March 19, 2008

Big Media Fundamentals Holding Up For Now

Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica's estimates weren't far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.

In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a "head fake" as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.

I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.

With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel....

....Jessica's report of March 14th had the first commentary that suggested TV advertising might be slowing. She mentioned that News Corp said that Fox TV stations are running about 5% under budget and that CBS mentioned slower advertising growth in some smaller markets. Both companies mentioned strength elsewhere that would at least offset the weaker TV ad trends but this is definitely something to watch.

The bottom line is that if TV ad trends (and travel trends for DIS) do not slow markedly over the next quarter or two the shares of the major entertainment companies are deeply undervalued. Another question is whether current prices reflect enough of a slowdown to insulate stock prices against lower estimates. I am not sure how this plays out but I think in the case of NWS and DIS downside is about 10% while upside is 20%. That is a risk-reward tradeoff that encourages me to maintain my positions in both stocks.

Posted by Steve Birenberg at 09:35 AM | Comments (2)

January 28, 2008

Sundance Wrap Before Reality Returns

If you love movies and have never been to Sundance I highly recommend it. This was my first visit and I found an incredibly well organized and orchestrated festival. Pulling it off is no easy task. There are seven venues with nine screens in Park City alone plus additional showings in Salt Lake City and Ogden. In Park City, eight films are simultaneously running from 9 AM through the midnight showings. We attended 9 films total including 4 each on Friday and Saturday. Every showing was easily sold out including last minute "wait list" tickets which are available in limited quantities in the two hours prior to the start of a show. The venues are scattered over several miles of Park City so a free transportation system of buses is available. We never had to wait more than 10 minutes for a shuttle and only got caught in a really packed bus a couple of times.

The only downside is the expense but the incredibly well staffed and friendly volunteers (many standing outside directing pedestrian traffic for hours at a time) make you accept the stiff price for meals. Film tickets were $15 and available at the main box office early morning for each day's showings.

Of the nine films I saw with my 17 year old indie movie addicted daughter, we liked Anywhere USA the best. It probably doesn't have much of a commercial future but it is really well done and makes its editorial viewpoint known without being preachy. We also enjoyed Hamlet 2, the big story out of Sundance because it sold for $10 million, the second largest sale ever after Little Miss Sunshine. It is a straight out comedy and was the far and away the crowd favorite. On Friday night we had dinner with several critics, including David Poland of Movie City News, who explained that Focus Features bought the film figuring if they could get the theatrical run to $20 million the film would be nicely profitable including DVD sales. Hamlet 2 is no academy award nominee but it should be a box office success.

Sorry to have used up space to chat about movies but I hope you enjoyed the diversion from the always intense and recently often sour market commentary. It's time to get back to reality, the market, and stocks.

Posted by Steve Birenberg at 10:30 AM | Comments (0)

January 25, 2008

Slow Sales At Sundance

I got to Sundance yesterday and caught my first movie. I am visiting a good friend in Salt Lake City so I won't be spending full time at the festival until today. I hope to catch 3-4 films on Saturday and Sunday before heading back to Chicago. Even though I've missed some good stock market rallying, it is very good to be away. My investments have done poorly so far this year. Space and distance helps to clear my head and will allow me to confront the difficult decisions better next week.

This is my first visit to the Sundance Film Festival. From Wall Street's perspective the festival only matters as it relates to the purchase of films by the major studios. Sundance historically ahs been a festival more about independent film that the sales of those same films. Over the past few years, it has become more of marketplace, and this year it the marketplace that is generating the most news. Or maybe I should lack of news.

Because of the writer's strike, which has postponed production on many films due in theaters in late 2008 and 2009, I believe expectations were raised that sales of films at Sundance would be robust in terms of both volume and price. Most of the stories about film sales at the festival have noted they have been slow and at prices below expectations. I suspect this is a case of the bar being set too high, much like with earnings on Wall Street. The agreement between the Director's Guild and the Studios may also be impacting sales because it has raised hopes for a quick end to the writer's strike.

I realize none of this has much to offer for market forecasts or stock ideas but it's been a crazy two weeks so I hope you appreciate the diversion. I'll be seeing the top selling movie on Saturday, Hamlet 2, which went for $10 million. I'll tell you what I think about it and the other films I see next week.

Posted by Steve Birenberg at 10:28 AM | Comments (0)

December 28, 2007

DVD Sales Moderately Weak But No Disaster

I still got my eye on holiday DVD sales. Data is now available at through December 16th. This includes the launch of the latest Harry Potter film and the second week of sales for Pirates of the Caribbean: At World's End. Please note that this data is for the US only. This could be especially important for popular international titles like Harry Potter, Pirates, or especially Ratatouille which performed exceptionally well in the overseas box office.

My impression of these sales figures is that they are moderately light pretty much across the board relative to analyst estimates. Holiday DVD sales are very important to December quarter earnings for the major entertainment conglomerates which own movie studios including Disney, General Electric, Viacom, News Corporation, Time Warner, and Sony.

It is hard to call winners and losers among this group but I do have some observations....

....First, Disney, the company most reliant on DVD sales, seems OK based on depth of titles. Pirates, Ratatouille, High School Musical 1 and 2, Meet The Robinsons, The Santa Calsue 3, and the Lost TV series are all presently in release and appear to be selling at least OK. Pirates had the biggest week one sales figure of the year and looks like it will be the top selling of the year. Some analysts have expressed concern about sales for Shrek The Third which might translate to Ratatouille since they have sold about the same number of units. However, Ratatouille did an unusually high 66% of its box office abroad vs. a more normal 60% for Shrek.

Second, the NBC Universal division of GE looks like it has a big hit, likely better than expected, in The Bourne Ultimatum, which sold over 5 million units in its first week. It is too bad that any upside gets lost at GE but NBCU has had a good year at the box office and in the event that a merger or acquisition is completed in 2008 it will be good to remember that the content pipeline has been recently strengthened.

Finally, executives at Viacom must be smiling with Transformers occupying the top spot on the sales chart so far in 2007 with a finish no worse than second in the cards. The DVD was releases was in October so look for most or all of that $126 million in very high margin revenue will be flowing through Viacom's Paramount studio this quarter.

Posted by Steve Birenberg at 08:07 AM | Comments (0)

December 26, 2007

TV Ad Market Strong. For Now.

