Formerly Big-Spending Media Giants Had a Gun-Shy First Quarter - Broadcasting & Cable

Formerly Big-Spending Media Giants Had a Gun-Shy First Quarter

Margins improve despite disappointing ad revenue growth
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Still wary after the recession, it appears
that formerly big-spending media companies have gotten better at pinching
pennies.

So far during this quarter's earnings reports, Viacom, Time
Warner and Walt Disney Co. have reported somewhat disappointing revenue
numbers, particularly when it comes to TV advertising sales. And yet, all three
managed to exceed analysts' earnings projections. News Corp. made its earnings
numbers despite spending $87 million on fallout from its phone hacking scandal.
Lower programming costs due to the NBA lockout also helped Time Warner, Disney
and News Corp.

Many of the pinched pennies wound up in the pockets of
shareholders.

"Finally by operating efficiently, managing costs and
seizing every opportunity to monetize our content, we continue to generate
significant free cash flow and to make good on our commitment to return
substantial capital to our shareholders, both in the form of stock buybacks and
dividends," CEO Philippe Dauman told analysts during Viacom's recent earnings
conference call.

A commitment to containing costs is important, even though
most companies see signs that the first quarter ad market will be better than it
was in the fourth quarter.

To be sure, media companies still spend millions on
big-ticket items such as their CEOs and football. But they have convinced
analysts they have a playbook for making money when they make significant
investments in content.

During Disney's conference call, analyst Doug Mitchelson of
Deutsche Bank asked about the company's new agreements with Comcast and the
NFL. The former sets the pace for future revenue growth, while the latter
represents a major expense for ESPN, a key asset. With both being long-terms
deals, Mitchelson asked: "Is it fair to say that you have increased comfort in
the ability for ESPN to continue to expand margins over time?" "Yes," responded
Disney CEO Bob Iger.

The conference calls often give CEOs an opportunity to
present their views on some of the major issues facing the industry. And where
they stand is often defined by where they sit.

For example, with ESPN being the cable service subscribers
pay the most for, whether or not they are sports fans, it's not too surprising
that Iger sees few benefits to the industry turning to an a la carte model.

"I think people want variety and they're getting it today,
and they're also getting substantially increased quality" under the current
system, Iger said. He added that, on average, subscribers get about 100
channels for $60 per month.

With an a la carte system, "there would be channels that are
of interest to a lot of entities, in some cases niche channels, that would
simply go away, and I don't think that would necessarily be good," Iger said.
"Secondly, the channels that were left would see decreased distribution,
decreased ratings, decreased advertising revenue, and that would put a lot of
pressure on the rates that they charge, so rates would go up. The result would
be that consumers would be spending more per channel, and it's quite possible
that the $60 100-channel package would quickly become a $60 50-channel
package."

Asked about the over-the-top joint venture of Coinstar's
Redbox and Verizon announced last week, Iger said he was puzzled. "I read the
Verizon-Redbox [news] about four times and I even turned it upside-down and
sideways, and I'm still not 100% sure I understand what they're offering," he
said. "But my sense is that it's going to be another opportunity for us to sell
content to the marketplace."

Time Warner CEO Jeff Bewkes, the earliest proponent of TV
Everywhere, which allows subscribers to view programming on devices other than
the TV for no extra charge, extolled the progress the industry is making in
heading off the over-the-top threat.

"Two years ago, TV Everywhere, or what many call
authentication, was only an idea with no technology underlying it and no
industry support," Bewkes said. "It has come a long way. Today, authenticated
TV has been embraced by every major distributor and program."

But News Corp. COO Chase Carey said he was frustrated by the
slow adoption of authentication. "In this world, you can't spend three or four
years getting something going," Carey told analysts. "I think TV Everywhere,
authentication, whatever you want to call it, is the right solution to the
marketplace, but we've got to execute better."

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