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TV Biz Expects Improvement in Second Half of the Year

There’s room for improvement in the second-half outlook for the TV business. But as the economy gains steam, ad revenue could accelerate. 6/17/2013 12:01:00 AM Eastern

With the economy slowly gathering steam, the
television business expects a brighter picture in the
second half of the year.

There are good reasons for the rosier hue. Most of the fundamentals
of the industry continue to point up. The advertising
market improved as the upfront approached. Subscriber and
retransmission fees continue to rise. And Netflix and other
streaming video-on-demand players are supplementing the
traditional syndication business.

Internationally, developing markets are creating opportunities for
programmers, and improved business conditions in more mature
markets are making contributions to the bottom lines of the major
media companies.

The stock market has noticed. As the Dow Jones Industrial Average
has risen, media stocks have skyrocketed, with many hitting all-time
highs. Profits are fueling higher dividends and
share buybacks, making the stocks even more attractive.

That said, there are reasons to temper the optimism. Advertising
revenue growth is not what anyone would call robust. After a 2012-13
TV season in which their viewer numbers plummeted, the broadcast
networks need to prove that they can still produce hits, starting with
this fall’s schedule. The business model that generates huge margins
for cable programmers is under pressure from online challengers and
from à la carte advocates in Washington.

Meanwhile, technology and innovation
marches on, and consumers can access video
on more devices from more sources seemingly
every day. In only some of these cases are programmers
in control and able to cash in.

Here’s a closer look at some of the key factors
affecting the TV business in the second
half of 2013.

It’s The Economy, Stupid

Still coming back from the recession, media
companies are finally operating with a more
large-scale macroeconomy that has shrugged off potential land mines
in the past year or so and could now be headed for smoother sailing.

“For the first time in a while, we’re heading into a summer without
a fiscal cliff or a U.S. Treasury downgrade fear or concern that
the next leg in the economy is materially down,” said David Bank,
managing director of RBC Capital Markets. “I feel like there’s a pretty
even-keeled view of the North American economy.”

“The economy is just gradually improving,” added Brian Wieser,
senior research analyst at Pivotal Research Group. “Business has sort
of shaken off the impact of the attempts at austerity, the payroll tax
increase and other factors that could have retarded ad spending. It
doesn’t seem like that’s going to be the case.”

Instead, the industry’s performance has been improving sequentially.
“The year-to-year growth rates are looking better,” Wieser said.

At a recent investment conference, Viacom CEO Philippe Dauman said the economy looked to be strengthening
for the next couple of years.

“We have a good dynamic going on right
now. The macroeconomy is certainly recovering
in the U.S.,” he said, adding, “Despite
non-recovery yet in Continental Europe,
we’re using this time period to build up our
international scope with continued strategic
and tactical realignment and development

0617 Cover Story Going up chart

Better Days for Mad Men

The most economically sensitive part of
the TV business is its advertising revenue.
Vincent Letang, executive VP and director
of global forecasting for media buyer Magna
Global, said “We expect the economy [in the
second] half to be better than the first.” Magna
is predicting national TV ad revenue will
be up 2% on a full-year basis, with growth in
the second half between 2.8% and 3%.

Magna’s prediction is mostly based on economic
forecasts, such as those published by
the Federal Reserve Bank in Philadelphia. The statistics that correlate
most closely to ad growth are personal consumption and industrial production,
Letang said. This has not been a great year so far for industrial
production, while personal consumption has been a bit more robust.
Letang said he expects both metrics to accelerate in 2014, contributing
to a 4% growth in national TV advertising dollars next year.

Till then, Magna sees broadcasters struggling in 2013, down 2% in
revenue growth in the first half and down 1% in the second half for a
total drop of 1.7%. Cable, meanwhile, is expected to grow 4.2%.

For the broadcasters, the problems predictably start with lower audience
levels. “The big question is, is it just [last] season? Does it have
something to do with the quality of the shows? Or is it the beginning
of an acceleration of a real erosion of TV viewing among the youth?”
Letang asked. “We think it might be a bit of both.”

Letang said that even though broadcast ratings are eroding faster
than expected—and might have to be factored into Magna’s forecast
in a few months—spending and revenue won’t fall nearly as far.
“That’s the big paradox,” he said. “If there’s a reduction of supply and
demand gets stronger, you’ll see an acceleration of inflation in prices
on a cost-per-thousand-viewers [CPM] basis.”

RBC Capital Markets’ Bank said he would like to see a better performance
from the shows the broadcasters put on the schedule during
their upfront presentations in May. Bank added it’s important for
CBS to demonstrate that it can continue to consistently generate the
kind of high-quality content that drives the syndication model. For
Fox, an improved primetime schedule is needed to stabilize the network’s
advertising revenue, although broadcasting isn’t a big driver
overall for News Corp., where the bulk of profits come from cable.

Technology: Friend or Foe?

The business of TV is experiencing unprecedented change from
consumers using multiple devices to watch programming, and from
new digital delivery systems.