On Monday, the New York Post reported that scatter market TV advertising on the big four broadcast networks is running up 18%. Scatter market represents TV ad inventory available for sale on the spot market. This price increase is occurring despite another year of accelerated declines in ratings for prime time network TV shows. What is happening is that advertisers have not achieved the reach they desired with their upfront ad purchases so they are aggressively bidding for limited inventory and driving up pricing. This situation bodes well for 4Q EPS of the owners of the broadcast networks – Disney (ABC), News Corporation (FOX), CBS, and General Electric (NBC).

A gentler version of this rising ad prices/falling ratings dynamic has been going on for more than a decade enabling the broadcast network TV market to grow modestly despite the steady market share gains for cable TV and other forms of media. The concept sold by the broadcast networks has been that “we are the only place where you can still reach a mass audience even if it is ways less massive than it used to be.” The winners at any point in time are the networks that are on top of the ratings or sustaining ratings momentum (currently ABC and FOX)....

....This situation could change for the worse over the next months, however, if the writer’s strike continues. TV ratings are likely to dive as most of viewers favorite shows leave the air and are replaced by reality programs, repeats, or a limited number of new original series. Advertisers seem likely to take a tough line and being to fight back against rising prices amid deteriorating ratings. This is the real risk to the broadcast networks from the writer’s strike. As a result, the scatter market bears very close watching over the next month as the final episodes of most viewer favorites are aired.

FOX is best positioned to weather the storm in the short-term because it has a fresh season of American Idol ready to start. CBS might also hang well in the near-term because its schedule is loaded with shows like CSI that repeat well. On the other hand, CBS is most exposed long-term as it gets over two-third’s of its revenue from advertising.

Posted by Steve Birenberg at 07:57 AM | Comments (0)

December 18, 2007

DVD Sales Mixed So Far

Just before Thanksgiving I highlighted my concerns that holiday spending on DVDs could be weaker than expected. At the time, I identified two potential problems. First, the studios have to deal with a generally weak holiday spending environment. Second, the amazing success of the box office this summer put a glut of high profile DVDs on retailer shelves. So assuming consumers were inclined to spend on DVDs, any single title could get squeezed or all the titles might lag sales goals. Now, another problem has emerged which is great success for video game titles. Halo, Guitar Hero 3, and others appear to be selling very well this holiday season.

Early returns on DVD sales were mixed. Transformers was first out of the box and did very well selling 8 million units at its launch. Spiderman 3 was next and underwhelmed with 3 million units. Ratatouille got off to a good start with 3.8 million units but Shrek The Third, which had domestic box office more than 50% above Ratatouille, sold just 3.3 million units in its first week. Things looked a little better when Live Free or Die Hard sold a better than expected 2.1 million units.

While the jury remains out, the latest sales data is much more promising. Last week saw the release of Pirates of the Caribbean: At World's End and The Bourne Ultimatum and both performed very strongly. Pirates sold 8 million units and Bourne sold 3 million.

I suspect the final outcome will be a moderately weaker than expected DVD sales season with more titles than usual underperforming.....

....But the breadth of titles across the industry and within individual studios should mean that weakness in individual titles won’t have a meaningful impact on 4Q results for the studio owners. The one exception could be Dreamworks Animation, which is relying completely on Shrek The Third. However, DWA shares already have been killed mitigating risk relative to expectations. Disney is most highly reliant on DVD sales among the majors but as long as shortfalls for Ratatouille or Pirates are not severe, the breadth of the company's offerings, including Meet The Robinsons, High School Musical 2, and Hannah Montana, should prevent DVDs from causing an earnings shortfall.

A moderately weak DVD season does have longer term implications as it will reinforce the thesis that this critical driver of movie and TV studio economics is in a gradual state of decline. Resolution of the format war between next generation DVD players would be the best tonic for the DVD flu but that is not happening this holiday season which means the industry likely has to wait another year.

Posted by Steve Birenberg at 07:39 AM | Comments (0)

December 13, 2007

The Writer's Strike Is About To Bite

I am surprised that the talks broke off between writers and producers. When the strike was launched there was a lot of discussion on both sides about how close they were to a deal. I figured that when they decided to start up negotiations again under a strict blackout a deal was at hand. My view was reinforced by two factors. First, the writers union is led by a folks who were willing to wage a strike so they had already proven to the producers that they were serious. Second, the fact that the writers seemed be winning the public relations war in a landslide. It seemed like a perfect setup for a deal.

Now things are looking ugly and the strike is dragging on long enough that it could impact media stocks. As a reminder, it is TV that could get hurt. That means that network owners and TV producers have the most to lose. Disney (ABC), NBC Universal (GE), News Corp (Fox), and CBS are the network owners. NBCU, Fox, Viacom, and Time Warner are the big TV producers.

The problem is most acute at the networks. Network TV is in a long-term state of decline as viewers diversify their media consumption. Cable networks have steadily gained share and now new digital distribution is starting to build viewership. With most popular original series about to run out of episodes, ratings will take a nosedive starting in January and February. The timing couldn't be worse as this is the first year advertisers are using the new currency of live commercial ratings plus three days of DVR playback. Ratings were unusually poor last TV season and although there is no an apples to apples comparison, they appear to be down sharply. Finally, the lousy ratings have actually tightened the ad market because the networks have had to offer "make goods" of ad time to compensate for low audience delivery. That means that if ratings nose dive under a prolonged strike scenario there is no obvious way for the networks to make good other than cut prices dramatically.

The financial impact of a prolonged strike on the networks is unlikely to hurt earnings at the networks owners because the cost of the replacement programming is going to be very cheap. However, the big picture risks of an accelerated decline in audience ratings and the shifting ad currency have serious long-term implications that could impact valuation of network assets. That said, CNBC is way overdoing the coverage of the strike relative to the stock price risks for the companies.

CBS is by far most exposed as the network is the primary driver of its profits. Disney and News Corporation have less to worry about given their broad base of entertainment assets. I remain bearish on CBS which also has serious ratings issues that put hundreds of million of operating income at stake. I still like News Corp and Disney which have plenty of growth levers away from network TV to drive operating income.

