Speaking at the Cable Show in Chicago last month, Time Warner CEO Jeffrey Bewkes, for the short term at least, dismissed the range of concerns gathering over the television business.
"Let’s cheer up. This is not the music industry; this is the cable industry,” said Bewkes, adding that the industry should make hay while “things are going great.”
Indeed, since the economic recovery began, media company stock prices have rebounded, earnings have jumped, and while head counts remain tight, CEO compensation has skyrocketed. Comcast, CBS, Viacom and Cablevision Systems have all felt secure enough in their fiscal future to declare or raise dividends. And in a robust $18 billion upfront advertising market, prices for television commercials on broadcast zoomed 9% to 12%. Spots on cable were up even more, with volume jumping more than 15% to a record $9.4 billion.
Such exuberance flies in the face of more sober statistics from an economy that is likely to sputter for the remainder of the year.
In late June, the Federal Reserve said the economy was expanding less quickly than it had predicted. The Fed now projects a growth rate of 2.7% to 2.9% in 2011 and 3.3% to 3.7% in 2012. Both estimates are markedly below its last forecast in April.
And earlier this month, the Labor Department said that employers added much fewer than expected new jobs in June, and revised downward the May total. That caused unemployment to rise to 9.2% from 9.1%, providing more evidence of a stumbling recovery.
“We don’t have a precise read on why this slower pace of growth is persisting,” Fed Chairman Ben Bernanke said at a news conference in late June. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and de-leveraging issues, may be stronger and more persistent than we thought.”
Certainly, some of that slowdown is being felt by the media.
In its latest forecast, media agency MagnaGlobal lowered its forecast for 2011 advertising spending growth to 2.9% from 3.1%.
“There’s weakness at the retail sales side. There have been five manufacturing surveys and everyone came out below expectations and showed declines,” said Alex Feldman, Magna manager of global forecasting.
Real personal consumption expenditures declined for the second month in a row in May, and the Dallas Fed’s Manufacturing Survey also dropped in June, reinforcing Feldman’s view of a slowdown.
Data Speaks Volumes
While Magna still sees a small uptick for 2011, “the data does not look like it’s improving. It’s going in the other direction,” Feldman said.
But there is some good news at this point: Few are out and out predicting that the worst-case scenario of a double-dip recession is heading our way. Still, this recovery appears weaker than most upturns.
“It’s a statistical recovery at best,” said Feldman. “If you look at the average of how the economy does after the recession ends, this recovery is weaker than the historical average by a significant amount in terms of real GDP, in terms of total employment, housing continues to stay locked in the basement, industrial production, the growth there still remains well below the historical average.”
A look at some categories that are keys to supporting the media business shows some of them are not doing well, either.
“You have automotives which were down 5.6% in May, that’s down for three months in a row,” Feldman said. “There’s some offsets to that. Personal care items have been up for four months in a row now. Telcos were up, travel was up, drugs are kind of " flattish.”
At the same time, the economy has consumer packaged goods changing marketing tactics, according to Bill Melnick, director of strategic planning at SAI Marketing. The recession has created a “culture of thrift,” he said. That means impulse purchases are down, while the importance of getting on a consumer’s shopping list is up. Melnick said in many cases media planning is shifting from a brand awareness perspective to a shopper perspective, and while television remains an important way to reach consumers, digital, social media and increasingly mobile are also being used to turn consumers into shoppers.
While some businesses adjust their marketing plans, TV appears to be something they can’t live without, based on the results of the upfront. But the upfront might not be a reason for poppi ng champagne corks either.
“It’s so foolish to base your estimates on an upfront scenario,” said Rino Scanzoni, chief negotiating officer for GroupM. (Earlier this month, GroupM cut its forecast for global ad growth to 4.8% from 5.8%, citing natural disasters in Japan and unrest in the Middle East.)
Rather than being a gauge of expectations, much of the strength of the upfront was a reaction to high prices in the scatter market, Scanzoni said. And reports about the upfront tend to emphasize rising prices on a costper- thousand basis, but not full-year revenue growth, which based on the budgets of GroupM’s clients will be anemic at best.
Scanzoni said optimistic forecasts show real GDP rising about 3%: “It’s still growth, but it’s relatively slow growth,” he said. “It’s not going to produce a significant improvement in unemployment. So that ultimately gets factored in on the marketing side.”
This upfront moved very fast, which means there will probably be adjustments made, both as the “holds” reserving commercial time become actual orders and as clients use options to cancel excess time they may have ordered.
“You will see breakage that will be higher than normal and you will see option taking that will be higher than normal,” Scanzoni said. “I don’t think we’re going to go into any kind of media recession, but we do believe the growth rates as we move into 2012 will probably be a bit below where they’ll be this year.”
News from the subscription side of television is slightly better. “One thing that we have seen coming through this recession is that subscription spending remains stickier than perhaps in the past. They did not dive very deeply relative to television subscription,” said Stefanie Kane, a partner at PwC’s Entertainment, Media & Communications practice. “A lot of that tied to the fact that you’re getting much more than your cable subscription. You’re also getting your Internet access, which is just critical to everyday life here in the 21st Century.”
Best When Things Are Worse
Which media businesses do best when the economy is sluggish? “Theoretically, the business models with recurring monthly revenue streams—cable operators and cable networks—should be the most defensive when cyclical advertising and consumer sentiment swoons,” said David Joyce, analyst at Miller Tabak + Co. “The most advertising-reliant will likely be the most susceptible, in particular the smaller, locally focused TV, radio and newspaper owners.”
