CBS's amazing race for profits
As earnings fall and a possible U.S. recession looms, the media company may just have to start conquering the world.
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Fortune -- It's no secret that the Internet, digital video recorders and video games are sucking audiences away from broadcast television and radio. Just how painful that shift is for traditional media hit home Tuesday when CBS, owner of the country's most popular television network, released its earnings.
The numbers weren't pretty, even though CBS (CBS, Fortune 500) beat Wall Street estimates. Fourth-quarter profits fell about 15 percent, to 54 cents a share, on a three percent drop in revenues, to $3.9 billion, during the same period a year ago.
Investors on Tuesday yawned at the results, but they're clearly unhappy with the company's direction: Shares have fallen 21 percent in the last year, compared to a 17 percent drop in the S&P Media Index and a 5 percent decline in the broader S&P 500.
The reason CBS is taking a bigger beating than most media companies has everything to do with the makeup of its business. Two years ago, a closely-watched spinoff from Viacom (VIA) left CBS primarily with a then-thriving television network, radio stations around the country, and outdoor advertising. All of them, however, are heavily dependent on advertising, a sector that's undergoing wrenching change as marketers shift their dollars away from network television to outlets where audiences are growing.
More than other large-cap entertainment companies, "CBS is very exposed to these secular trends," says Doug Creutz, an analyst with Cowen & Company.
Worse, CBS is likely to suffer more than its peers if, as many economists now expect, there's a recession in the United States. Media analysts estimate total ad spending in the United States will decline 6 percent in 2008, a falloff that would be even sharper but for boosts from the presidential race and the summer Olympics in Beijing.
Consider that 72 percent of CBS' revenue comes from advertising, which is usually among the first to suffer in a downturn as companies rein in their marketing budgets. By way of comparison, advertising accounts for 44 percent of revenues at News Corp (NWS, Fortune 500)., 35 percent at Viacom, 23 percent at Disney (DIS, Fortune 500), and 19 percent at Time Warner (TWX, Fortune 500).
On the flip side, companies that draw more revenues from subscriptions generally fair better in a slowing economy. Just 8 percent of CBS's revenues come from its Showtime cable unit and other subscription services.
And unlike its competitors, CBS doesn't have a big overseas presence to help offset a U.S. slump. A mere 11 percent of its revenues last year came from abroad, compared to 47 percent at News Corp. and 27 percent at Viacom.
So how can CBS jumpstart growth? By returning to its Viacom roots, some analysts suggest.
Merrill Lynch media analyst Jessica Reif Cohen suggests that CBS borrow a script from NBC Universal. Six years ago, the General Electric (GE, Fortune 500) unit embarked on an aggressive buying spree in the hopes of becoming less dependent on advertising and English-language programming. In 2002 it bought Telemundo and Bravo. A year later NBC merged with Vivendi Universal, folding in Universal Studios, Universal theme parks, USA Network, and the Sci Fi Channel.
The result: A more global reach and far less reliance on advertising. NBC now generates about 45 percent of its revenues from ads, down from 90 percent in 2003.
"CBS now finds itself at a similar crossroads [as NBC in 2002]," says Cohen, pointing out that the company's high-growth assets, such as sports channel CSTV, Showtime, and its international billboard and outdoor advertising unit, make up only 24 percent of revenues, while 57 percent is derived from network television and radio stations. Simply put, says Cohen, "CBS needs to acquire to grow."
If that's the plan, CBS chief Leslie Moonves isn't talking publicly about it. During an analyst call following the company's earnings report, the veteran media executive acknowledged that economic challenges lie ahead, but insisted that CBS can weather any storm.
"We'll continue to watch trends," Moonves said, "but please remember, in any difficult market, it is the leaders who are the must-buys for agencies and advertisers, and that certainly includes network television and CBS."
Unfortunately for Moonves, there are a lot of leaders in this race. 
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