Posted by Steve Birenberg at 10:53 AM | Comments (0)

December 10, 2007

UBS Media Conference Recap

I'm back in Chicago and have had some time to digest the UBS Media and Communications Conference. Below are brief comments from every presentation I attended. As you read, keep in mind that I found the general background of the conference to be cautious. This impression is based mostly on the uncertain advertising environment and the decelerating growth in the cable sector. Don’t confuse my comments with a bearish view, however. Media companies are in pretty good shape to weather the storm due to strength in margins and cash flow, and new growth initiatives. The group as a whole may not work well for a few more quarters but there is enough good for individual ideas to be money makers.

The following comments are meant to provide my immediate impression of the presentations with an emphasis on stock price performance in 2008 weighted to the first half of the year. I am trying to find the best media stocks to own not necessarily big absolute price gainers. The comments are listed in the order of the presentations I attended....

....Rogers Communications (RCI): This presentation was the company's first chance to respond to newly announced spectrum auction rules in Canada. Management was calm and confident. The stock should continue to bounce back toward the mid $40s but a move back to recent highs will be difficult given the shift in investor sentiment toward skepticism about the sustainability of growth.

Time Warner Cable (TWC): CEO Glenn Britt was reassuring about seeing real progress in the troubled Dallas and LA systems in 2008. However, this presentation was before Comcast lowered guidance and it is unlikely that TWC shares can perform well until sentiment improves for the entire cable sector. Don’t hold your breath but late spring might work for bulls.

Disney (DIS): This presentation was solely about ESPN. My main takeaway is how similarly ESPN and Disney use their brands. ESPN seems largely autonomous but definitely fits comfortably within the Disney corporate culture. ESPN will be a consistent driver of growth for Disney for at least several more years.

NBC Universal: NBCU is a division of General Electric so no investment insight here. I was a little surprised to learn that cable networks produce 50% of operating profits. Granted that figure is inflated because of the profit collapse at NBC Prime Time but the breadth of cable network exposure (USA, Sci-Fi Bravo, Oxygen, CNBC, MSNBC, and 57% of Sundance) is impressive. Now if Jeff Immelt would just spin NBU out or merge it into another media company.

Viacom (VIA): A turnaround appears in place due to improved ratings at MTV and a much tighter focus on operations including cost cutting. Margin expansion will be crucial to the stock price and may lag investor expectations as higher ratings come at the cost of increased programming investment.

Liberty Media: Presently two tracking stocks, Capital (LCAPA) and Interactive (LINTA), but shortly Capital will be split in two when the acquisition of News Corp's interest in DirecTV is completed. I still think it is all too complicated and Liberty lacks top tier assets with superior growth potential.

Fox Interactive Media: This presentation focused on how MySpace was being monetized away from the Google deal. The focus on targeted marketing to groups of MySpace users seemed very plausible to me. I like News Corp (NWS) and feel better about MySpace after seeing this presentation. With the help of MySpace, NWS should offer the best operating income growth in big media for the next few years.

Charter Communications (CHTR) debt to EBITDA ratio is over 9 times. With Comcast trading at 6 times EBITDA this means there is no value beyond an option in Charter shares. Investors will pay for the option, however, when cable stocks are performing well so if Comcast recovers and you want a leveraged play, Charter is your stock. The company is being much better managed since the new team came in a year or two ago. Still no way they can ever produce enough free cash flow to grow their way out of the debt. The bonds have gotten killed due to the credit crunch and may be a better play.

JC Decaux is the largest outdoor advertising company in the world. The stock is not listed in the US. I liked the story very much a year ago at this conference and nothing has changed. If I bought stocks listed outside the US for Northlake clients, I would be long. Growth should hold at double digit levels as JCD continues it s expansion in emerging markets.

Time Warner Telecom (TWTC)was a brand new idea for me. I have never heard them speak and barely knew what they did. It seems like a good growth story as they expand their network of buildings wired for enterprise voice and data services. Plenty of room left to penetrate in their markets and companies are always looking to move away from the administrative and customer nightmare that AT&T or Verizon often offer.

Discovery Communications (DISCA) has made quite a turnaround under David Zaslav who joined the company from NBCU just one year ago. Money losing units have been sold and widely distributed but undermanaged channels are being rebranded. I think some upside remains and if the company eliminates its tracking stock status in 2008 the shares would surge on takeover speculation.

Les Moonves was his usual optimistic self as he told attendees how everything is great with all of CBS's businesses. His schtick is getting old though as CBS (CBS) continues to offer no revenue growth in the near-term or long-term. And one more year of lousy ratings at the CBS Network and EBITDA will start to suffer as a few hundred million of downside exists if the network drops to third to fourth place. It's not a short anymore following the fall from $33 to $28 but no reason to be long.

I enjoyed myself at Lionsgate (LGF)by hassling Michael Burns about the company's growth rate. The stock has asset value near the current stock price based on recurring free cash flow of $100 million. However, the company is unable to explain when or how free cash flow will step up. Until it can, the stock won't get of its trading range so buy near $9 and sell near $11.

America Movil (AMX) is the largest wireless company throughout Central and South America. Growth will slow a little as new markets are not being opened but the benefit will be a boom in free cash flow. Competition is rising in Mexico which has pushed the stock down. Of all the presentations I saw AMX is closest to a new buy idea.

Grupo Televisa (TV) is a buy if growth picks up in 2008 and the company gains traction in its gaming business. Both things should happen but I am less confident now than I was in the summer.

Not much left for me to say about Comcast (CMCSA) so just read here and here for my comments following the company's reduced guidance and UBS presentation. I plan to take my loss before year end but expect to do so slightly above current prices.

nTelos (NTLS) is a regional telco serving parts of Virginia and West Virginia. I think the shares have upside in late 2008 and 2009 as the EVDO buildout of its wireless network begins to generate added data revenue due to the higher download speeds customers will receive. In the meantime you have a good current yield and asset value. Put it on your monitor.

Liberty Global (LBTYA) is a great story with lots of emerging markets exposure and triple play potential for its cable operations in Western and Central Europe and Chile. However, the shares won’t go up until US cable stocks begin to recover so no reason to get long now. I love the aggressive buyback and high leverage strategy. Comcast CEO Brian Roberts should pay attention.

Verizon (VZ) was boring like a telco usually is but offered a compelling case for a continuing acceleration in its growth rate. It frustrates me that investors prefer the much slower growing but accelerating VZ to the much faster growing but decelerating Comcast especially when Comcast is gaining 5-10 telephone customers for every cable subscriber it loses. Nevertheless, no reason to hold that against VZ shares which I think will remain a good investment.