Joyce adds that during the recession, technology introduced new fears, such as consumers using broadband to get video programming over the top, and those fears compounded investor nervousness about the cyclical downturn.
Joyce is assuming that the economy will be onl y slightly better than flat this year. Despite that, he thinks the growth rate will not be an obstacle to large media companies achieving their full-year earnings targets. “For now we assume company expectations are in line with economic expectations,” he said.
David Bank, managing director, global media and Internet research at RBC Capital Markets, said that if some of the recovery’s steam is cooling off now, it couldn’t be happening at a better time for media companies because of the presidential election year on the horizon.
“Just as you’re seeing some of the tailwind get tired, you’ve got all of this political money coming in on an absolute basis and tightening up general [advertising] inventory, which has got to help pricing,” Bank said.
He also believes that this year’s upfront establishes something of a floor in terms of how much advertising revenue can fall, as long as there isn’t a huge spike in cancellations. “If the economy’s going to double-dip, the industry benefits tremendously by having that materialize after the upfront deals have been inked,” Bank said.
During the recession, media companies cut costs. While the economy has recovered, those cuts mostly have not been restored.
“This is a business of like 80% fixed costs by nature, so I think if there is a second dip it is going to be difficult for the broadcasters to maintain margins,” Bank said. “Investors have to take a slightly longer-term view of the business and realize that it’s cyclical in nature, so if we’ve learned anything from the last go-round, it comes back.”
But Bank notes that at this point, no one’s re ally seeing a “material deceleration” in their businesses. The natural disasters in Japan caused a blip in the third quarter, but Japanese automakers appear to be ready to spend more in the fourth quarter. “It feels like it is slowing at the margins, but not really materially softening.”
Media company executives said they aren’t remaking their plans because of concerns the economy could dip. In fact, they said the strong upfront encourages them to continue to ramp up spending on original programming.
“Right now I don’t feel at this point that we have the need to have a Plan B in terms of expenses,” said John Lansing, president of Scripps Networks. “We’re feeling a lot of momentum in our business right now. While I read the same headlines you do, at this point we’re full steam ahead at building and growing.”
During the last recession, TV viewing went up, so Scripps saw an opportunity to double down on programming investments.
Right now, Lansing said, it feels like the economy is holding up, but “should it get a little shaky, and I hope it doesn’t, our intention would be to hold strong with our current plans for investment and try to continue to grow the audience as best we can.”
Similarly, Bob DeBitetto, president of A&E, said his company is “guardedly optimistic” about the second half of the year.
“There’s no question that we all saw some secondquarter softness” because of commodity prices, gas prices due to the disaster in Japan and the effect it had on auto advertising, he said. “Like all the other cable groups, we’ve been monitoring the situation pretty closely.”
Nevertheless, De Bitetto isn’t changing plans to spend aggressively on programming. “I absolutely see this as the time to step on the gas in terms of investing in original programming.”
Noting that ratings are down on cable for off-net dramas and comedies, DeBitetto said his network’s future is ever more dependent on original programming.
“With the economic results that we’re seeing, particularly with respect to advertising, now is absolutely the time to invest in this programming because there will be a demand for this programming,” he said. “There will be a continuing shift of audience from broadcast to cable as a category. And within cable, the question is how do you get your unfair share? And so in order to get your unfair share of the audience that continues to migrate to cable as a category, I think you need to have more original programming.”
Vital Issues to Address
Even as it rides out business cycles, the media industry has secular issues it needs to address if it expects to remain vital in a digital age. At this point, digital appears to be creating as many opportunities as it does over-thetop threats, said RBC’s Bank.
“In the near term, you lose some of your viewership, but you’re migrating your business more toward exploiting the content that you previously couldn’t exploit as well,” he said. “But you look at your business out five years and you say the landscape likely will be different. What do I do about that? And it’s really hard to make major changes when your business is going pretty well. That’s the dilemma that they all face. Why would I be making transformational moves at a time when my core business is actually not just good, but really good?”
But change they must. Francesco Venturini, managing director and global lead for the broadcast industry at Accenture, said the enterprise value of broadcasters worldwide has not yet recovered from the last recession. In particular, the future enterprise value is lower than it was three years ago. “Possibly the business model is not as rich in terms of margin, not as fast in terms of growth as it was three years ago,” Venturini said.
A battle is shaping up between a linear television model and a non-linear model. “What we believe from our analysis is that linear is still alive. All the statistics show that linear broadcasting is quite strong, TV consumption is going up,” Venturini adds. Nevertheless, broadcasters need to move quickly on the opportunities offered by broadband. “If they don’t, non-traditional competitors like Apple TV and Google TV and Netflix and the telecoms will enter this space,” he said.
“This transition requires quite strong changes in the traditional capabilities of the broadcasters,” according to Venturini. “Broadcasters are not famous for being innovators in terms of business models.”
Not that there isn’t a risk to making changes, he conceded. “The trick is to find a way to use the non-linear offer as a way to enrich you current linear services.”
Kane of PwC said that in order to succeed in a convergent world and give consumers what they want and where they want it, the industry will need more collaboration between content and technology companies; better engagement with consumers, particularly the growing number of digital natives; and advertising that is more personalized and better measured.
Will it happen? “In 2010, we witnessed the industry looking inward, doing a lot of cost-cutting and saving. Now in 2011, we’re seeing the industry facing much more outwardly and doing some of these items that we just talked about across these three themes,” Kane said. “You would hope that even in a bad economy, businesses would see this as an imperative to grow and come out competitively stronger.”
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