Bad news for Big Media
As the United States slips into recession, advertising spending is set to fall - spelling trouble for traditional media companies already battered by Internet upstarts.
(Fortune) -- Media industry watchers are no longer debating whether the United States economy is in recession. Rather the question is, "how bad will it get?" If recent trends continue, the outlook is likely bleak for broadcasters, magazine publishers, newspapers, cable operators and the conglomerates that own them.
Advertising spending - the fuel that powers the media and entertainment industries - is poised for a downturn as corporations and consumers grow frugal. Cutbacks in consumer spending are expected to take a toll on everything from Disney's theme parks to Time Warner's magazines and News Corp.'s (NWS, Fortune 500) newspapers, according to analysts.
The slowdown in advertising began in earnest during the final quarter of 2007, when ad spending grew an anemic 0.7 percent - its slowest pace in five years, according to Bernstein Research. One bright spot: The presidential election should generate a record $3 billion in spending on political advertising - the bulk of which will be shelled out between June and early November.
The recession wouldn't be so bad for old-guard Big Media companies if not for the battle they are simultaneously losing against Internet competition such as Facebook, Google (GOOG, Fortune 500), Microsoft (MSFT, Fortune 500) and Yahoo (YHOO, Fortune 500). Online advertising grew by 27 percent in 2007, to $25.5 billion, according to research firm International Data Corp. That pace isn't expected to let up, as advertisers shift pitches to the Web, where they can immediately measure and assess the effectiveness of their ads. Standard & Poor's Internet analyst Andy Liu noted last week at the company's 2008 Media Summit that that he expects online ad revenues to grow by 20% this year - recession or no.
A savvy investor might note that the media sector has outperformed the S&P 500 over the last three months, a period in which many economists argue the U.S. economy entered a recession. But behind that uptick in media shares is a looming downturn, according to Goldman Sachs analyst Ingrid Chung.
Chung used recent history to guide her take on how a recession is likely to affect large-cap media and entertainment stocks. Looking back at the 2001 recession, Chung observes that the media sector outperformed the S&P 500 for a brief time then too. "When the recession began in the first quarter of 2001, results and public statements did not reflect the recessionary impact until second quarter 2001 [financial] results," Chung wrote in a note to investors last week. "We expect to see the impact on results begin in second quarter 2008. We believe ...that as the companies report second quarter results in late July/early August, we will hear statements regarding a broader advertising slowdown, pressuring shares."
The result of Chung's analysis is that Goldman Sachs has adjusted its price targets for big media companies from 12 months out down to six months. Presumably, Chung doesn't see enough clarity in the markets to make a year-long call. That means that Chung's previous year-end calls for CBS (CBS, Fortune 500) ($25), Disney (DIS, Fortune 500) ($39), Time Warner (TWX, Fortune 500) ($18), and Viacom (VIA) ($46) have each been reduced by 10% and are only good until June.
Cowen and Company analyst Doug Creutz is preparing for a rougher ride for this recession. "Our industry thesis is informed by our view that a recession in 2008 is likely, and that its impact could be more severe than those experienced in either 1990-91 or 2001," he says.
Creutz does see some companies' weathering and even prospering during a downturn. He likes Viacom's prospects, for instance, because cable networks can rely on subscriber and affiliate fees to help offset an advertising slowdown.
And News Corp. may fare well too, due to its global operations. "We believe international markets offer (1) lower near-term risk in the event of a recession, and (2) better long-term growth opportunities," Creutz told investors in a recent note. By contrast, Creutz warned that too many of CBS' businesses are "exposed to long-term negative ... trends."