Posted by Steve Birenberg at 09:46 AM | Comments (0)

November 21, 2007

Holiday DVD Sales Could Disappoint Investors

A significant risk for fourth-quarter earnings for the major entertainment conglomerates is an extremely crowded DVD release schedule. The risk is heightened by generally weak DVD sales for the past 18 months.

Early indications from the launch of several blockbuster movie titles are not promising, so investors should keep an eye on Disney (DIS) , DreamWorks Animation (DWA) , News Corp. (NWS) , Time Warner (TWX) and Viacom (VIA) for possible trouble.

DVD sales are critically important to the major movie studios. I have seen several analyst models in which the operating margin on DVD revenue is projected at more than 40%. Even for companies the size of Disney or Time Warner, the numbers are meaningful.

For example, a title such as Ratatouille might sell 25 million DVDs worldwide in its first release. At a wholesale price of $15, total revenue could be $375 million, and operating income could be north of $150 million. During the December quarter alone, Disney might sell 18 million units, generating operating income of over $100 million, which represents over 5% of projected operating income for the quarter.

During this holiday season, there are 16 movie titles set for DVD release that grossed over $100 million at the domestic box office. Several mega hits are for sale, including Ratatouille, Pirates 3, Shrek 3, Transformers, Spiderman 3 and Harry Potter 5. Crowding out is a definite risk, but it would not be so worrisome if DVD sales as a category were not already weak. According to Jessica Reif of Merrill Lynch, year-to-date DVD sales are down midsingle digits, the second consecutive year of flat to negative growth.

DVD sales peaked in 2005-2006 as penetration of DVD players into U.S. households reached saturation. For many years, DVD sales boomed, riding the wave of more players in more homes and the building of personal DVD libraries. A huge number of releases, including TV shows and movie catalogues, also boosted consumer interest and demand.

Growth ground to a halt as penetration of DVD players rose and early adopters finished building their initial libraries. Late adopters of DVD players naturally bought fewer DVDs. Adding to current sluggish sales trends is confusion over next-generation DVD technology (HD or Blu-ray) and initial developments in digital downloads.

Several Web sites track DVD sales and releases, including and According to sales data from early holiday season releases, the outlook for the rest of the quarter looks mixed.

Transformers (Viacom) got things off to a good start, selling over 8 million units so far, including a debut week of more than 5 million. Sales were not nearly so strong for Spider-Man 3 (Sony) or Shrek 3 (DreamWorks Animation). Spider-Man sold 2.4 million in its opening week and is at 3.4 million after two weeks in release. Ratatouille was the next major release, and it sold over 3.8 million units in its first week, a level variously described in trade publications as "very strong" and "as expected."

Shrek 3 was just released last week, so early sales have not been formally reported, but according to an article on, sales are close to the Spider-Man level. This would translate to a disappointing quarter unless sales pick up considerably, given analyst estimates for 15 million to 20 million units.

Here is a brief look at the outlook for major studios this holiday season. Keep in mind that the holiday season is just starting, so it might be early to draw conclusions. Nonetheless, there is reason to be nervous based on early trends....

....Disney has three key films: Ratatouille, Pirates 3 and High School Musical 2. As mentioned, Ratatouille appears to be off to a good start in the U.S., but keep in mind that an unusually high two-thirds of the worldwide box office will have been generated overseas. High School Musical 2 is unlikely to have problems, so keep an eye on Pirates 3, especially in light of sluggish sales so far for the other $300 million grossing "threequels" released in May.

DreamWorks Animation has everything riding on Shrek 3. Initial indications of first-week sales are disappointing. With Bee Movie tracking well below most box-office estimates, it is not surprising that DWA shares have fallen 15% this month and are trading close to their August low.

News Corp. released Live Free or Die Hard this week, but the big action will come the week before Christmas when The Simpsons Movie goes on sale. The Dec. 18 release date positions the film as the perfect last-minute shopping gift. It is sure to get prime shelf space and plenty of advertising support, because the other blockbusters will have been in stores for one to six weeks.

Time Warner has already had a good year in home video thanks to 300, which sold over 8 million, and Happy Feet, with over 9 million units. The big holiday release is Harry Potter 5 on Dec. 11. For an upside, keep an eye on Hairspray, due in stores on Dec. 11. The film is getting a big push for a Best Picture nomination, it performed well in theaters, and its status as a remake of a popular musical gives it a built-in audience.

Viacom is already in good shape for the December quarter thanks to Transformers, which kicked off the DVD selling season in late October and has sold over 8 million units so far.

Posted by Steve Birenberg at 12:22 PM | Comments (0)

June 08, 2007

Advertising Growth Remains Below Par

According to, advertising spending in the first quarter fell by 0.3% excluding paid search. The data is from a study by TNS Media Intelligence. With GDP growth in the low to mid single digits, historical correlations would suggest that advertising growth should have been closer to 3-5%. Part of the problem was a tough comparison to 1Q06 when Winter Olympics spending added to the total. TNS thinks that adjusting for the Olympics ad spending grew just over 2%, still a weak performance that indicates traditional advertising is losing market share to online advertising. TNS believes that major advertisers have also been spending cautiously given slower economic growth and concerns about the health of consumer spending. An interesting aspect of the study is that for the first time in several years growth in advertising outside of the top 100 advertisers was flat. These smaller advertisers had been picking up the slack and driving overall growth above the rate of major advertisers.

TNS also tracks spending by media and by advertiser industry. There are 19 categories of measured media advertising and in 1Q only 6 were up year over year. Outdoor and Spanish TV were up 2-4%, cable TV and consumer magazines rose 6-7%, Spanish magazines were up 14%, and internet ex-paid search was up 17%. Among industries, domestic auto continues to be a major laggard, falling almost 11%. This is especially negative for newspaper which are losing the most market share in auto advertising to the internet. Other industries with notable declines include telecom, foreign auto, and travel and tourism. The only industry mentioned in the Ad Age article that showed an increase was direct response companies.....

The implications of slower than expected growth in advertising are obviously significant for major media companies reliant on advertising for a significant part of their revenue. Economists may also point out that slowing advertising indicates low confidence by corporations in the pace of economic growth and the health of their customers. Bears on the stock market will find comfort in the lack of advertising growth.

