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Media firms on front lines
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September 25, 2001: 3:00 p.m. ET
AOL lowers forecast after Viacom warns, Disney loses ads in WTC coverage
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - The recent terrorist attack and the likelihood of a military response may be enough to push the United States into a recession, and media companies may be among the first casualties.
Continuing coverage of New York's World Trade Center disaster caused many media conglomerates to lose prized ad revenue during the week of Sept. 11. The loss couldn't have come at worst time for the likes of Viacom Inc., AOL Time Warner, News Corp., and Walt Disney Co.
As expected, AOL Time Warner cut its cash earnings outlook for the year. AOL, the parent of CNNfn, warned Monday that 2001 earnings growth before interest, taxation, depreciation and amortization (EBITDA) now will be about 20 percent, with revenue rising 5 to 7 percent.
AOL Time Warner had been sticking by its projections for 2001 EBITDA growth of 31 percent, or $11 billion, and had said revenue would grow by as much as 10.5 percent, to $40 billion.
"The real key driver here is the weakening ad space across all fronts in 2001," analyst John Corcoran of CIBC World Markets said.
Shares of AOL (AOL: up $0.15 to $32.65, Research, Estimates) fell slightly Tuesday afternoon after initially gaining. Viacom (VIA.B: down $1.15 to $31.95, Research, Estimates) dropped nearly 5 percent while Disney (DIS: down $0.56 to $17.34, Research, Estimates) shares shed nearly 2 percent. News Corp. fell nearly 3 percent.
A softening ad market already has taken its toll on shares of the top media conglomerates. But the continuous coverage of the attack and their aftermath caused the major television networks to pull their regularly scheduled programming for a week.
Major TV networks generate about $40 million in ad revenue a day, which can rise to about $100 million with profit from cable ads. So the TV networks lost anywhere from $300 million to $500 million last week, analysts said.
AOL's announcement follows a warning from Viacom last week. Walt Disney, for its part, acknowledged that its broadcasting division will experience a drop in ad revenue but stopped short of issuing a warning.
The terrorist attack of Sept. 11 put added pressure on AOL's businesses. But some analysts, Corcoran included, were predicting that AOL would have to cut its estimates even before the destruction of New York's World Trade Center.
"This was not a big surprise," Corcoran said. "The events of Sept. 11 give (AOL) the opportunity to make this announcement."
But AOL Time Warner is expected to endure the current economic crisis the best, he said. The top media conglomerate has about 12.7 million cable TV subscribers through Time Warner cable as well as 34 million Internet subscribers via AOL and Compuserve.
New York-based AOL also has an additional base to draw on from magazines like Fortune, Time and People. "AOL will weather the storm the best because it has a subscription base of revenue that holds up well in a down time," he said.
AOL is suffering from the drop in ads, which generate about 25 percent of its revenue. AOL said Monday its 2001 results were affected primarily by advertising softness and the commitment of additional resources to its newsgathering operations, which include CNN.
The world's largest media concern spent from $30 million to $50 million on CNN's WTC coverage, Corcoran said.
"AOL will see a $40 million to $50 million swing in operating income due to coverage of the WTC crisis," he said.
AOL plans to report third quarter results, which will include the impact of the WTC attack, on Oct. 17. Before the attack, Wall Street had expected AOL to earn 30 cents a share for the quarter and $1.27 for 2001.
The first warning
Viacom said last week that its 2001 results will fall short of estimates. Due to round-the-clock news coverage, Viacom lost significant amount of revenue from its broadcast networks, cable and radio and TV stations.
New York-based Viacom (VIA.B: down $1.15 to $31.95, Research, Estimates), which owns the CBS TV network, MTV and Nickelodeon cable channels, and Paramount film studios, gets 50 percent of its revenue from ads. The media conglomerate also lost money from the cancellation of the Latin Grammys, cancellation of last week's NFL games, rescheduling of the Emmy Awards, and the delay of the fall television season, Chief Operating Officer and President Mel Karmazin said.
Many of Viacom's advertisers now are reassessing their ad strategy in light of the terrorist attack and may change their messages. While most believe they will return to normal ad levels, they are uncertain of the timing, Viacom said.
Of the top media companies, Viacom will feel the greatest impact from the loss of ads and the softening economy, Corcoran said.
Viacom, which had expected double-digit growth this year, will barely top Wall Street's third-quarter estimates of 8 cents a share and 18 cents for the year.
But Viacom has done a better job with cost cutting and has strong ratings, countered analyst Jeff Logsdon of Gerard Klauer Mattison & Co.
Viacom is suffering from the general economic malaise, but when the markets rebound it is set to surge, he said.
"There is a big difference between execution and economy," Logsdon said. "Viacom has great assets and terrific management. If in two to three months, the world stabilizes, Viacom will perform better."
Disney
But the outlook for Walt Disney Co. wasn't nearly as bright. Disney shares have dropped about 25 percent since the attacks.
Disney, which owns the ABC and ESPN TV networks as well as theme parks and movie studios, now is getting hit twice. Once by the drop in ad revenue and again by concerns over its tour and travel holdings.
On Sept. 12, Disney shut its Orlando, Fla., theme parks for only the second time in its nearly 30-year history. The House of Mickey receives nearly a quarter of its revenue from its theme parks and travel assets.
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Disney's Magic Kingdom | |
"Theme parks are a big ticket discretionary spending item for consumers," CIBC's Corcoran said. "And people are cutting back on discretionary spending items."
Burbank-based Disney (DIS: down $0.56 to $17.34, Research, Estimates), the second-largest media conglomerate behind AOL Time Warner, also faces pressure because of its execution.
Disney's lacks the distribution assets of its bigger rivals. AOL reaches 30 million households through its online and its cable unit, Time Warner, is second to AT&T Broadband in number of subscribers. Without its TV networks, Disney is a "pure" content play.
In another sign of uncertainty, Disney this week repurchased 50 million of its common shares through Goldman Sachs from "significant stockholders" at a discount to the current market price.
The Bass family of Texas sold a sizeable chunk, 135 million shares, of their Disney stake for about $2 billion.
Disney executives also acknowledged last week that the company's broadcasting division had lost ad revenue due to the terrorist attacks.
"Obviously the theme parks were affected," Disney spokeswoman Chris Castro said. But it's too early to predict what the impact would be and we have not issued a warning."
Disney executives said in August they foresaw single-digit earnings growth for the rest of 2001. Before the attack, Wall Street had expected $25.7 billion in revenue for year end 2001 and a 79 cent profit.
But Gerard Klauer's Logdson expects the top media conglomerates to cut EPS estimates by 10 percent to 20 percent. Disney likely will lower targets in the lower range, around 10 percent, he said.
Disney is expected to announce fourth-quarter and year-end results sometime in October.
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Sydney, Australia-based News Corp., which currently is battling it out with EchoStar Communications to buy Hughes Electronics Corp., will be less impacted.
News Corp. (NWS: down $0.70 to $24.60, Research, Estimates), which owns the Fox TV network, also will feel the pinch. One of the world's largest media conglomerates, News Corp.'s assets include the L.A. Dodgers, Twentieth Century Fox and several newspapers, including The Times of London . So News Corp. won't be affected as much as either Viacom or Disney.
Many had hoped for an economic recovery sometime in the fourth quarter but such hopes have been pushed to late next year.
"If it's not a recession it's certainly looking and smelling like one," CIBC's Corcoran said. 
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