Before the upfront presentations in May, a variety of Internet
companies made NewFront pitches telling
advertisers that more desirable consumers
are getting entertainment, sports and
news video via digital content. While online
video programming is currently the fastestgrowing
form of digital media, ad spending is
expected to be $2.5 billion in 2013, according
to Magna’s Letang, which is only 6.25% of the
$40 billion spent on national television. “Even
if the demand for online video doubles, it’s not
going to change massively the outcome for conventional
TV,” Letang said. That seems to be the
case—for this year, at least.

Nevertheless, digital players—in addition
to writing checks for off-network and library
shows—are producing high-profile programming, such as Netflix’s resurrection of Fox’s Arrested Development,
and starting to soak up viewers’ time.

If this has worried executives running more traditional businesses,
they are not letting on. When Netflix let its deal to stream programming
from Viacom expire, Viacom was able to find another buyer in Amazon.

“There’s never been a better time to be in the content business, at
least for the next three or four years,” Discovery Communications
CEO David Zaslav told an investors’ conference last month. “In the
near term, what is happening here is very beneficial for us. A lot
more people want to buy our content, [there are] new windows for
our content, the U.S. is more pro"table than it’s ever been,” he said.

At the same time, Discovery is buying digital video companies, including
Revision3. “People are spending time watching content on Netflix;
they’re spending time watching content on YouTube. What does it
all mean? We don’t really know what it means,” Zaslav said. “So on
the left side of our company, we’re making our channels stronger,
growing our market share, monetizing it, and we’re optimistic about
that great model we have. On the right side, we’re saying let’s play
around in this new space and see if we can get to know how people
consume content and make sure that one of our brands is in front of
them so we can learn from it and we can grow from it.”

Aereo in the Air

Other media companies are also looking for ways to exploit the
growth in digital viewing. “We saw ABC roll out its Watch ABC [app].
I expect to see more of that in the second half,” said RBC’s Bank. “And
I want to see how the Aereo lawsuits play out.”

Aereo, backed by former TV exec turned CEO of interactiveoriented
IAC Barry Diller, has so far withstood legal challenges from the
broadcast networks, which have sued claiming that Aereo is misappropriating
its signal for its digital subscribers without paying retransmission
fees the way cable operators do. “I’m less concerned about the ad
market than I am about those kinds of things,” Bank said. “The content’s
rich, the share shift in ratings, the technological and legal forces
at play—these are things that are going to play out in the back half.”

One clue to how digital will play out will come when a buyer is found
for Hulu, the video streaming website now being auctioned off by News
Corp. and Walt Disney Co. (A third owner, Comcast, is a silent partner
under terms of a consent decree issued when it acquired control of NBCUniversal.)
Bank calls Hulu “the best brand in online television.”

Let’s Not Make a Deal

Other deals are in motion that could affect
the way the second half of the year plays out.
News Corp. is scheduled to split into two,
separating its lagging publishing assets from
its TV and movie businesses, which will be
owned by a new public company controlled
by Rupert Murdoch to be called 21th Century
Fox. Those TV assets will be undergoing a fair
amount of change. News Corp. also will be
launching a new national sports channel, Fox
Sports 1, a potential challenger to Disney’s dominant
ESPN. It will be also launching FXX, the
younger-skewing component of FX Networks.

Other potential deals are in the wind. Sony’s
movie and television operations could go into play; the ever-growing
Scripps Networks Interactive could finally complete a deal to acquire
Tribune Co.’s stake in Food Network; and CBS has been accumulating
cable programming assets. One of the bigger players could acquire one
of the smaller players, further consolidating the industry.

“[On] the M&A landscape, one of these guys [might] do a big deal and
we think it’s the wrong deal and our view of capital allocation could shift.
That could be a driver in the wrong direction,” said Bank. “Our preferred
capital allocation tends to be return of capital to shareholders. And I think
a deviation from that, even for a good deal, could give some pause.”

The Price Is Right

Wall Street likes the TV business. With the market rising in the first half of the year, media stocks rose even further. Could that rise

One thing investors like about media stocks is that revenue has become
fairly predictable, with affiliate fees and retransmission agreements
being long-term and most ad sales locked in on a year-long basis.

“There’s so little that can change financial. Most ad spending is so
pre-planned and share shifts take many, many years. It’s not likely
we’ll see a rapid shift,” said Pivotal’s Wieser.

In the first half of the year, “the stock market performed really well,
Wieser said. “It remains to be seen whether or not stocks can keep
up. Underlying business performance will be OK with a pretty wide
range of outcomes, depending on which company, which sector.”

In the last week the market, and media stocks in particular, pulled
back. Todd Juenger of Sanford C. Bernstein said the decline was the
result of selling by hedge funds and that there has not really been a
significant change in business conditions, despite slightly lower than
expected upfront price increases for the broadcast networks.

With the run-up of media stock in the past six months, some investors
have been waiting for an opportunity to buy, and the current
dip may give them a chance. Juenger specifically points to Discovery,
which had the sharpest decline despite its earnings being revised upward.
“The question now, for all those who said they wanted a better
entry point, is: Will they still have the conviction to buy? We believe
the ‘buy on the pullback’ case is very strong,” Juenger said.

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