If advertising growth fails to pick up, all the major media companies could see pressure on revenue growth and operating margins later this year. Among the media giants, Viacom (VIA) and CBS (CBS) are most exposed to advertising with News Corp (NWS), Disney (DIS), and Time Warner (TWX) having significant but lesser exposure.

Posted by Steve Birenberg at 11:39 AM | Comments (0)

April 23, 2007

Monday Morning Media Madness

Here is your Monday Morning Media Madness:

• On a year over year comparison basis, it was the worst weekend of 2007 for the box office. When all the data is tallied the decline should be a little over 20%. Fortunately, it is usually a small weekend as studios clear their inventory ahead of the launch of the summer on the first weekend in May. Quarter to date, the box office is still running 2.9% behind year ago levels but there is no to worry as May brings the third films in the Spiderman, Shrek, and Pirates of the Caribbean franchises. Speaking of Shrek, the distribution on that film is being handled by the Paramount division of Viacom (VIA). Paramount has now had the #1 film for four consecutive weekends (Disturbia and Blades of Glory) was the #1 film for the second consecutive weekend, continuing much improved performance for the studio. Paramount is only a small part of VIA, less than 10%, but every little but helps.

Clear Channel (CCU) announced the sale of its TV stations for an attractive pre-tax multiple of 14-15X EBITDA. Additional radio station sales were alos announced at a price of around 11 times EBITDA. This news supports the recently upwardly revised offer of $39 from private equity and would have caused a major storm had it been announced prior the offer going up. I don’t think the TV sales will impact the outcome of the shareholder vote in either direction although it probably gives more talking points to those opposed to the deal. I'd still vote yes and be happy to escape with $39 if I were a CCU shareholder, which I am not....

• Friday's Wall Street Journal had an interesting article on how Hollywood studios are looking to Direct-to-DVD releases of film content as a way to boost revenues. Direct-to-DVD has always been part of the Hollywood's distribution but the focus now is on better quality films with dedicated and unique marketing campaigns. There is not a lot of money here as the largest grossing direct-to-DVD film only brought in $150 million range. Only three films have exceeded $100 million in sales and all were animated fare from Disney. Nevertheless, look for live action films in the year ahead which should have decent production quality despite budgets under $10 million.

Comcast (CMCSA/CMCSK) reports Friday. I think investors should be long ahead of the call. I expect above consensus results on most metrics and believe there is a strong possibility that the company will raise guidance. I also think that any increased guidance on subscriber growth will no be accompanied by a meaningful increase in capital spending. In-the-money options such as the May $25s or the May $27.50s would be a good play if Comcast produces the good quarter I expect.

Posted by Steve Birenberg at 09:17 AM | Comments (0)

April 19, 2007

Mid-Week Media Madness

Time for a little mid-week Media Madness:

• It appears that David Poland and I aren't the only voices proclaiming that "movie theatres are dying" is a flawed thesis. According to this article, long-time media analyst William Kidd of Wedbush Morgan agrees with us. Bill's report agrees with my thesis that most of the problem in 2005 was bad movies. Bill makes the additional point that trends in 2005's lousy box office were consistent in the US and abroad even though international markets are much less impacted by home theatres and other alternative entertainment options. I have not read Bill's report but one thing not mention in the article is the fact that 2005 faced the unique, likely unrepeatable $370 million box office of Passion of the Christ. Passion account for almost 4% of the total domestic box office in 2004. I have no way of proving it but I think it is fair to say that a significant portion of the Passion ticket sales would not have been made on any other movies released that year. This analyst recommends Regal Entertainment (RGC), a long position in Northlake accounts for over a year, as the best play on the renewed box office strength....

Clear Channel has received a sweetened bid from its private equity suitors in an attempt to bribe enough shareholders to vote in favor the merger. The new bid is $39, up $.140 over the original bid. I don’t know if it will be enough but I stand by my opinion that shareholders will be very unhappy if the deal fails and the private equity firms walk away. $39 will seem awfully good when CCU is trading at $32 later this year.

• The Wall Street Journal speculated yesterday that Time Warner (TWX) was going to aggressively divest itself of its 84% ownership of Time Warner Cable (TWC). The spin in the article and on CNBC was that TWX management is souring on the cable business do to fears that internet browser based TV is a looming threat to the business model. I call bullshit. The rumored split, if accurate, is because the content and cable businesses within TWX have different financial characteristics. One is a high growth, high capital intensity business, while the other is a moderate growth, low capital intensity business. Keeping them under one roof complicates capital allocation decisions potentially to the detriment of both entities. I think that one of the reasons for buying Adelphia in concert with Comcast (CMCSA/CMCSK) was recognition that the entire cable could be restructured in preparation for a more complete separation. The Adelphia deal was a good way to create the TWC currency and ease the way toward breaking apart two businesses that are incompatible from a corporate financing viewpoint. But let the spinmeisters keep dissing cable. When CMCSA and TWC are making new highs later this year, the cable bulls will get the last laugh.

Posted by Steve Birenberg at 09:22 AM | Comments (0)

April 16, 2007

Monday Morning Media Madness

Here is your Monday Morning Media Madness for April 16, 2007:

• A tough comparison against a $40 million opening for Scary Movie 4 pulled the box office down 5% this past weekend. The weak comparison does little to year-to-date comparisons which remain up 6%. With the a very strong release schedule for the summer season set to kick off in early May, comparisons are likely to improve. In fact, this could end of being one of the best years ever. With the big movies this year yet to come, the box office is already running at an all-time best pace and is up vs. any year in the past five. This should be good news for Regal Entertainment (RGC) which has produced a total return of 19% in the past year. RGC shares have already recouped about $1.30 of the $2 special dividend they went ex-dividend in late March and the shares till have a 5.7% current yield. A target of $23-24 over the next couple of months is realistic.
Comcast (CMCSA/CMCSK) is buying movie ticket selling site Fandango. Fandango will continue to exist as is and will also be the core of a new entertainment site called Fancast. Fandanago and Fancast should both benefit from more than 11 million broadband subscribers that buy broadband internet access from Comcast, 70% of whom use as their home page. Comcast is developing a sizable internet advertising business that has thus far gone largely unnoticed on Wall Street. According to a recent article in the Wall Street Journal, solely from its relationship with Google (GOOG), which provides search for, Comcast is receiving about $70 million in revenue. This deal is due to be renegotiated this year and Comcast could see a significant boost in its revenue. The Fandango deal may get investors to notice the rapidly growing internet advertising business buried within Comcast. This is just another positive in a bullish story for Comcast over the next couple of years....

