Media's cable engine splutters, writedowns loom
By Yinka Adegoke
Next week's quarterly earnings reports from the major media conglomerates will be marked by two factors: expensive flops and withering cable network viewership.
Writedowns will make a notable showing on earnings scorecards for the first time since the financial crisis, while ratings declines will underscore early signs of maturity for cable channels - the engines of growth at most big media companies - after years of relentless expansion.
Wall Street is expecting a solid quarter for the media business overall for the quarter. It is just less excited about its immediate future.
Creative bets, while necessary, are costing media companies more than ever when they fail to work out.
Take Disney, for instance. The company has already got in front of the widely reported sci-fi blockbuster flop "John Carter" in more ways than one. It warned investors to expect operating losses of between $80 million to $120 million at the studio level and the failure helped force out Disney Studios chief Rich Ross.
Disney is unlikely to be alone. Several analysts forecast that Time Warner will take a charge of between $35 million to $40 million after HBO canceled its high profile drama 'Luck.' The show, about the world of horseracing and gambling starring Dustin Hoffman, was canceled when a third horse died during production for a second season.
Media companies and their investors already have this kind of risk failure 'priced in' to their business models. Yet there is growing concern that the size of the risk and price of failure might swell as more competitors for original content enter the market.
In recent months Netflix Inc, Hulu and YouTube have all made firm commitments to creating more original content to supplement their back catalogs of TV shows and Hollywood movies.
While the original content efforts of these newcomers are only in their infancy, investors are asking if big media companies will have to keep raising the bar and making bigger bets with their own content.
"There's only so much good content and everybody wants good content whether it's (Netflix CEO) Reed Hastings or Hulu to say nothing of the regular networks," said Larry Haverty, portfolio manager at Gabelli Multimedia Funds. "So you're bidding up the price of content and the price of failure is escalating and what this means is profit-margin pressure."
CABLE RATINGS PRESSURED
More concerning than writedowns, according to Bernstein Research analyst Todd Juenger, is that "TV ratings have been generally abysmal so far in 2012, with marked disparity between certain winners and losers, especially among cable networks."
Many major cable networks saw significant ratings declines in the first quarter, including Viacom Inc's Nickelodeon (-27 percent) and MTV (-14 percent); News Corp's FX (-12 percent) and Fox News (-7 percent); and Time Warner's TNT (-18 percent) and CNN (-28 percent).
Overall, total TV viewership among the key demographic of adults 18 to 49 years old is down 3.7 percent year-to-date.
Citigroup analyst Jason Bazinet said he and his colleagues are "flummoxed" by what he described as troubling ratings data.
Bazinet recently downgraded the stocks of News Corp, Scripps Networks and CBS Corp to "neutral" from "buy." He did the same with Discovery Communications, one of the few ratings winners in the first quarter, saying it too may fall victim to long-term industry ratings pressures.
Citigroup said advertising revenue growth at cable networks, which has long outpaced the overall ad market, only grew 1 percent faster in the fourth quarter. Overall, Nielsen ratings data was weaker in the first quarter.
The importance of cable networks to big media companies cannot be overestimated.
While broadcast networks and Hollywood studios have the highest profile within media conglomerates, cable networks have been responsible for operating profit growth quarter-after-quarter, even through the dark days of the last recession.
As Bazinet notes, between 2008 and 2011 more than 100 percent of media sector revenue growth and nearly 175 percent of operating profit growth has come from cable networks, leaving other sectors like studios, broadcast networks, theme parks and publishing in their wake.
As Haverty points out, however, "Cable penetration is pretty much at a max in the United States and will probably grow with new household formation but we don't know if that will happen this year or even next."
Still, Haverty says cable networks have plenty of options.
"The likelihood of this being a severe problem for the cash flow is limited by the fact that they're discovering alternative revenue streams from collecting tolls on the Internet or selling the content more effectively in foreign markets," he said.
