm Magna Global will spend more than $200 million in scatter in the fourth quarter. He called that "a positive sign" in a down market.

Another bright note: Disney's Iger said 90% of the ads pulled on ABC in the third quarter have been reassigned to the fourth quarter.

And Viacom's Karmazin reported that CBS sold $40 million in scatter advertising two weeks ago at prices above upfront rates, which CBS says were up 1%-2% overall. But uncertainty remains for the near term, he said, noting that it's likely the U.S. will retaliate in some way for the Sept. 11 attacks, which will also likely result in more commercial-free coverage by the networks, lost advertising and increased news costs.

What about next year? Sorry, poor visibility. But Karmazin offered this: The fourth quarter of next year is going to be "a great deal better than this fourth quarter."

Two years down
Goldman Sachs' new forecast sees first two-year downturn in TV ad spending in history
Year-to-year change
Source: Goldman Sachs
2000 2001* 2002*
Broadcast TV 8.5% -12.0% -7.0%
Cable TV 13.7% -5.0% -2.0%
Radio 8.8% -8.0% -3.0%
Internet 80.2% -13.0% 5.0%
Newspapers 6.3% -10.2% -6.6%
Magazines 7.5% -12.0% -6.0%
All U.S. media 8.3% -9.0% -4.0%