• Going back to the movie business, movie critic and industry observer David Poland, who is an occasional guest on CNBC, wrote a piece this weekend on The Hot Button arguing that the movie business is looking much better on a secular basis for the major studios. His thesis has to do with the difficulty of smaller studios gaining distribution for their movies while the cost of producing and marketing a movie continues to rise. Poland has been one of the few voices who did not buy in the gloom and doom brought about the poor 2005 box office performance. I agreed with Dave as we both noted that the problem in 2005 was just some bad movies and a comparison against Passion of the Christ, a once in a lifetime niche film that grossed almost $400 million.

Posted by Steve Birenberg at 09:33 AM | Comments (0)

April 02, 2007

Monday Morning Media Madness

Here is your Monday Morning Media Madness in honor of tonight's final game of March Madness.

• Is anyone else bored by the prospect of another national title game between Buckeyes and Gators? Probably not CBS (CBS) which is enjoying a good year in ratings for the hoops tourney, up 2% vs. a year ago. Two national powers rated in the to 4 all year should bring in another night of good ratings. I'll still be watching 24.
• The weekend box office slumped more than 10% vs. a year ago as OK openings for Blades of Glory and Meet The Robinsons had no change against the $68 million opening for Ice Age II> a year ago. For the sake of comparison, that $68 million is on par with Pixar's latest release Cars which debuted last summer. Disney (DIS) probably won’t be too worried about Meet The Robinsons as it didn’t bomb and it is the final animated picture that was pretty much completely done prior to the Pixar acquisition. The next picture film, Ratatouille is in theatres at the end of the June, a full month following the next film in the Pirates of the Caribbean franchise....

Rogers Communications popped on Friday, probably due to rumors out of Canada concerning BCE (BCE). Speculation surrounds a private equity led buyout of Canada's largest telecommunications company or a merger between BCE and one of Canada's other major wireline and wireless companies, Telus (TU). Either outcome would be positive for RG. A private equity led buyout would challenge foreign ownership rules – RG is the perfect acquisition for Comcast (CMCSA/K), in my opinion. A merger of BCE and TU would eliminate one competitor in the already vibrant Canadian wireless market which is the driver of RG's growth.
• ISS issued a NO recommendation for institutional shareholders last week on the Clear Channel (CCU) buyout. This likely spells doom for the deal. I think CCU goes lower if the deal is voted down but nobody on the street seems too concerned as a higher bid, a new bidder or self help recapitalization is presumed to be waiting in the wings. I think radio multiples ate 11 times EBITDA are way overvalued. Ratings think, advertising growth is poor, and expenses are going up as station owners attempt to fight back. With most of the rest of media between 8 and 10 times EBITDA I think significant multiple compression lies ahead for radio stocks.
• We may hear a final result on the auction of Tribune (TRB) this week. Two bidders exist, offering $33-34 per share. Be careful on the structure of these deals as neither appears to promise full payment of the takeout price in one step. If there is any significant lag or a highly leveraged equity stub left outstanding investors will have to deal with accelerating declines in newspaper advertising as real estate classifieds join autos and help wanted with negative comparisons.
Discovery Communications (DISCA) bought out one of its minority partners paying cash and assets for the 25% stake held by now private Cox Communications. DISCA is a tracking stock with a business singularly focused on cable networks. I have concerns about slowing growth in the cable network business but if the other partner were bought out and the tracking stock structure eliminated I could get interested in DISCA from the long side at the right price. That price is a significantly below current trading levels, however.

Posted by Steve Birenberg at 04:10 PM | Comments (0)

March 29, 2007

Prudential Midwest Media Day 2007

I spent Tuesday at Prudential Securities Midwest Media Day. This is a great conference using a unique format combining very small group discussions with one-on-one meetings. Over the course of the day I met with CBS (CBS), Lee Enterprises (LEE), DreamWorks Animation (DWA), EW Scripps (SSP), Omnicom (OMC), Moody's (MCO), and Disney (DIS). Special thanks to Prudential media analyst Kathy Styponias and my institutional salesperson Michael Callahan for inviting me to the conference. Customer service is a hallmark of both of their efforts.

The only company at the conference that is presently owned broadly in Northlake client accounts is Disney (DIS). Nevertheless, I am positn gthis summary here instead of at Media Talk because broader conclusions about the media environment that impact actual Northlake holdings couldbe drawn.

I did not come away the conference with any new buy or sell ideas. However, I am incrementally more positive on CBS and SSP. I have been bearish on both stocks and don’t feel they are buys but I learned new information that challenges my core long-term bearish thesis on each stock.

On DIS, which I have been long on behalf of Northlake clients for a couple of years, I gained increased confidence in the upcoming March quarter earnings report. DIS is not included in this report but look for a separate note in the next couple of days.

Read on for individual company comments....

CBS: I have been bearish on CBS because of my concern that faltering ratings performance at the CBS Television Network, particularly on Thursday nights, could be the cusp of a multiyear decline in the network's financial performance amounting to hundreds of millions of dollars. In the past the swing from networks going from #1 to #3 or #4 has been of this magnitude. The reason I am less negative about CBS is because the management team of Les Moonves and Fred Reynolds explained to me how the economics of the network business have changed for the better, which should reduce volatility of financial results relative to ratings. There are three factors at work. First, a large portion of the fixed cost base in the form of affiliate compensation has been eliminated (fees that CBS used to pay to local TV stations to bribe them into being a network affiliate). Second, CBS owns 75% of its primetime schedule enabling it to make a lot more money off a successful show. In the old days, all the network received was advertising revenue from an initial showing and a rerun. Now they can earn money on syndication (selling the show to local TV stations and cable networks) and through developing digital distribution channels. Finally, the advent of high def TV is improving the quality of primetime TV, particularly in dramas. The production value of TV is the highest it has ever been which is helping to keep viewers and advertisers interested. I still don’t think CBS is cheap enough to buy but if the shares pulled back 10-15% I am now more inclined to consider it as a buy idea.

