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Media companies suffer
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November 9, 2001: 6:13 p.m. ET
Terrorist attacks have postponed any recovery, prolonged a recession.
By Staff Writer Victoria Zunitch
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NEW YORK (CNN/Money) - Two months after the terrorist attacks, major media conglomerates such as Viacom, Walt Disney, News Corp. and AOL Time Warner are suffering through an economic downturn that's expected to last at least until mid-2002, say media-industry executives and analysts.
"Things look bleak. It's unclear when things are going to start to look better," said Linda Bannister, Media Analyst at Banc of America Capital Management.
Extra news coverage increased costs for these companies in the third quarter, but a slump in advertising revenue is the main problem. It's now believed that the Sept. 11 terrorist attacks squashed a nascent late-summer recovery in both the overall economy and the advertising market, and instead sparked a recession.
"Pre-Sept. 11, what we saw was a weak ad environment with indications that things might have been improving," said Peter Mirsky, vice president, Media Analyst, SG Cowen Securities. "Things were looking incrementally better. Not good yet, but incrementally better."
"When Sept. 11 happened, it just knocked the advertising market out of bed," he added. Ads were pre-empted by continuous television news coverage and the postponement of a plethora of high-profile events, such as the Emmy Awards, the Latin Grammys, the fall television season, and National Football League and Major League Baseball games.
October's ad declines were less than September's, although they couldn't help but be, Mirsky noted. The prevailing opinion is perhaps best summed up by Banc of America's Bannister, who said that October's ad dollars were simply displaced from September. "Once we get past that, I think we're going to realize that things are going to be pretty weak," she said.
November and December are looking pretty bleak, as well, said Gordon Hodge, media analyst at Thomas Weisel Partners. He bases his projections on anecdotes and conversations gathered from people in the industry.
The ad market is pressured on both the supply and demand sides, Bannister notes. Demand is down because corporate profitability is off, yet supply has steadily increased in the past few years because of satellite television and digital cable.
Unfortunately for media companies, the recovery of the advertising market is expected to lag any recovery in the overall economy. Jon Mandel, chief negotiating officer at New York media agency Mediacom, said that historically, advertising downturns lag the U.S. economy by six months while advertising recoveries lag by a full nine months. He made his comments Friday at the JP Morgan H&Q telecom and media conference in New York.
Toughing it out until mid-2002
With many economists predicting a U.S. economy to begin no earlier than the second quarter of 2002, media companies could be in for a rough ride. "We're hopeful that we're going to see an increase (in advertising) by late next year, but it could be early 2003," Bannister said.
The conglomerates are suffering, and coping, in a variety of ways. Mirsky said that Viacom, Disney, News Corp. and AOL Time Warner were very good about guidance. So while business has turned out to be as bad as expected and several still missed estimates, they have been able to head off any huge, last-minute surprises.
News Corp. (NWS: up $0.11 to $28.40, Research, Estimates), based in Australia, reported on Nov. 7 that it had earned 6 cents per American depositary receipt instead of the expected 11 cents in its first quarter ended Sept. 30. The company said it lost more than $100 million in ad revenue on its commercial-free coverage of the attacks.
But the owner of newspapers including the New York Post, the Fox TV Network, Twentieth Century Fox movie studio and the LA Dodgers baseball team said that it still expects operating income to grow in the high-single to low-double digits in 2002, although those expectations are down from its pre-Sept. 11 earnings growth expectations of 20-to-26 percent.
"In the back half of the year, we are exceptionally well-sold," said John Nesvig, president of sales for News Corp.'s Fox Broadcasting unit, at the JP Morgan H&Q conference. Cancellations for the first quarter of 2002 are under 10 percent so far, he added. And although Fox won't start to hear about second-quarter cancellations until January, Nesvig thinks Fox will be in pretty good shape in April.
Still, he stopped short of saying that the ad slump is over. "Short-term, our business looks good," he emphasized.
Viacom (VIA.B: up $0.14 to $39.88, Research, Estimates) posted on Oct. 24 a loss of 11 cents a share, worse than the 3 cents a share loss estimate of analysts surveyed by First Call. Viacom had warned on Sept. 19 that the attacks would result in only a slight full-year cash-flow increase over the earlier year, but didn't provide specific EPS guidance.
The owner of the CBS TV network, the MTV and Nickelodeon cable channels, and Paramount film studios was hard-hit by the rescheduling of events. The Emmy Awards were rescheduled twice, once in the aftermath of the attacks and once on the day the U.S. began military action in Afghanistan. It also lost revenue from the cancellation of NFL games and the cancellation of the Latin Grammys. And, like other networks, the delay of the new fall season hurt revenue for the quarter.
As with other companies, Viacom is expecting to recoup some of its losses from business-interruption and other insurance. In announcing earnings, CEO Sumner Redstone and President Mel Karmazin seemed to be focused on poising the company for better times. Karmazin cited the company's plan to focus on free cash flow and its core businesses, which would "enable us to quickly reap the rewards of resurgence in the economy."
Walt Disney Co. (DIS: up $0.11 to $18.95, Research, Estimates) may be having the toughest time. The company reported Thursday that it earned 3 cents a share in its fourth fiscal quarter ended Sept. 30, missing Wall Street's expectations by only a penny.
But the owner of the ABC and ESPN TV networks, theme parks, and movie studios said its first fiscal quarter of 2002 would be even tougher, when operating income could be "somewhat less than half" of the year-earlier quarter.
Banc of America's Bannister noted that Disney is expecting a decline in 2002 cash flow while its American competitors are expecting cash-flow growth, Viacom in the single-digits and AOL in the mid-teens. With nearly 25% of its revenue coming from its theme parks, Disney has perhaps a greater exposure to the overall economy than do the other media companies, she said.
Bannister also pointed out that about 50 percent of the visitors to Walt Disney World, the single-biggest component of the company's theme-park operations, get there by flying. And the ABC television network is grappling not only with weak advertising revenue, but lower ratings as well.
One bright spot could be the movie "Monsters, Inc.," which has seen some recent success. "Monsters" could also benefit from the changes in American spending patterns, which is expected to show an increased focus on local and home-based entertainment over trips require travel on airplanes or abroad.
AOL Time Warner (AOL: up $0.65 to $37.10, Research, Estimates), the parent company of CNN/Money, also is expected to reap big gains from a fourth-quarter movie release, "Harry Potter and the Sorcerer's Stone."
The media conglomerate, which also owns CNN and the CNNfn business-news networks, publishes magazines, books, and music, and produces cable-television shows in addition to selling cable TV to subscribers through its Time Warner cable business, posted on Oct. 17 a third-quarter net loss of 22 cents a share that was wider than the 21 cents pro forma (as if AOL and Time Warner had already merged) earnings reported for the year-earlier quarter. Excluding certain costs, AOL Time Warner reported higher third-quarter earnings.
AOL had warned on Sept. 24 that had lowered its expectations as a result of the attacks. It now expects full-year earnings before interest, taxes, depreciation and amortization (cash flow) to grow in the 20 percent range, revenue to grow by 5-to-7 percent, and cash earnings per share to be lower than previous expectations.
"About 42 percent of the revenues are subscriptions, and only about 25 percent is ad-based, so they're more immune although not entirely, to the ad slowdown," Bannister said.
Overall, the tone that most analysts and executives seem to be taking with the media conglomerates is one of "wait until next year." The consensus seems to be that with a continuation of what now appears to be good management on the cost side, these companies will be ready for an improvement in the economy.
"There are opportunities to invest in these stocks even given the uncertainty because they're strong companies and they're poised to recover when things start to look better," Bannister said. 
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