SSP: My bearishness on SSP has been linked to concerns that the cable TV network business was maturing rapidly and the premium valuation previously accorded operating income from this segment would contract rapidly. SSP management made a strong case that it can outperform its industry and has new levers to pull to sustain growth. Specifically noted was that $75 million of 2006's $840 in cable network revenues was earned online. This figure grew 50% last year and seems likely to sustain 25-50% growth for several years. Simple math suggests that this revenue stream alone can add 2-4% to the overall segment revenue growth rate making the likelihood of 10% annual operating income growth quite high. HGTV and Food Network have very popular and interactive websites with big traffic numbers. So far management appears to be doing a good job of monetizing the traffic with at least 80% of the revenue considered incremental. A setback in SSP's Interactive segement ( and continued poor performance of the Newspaper segment along with a valuation that is still at a premium to other diversified entertainment conglomerates like DIS keeps me on the sidelines at SSP. All else equal, I'd consider buying the shares in the upper $30s.

LEE: LEE remains an outperformer among newspapers companies due to a sales oriented corporate culture and a small market focus where the broad reach of the paper and associated website can sustain value to advertisers more easily. I don't think the stock can overcome the headwinds facing the newspaper industry however. I think newspapers are headed toward valuations 5-6 times EBITDA. At that level, LEE would be interesting.

MCO: My overwhelming takeaway was that this is purely and simply a macro story. if debt issuance remains in a growth mode then MCO will work again, if not then the story is over until debt issuance resumes growth. For the short-term, in the current environment with fears of a credit contraction paramount, it is hard to see how MCO works. The meeting also reminded me how complicated and diverse the various structures in the bond market have become. this makes me think that there is no real way of knowing how much stress many of these structures can take. I don't fear liability on the part of the rating agencies but rather that deals will unexpectedly blow up and the spillover impact will be credit contraction.

OMC: In blogosphere terms this was a meta discussion. Lots of talk about trends in advertising budgets and lots of talk about digital. OMC pitches the story that their ability to offer any marketing service including advertising, investor relations, public relations, promotion, etc in any medium gives them a competitive advantage in winning and retaining clients. They also think that movement away from TV is beneficial as they go from capturing 10-15% of the client spend to 80-90% in some cases. Costs are correspondingly higher but they said margins were similar. I got the impression that they really think that margins are "at least" equal. In any event, a 10% margin on $10 million is $1 million, while a 10% margin on $80 million is $8 million. On a side note I asked about cinema advertising and found that OMC believes it is a worthwhile medium and a growth business.

DWA: Everything rides on Shrek 3 in the near-term quickly followed by the Bee Movie. Shrek 3 cost around $160 million all in and the marketing spend will be around $150 million. Shrek 2 had an opening weekend of $108 million and a domestic gross of $441 million. International gross was slightly higher. they believe analysts have $300-325 million in their models for domestic box office on Shrek 3. I think anything short of almost $400 million will be bad news for the stock regardless of how it impacts analyst estimates. They also discussed the DVD market. they feel that things have stabilized enough and they learned some lessons on Shrek 2 so that there won't be any screw-ups for Shrek 3. one other interesting item was that in the future all movies be made as 3-D and then turned to 2-D in post production. The theatres are adding thousands of 3-D screens over the next few years so that they can charge a higher price for tickets to these screenings and differentiate from the home theatre experience. Costs are not significantly higher to produce in 3-D and piracy is a lot harder. Finally, we discussed what they will do with the excess cash on the balance sheet. There is really no need to invest in the business or pay down debt. Share buybacks make sense but float is an issue as there are only 50 million shares in the float and 80% is held by the top 15 shareholders. Special dividends were discounted (that was my idea) as setting an expectation bar that couldn't always be met. The bottom line is that DWA should be private or part of a large conglomerate. I have no opinion on the shares at current prices.

Posted by Steve Birenberg at 11:59 AM | Comments (0)

March 26, 2007

More Media Madness

The market had its best week since 2003. The weekend is 75 degrees and sunny in Chicago. Same forecast for today. All the windows are open creating the perfect sleeping weather we all covet. Is all this good news a sign I should make a new buy today? Or does all this good news mean a top is at hand and it is time to sell?

Here is your Monday morning Media Madness:

Tribune (TRB) is reportedly leaning toward accepting a two-step takeover from Sam Zell that will ultimately pay shareholders about $33 per share in cash. Eli Broad and Ron Burkle, who made a similar bid aren’t happy and are asking for the Board for details. This scenario could squeeze another dollar or so for TRB shareholders. There isn’t much more value in TRB but the latest news suggests the stock has minimal downside, a change from last week when the possibility that no deal would exist had the stock headed for a long period in the mid $20s.
Regal Entertainment (RGC) should trade ex-dividend for the $2 special dividend being paid with the proceeds of the National Cinemedia (NCMI) IPO. The current yield on the adjusted price is 6.1%. I think that is too high given current interest rates and strong box office results so far this year and coming up in 2Q. I believe the stock will rebound over $20 easily in the near-term.....

• Speaking of box office, it was another strong weekend with a gain of 25% vs. a year ago. RGC's quarter ends this Thursday and the box office is tracking to be up 7%. I think this is far ahead of current analyst estimates which are stale due to restrictions related to the NCMI IPO. Comparisons toughen for a few weeks before focus shifts to the enormous potential in May when Shrek 3, Spiderman 3, and Pirates 3 all hit theatres.
• Keep on eye on the Vonage (VZ) blow-up from the perspective of the cable industry. My first reaction was to wonder whether the
Verizon (VZ) patents may be applicable to the cable industry. I've asked the question and so far I hear mixed results. In general, the expectation is that the cable companies don’t have to worry about violating VZ's patents. However, one contact indicates that VZ thinks that based on how the judge ruled the cable companies may be in violation. Another thing to keep an eye on is what happens to VON's current customers, who will get the customers that Vonage would have won in next year, and will pricing firm up now that the low price competitor is leaving the market. In general, the answers to these questions are positive for cable as long as they don’t get caught up in VZ's patents.

Posted by Steve Birenberg at 11:13 AM | Comments (0)

March 20, 2007

Media Madness

A few small items in the media world that are cluttering up my desk:

• Last week FCC Chairman Kevin Martin appeared before Congress for the first time since the Democrats took control. The questioning made it very clear that the FCC will face much different Congressional oversight until at least January 2009. Fortunately, the agenda for media companies is not that heavy but pending and rumored mergers are likely to find a much tougher road to approval.
• Martin's testimony revealed that the FCC will consider reestablishing the 30% ownership cap for any multichannel service provider, cable or satellite. This should not create much of an obstacle to further industry consolidation. Presently, a DirecTV-Echostar merger would just barely slide in under the proposed cap. Additionally, either Time Warner Cable (TWC) or Comcast (CMCSA/K) could acquire Cablevision (CVC).
• According to a Reuters article, 40% of all sub prime loans were made to Hispanics. There are already some signs that Hispanic advertising growth is slowing from its historical rate. I wonder how much Hispanic radio and TV advertising was from sub prime lenders. I also wonder if the sub prime meltdown could cause damage specifically to the Hispanic economy that could impact general advertising trends to the important population. Negative implications might exist for Spanish Broadcasting (SBSA) and Entravision (EVC).....

• As theatres upgrade to digital projection, expect a big expansion in 3-D enabled screens. I read an article that said currently there are 700 3-D enable theatres and that number is expected to grow to 6,000 to 8,000 by 2009. The upcoming Disney (DIS) release Meet The Robinsons will get a lot of 3-D distribution which is being supported by Disney's marketing campaign. More 3-D films is a benefit for theatre operators like Regal Entertainment (RGC) as 3-D is not presently replicable in a home theater.
• The box office was up 3.3% this past weekend according to Year to date the box office is up 4.2%. RGC's 1Q07 includes the final weekend of 2006 and wraps a week from Thursday. On this basis, the box office is up over 5% so far this quarter. Comparisons toughen considerably in April but investors will look ahead to the guaranteed record breaking May when the third films in the Shrek, Spiderman and Pirates of the Caribbean franchises hit theatres.
• Speaking of Pirates, the theatrical trailer for the Pirates of the Caribbean: At World's End had its world premiere Monday night on Here is a link.

Posted by Steve Birenberg at 10:13 AM | Comments (0)

December 08, 2006

UBS Media Conference 2006

Every year I attend the UBS Media Conference in NY to get a face-to-face update with many companies in the media industry. My goals are to find new ideas for client accounts, gain a better understanding of major industry trends, and connect with other money managers focused on the media sector. Below is a lengthy providing one paragraph summaries of all the presentations I saw during my four days in NY.

Overview and 2007 Advertising Forecasts

Sir Martin Sorrell, CEO of WPP Group noted is his keynote presentation at the 34th Annual UBS Global Media & Communications Conference that "if you compete on price, you create commodities, not brands." Usually we think of price competition on products and services purchased by end users. However, Sorrell made his comment in the context of a discussion of what is going on in the global economy for all things advertising related.

I think what Sorrell was getting at is that changes in media consumption due to digital technologies will be tricky to navigate. On the one hand, the digital technologies are opening new avenues for consumption of content supported by advertising. On the other hand, these same digital technologies could serve to depress profitability across all advertising-related industries because there is a major risk that the transition to digital/broadband delivery of content could depress pricing on the content, and in turn, the advertising.

The first day of the UBS conference was largely devoted to advertising forecasts and big picture, meta thinking about the future of the global media industries. I'd classify the news as mixed. 2007 advertising forecasts revealed by Universal McCann and Zenith Optimedia called for U.S. growth of 4.8% and 4.1%, respectively, and international growth of around 6%. International growth is boosted by continued double digit growth in many emerging markets with Central and Eastern Europe and Asia being the strongest geographies.

These growth rates overstate the outlook for traditional media as they include another year of 20% plus growth in internet advertising. Internet is contributing about 2% of the growth rate, leaving traditional media advertising growth at just 3-4%, or about inline with real GDP growth rates. Historically, advertising has been a considered a cyclical growth industry because it tracked nominal GDP growth. The loss of pricing power that Sir Martin noted in his comments reflects the new reality.

It is not pricing alone that is causing problems for traditional ad supported media. Newspapers, magazines, radio, and TV are all losing time spent using to alternative forms of entertainment including the internet. In fact, a study noted by Zenith Optimedia CEO Steve King concluded that the internet now represented 22% of our media consumption but just 7% of the total advertising pie. The cost to reach consumers on the internet is far lower than in traditional media so even if media companies can keep the lion's share of their users as the online transition continues, prices and profitability could compress.

Fortunately, this viewpoint is readily accepted by investors, analysts, and the companies themselves. Consequently, the upside is that most companies and industries are fighting back and are willing to risk new trying new distribution methods to reach consumers. Furthermore, when perception becomes reality and conventional wisdom, stock prices ought to reflect the news. In other words, whether it is the depressed stock prices of local media such as newspapers and radio or the outperforming prices of the big entertainment conglomerates and multichannel TV distributors, it is probably fair to say that the stocks reflect the tricky fundamental environment. This leaves it to investors to find opportunities where companies are meeting the challenges and thriving.

With that in mind, here are a few observations on other presentations I attended during the conference which ran from December 4th through December 7th.....

Monday, December 4th

Modern Times Group (MTG) is a Swedish company with leading free and pay TV positions in Scandinavia, Central and Eastern Europe (CEE), and Russia. There is no US listing for the shares. However, the company's commentary was very constructive for other companies operating in these regions including Central European Media Enterprises (CETV) and CTC Media (CTCM). News Corp (NWS) also has a growing presence in CEE markets.

My interest in CETV, long my favorite stock, always has me listening for commentary on CEE media markets. I believe I can state objectively that this conference represents the mainstreaming of the CEE opportunity. King of Zenith Optimedia, Sorrell of WPP, and Peter Chernin of News Corp all highlighted the CEE opportunity, often multiple times. King was unusually enthusiastic, noting that 15% 2007 advertising growth in this region was the highlight of Zenith's 2007 forecast. If my assessment is correct, it bodes very well for shares of CETV.

Additionally, MTG responded to several questions about their #2 station in the Czech Republic by noting that the would follow CETV's lead and attempt to raise TV advertising prices by 10-15% in 2007. CETV remains my #1 pick in all of media with 20% revenue growth and margin expansion driving margin expansion and a $90-100 target on the shares.

I would also recommend investors add to positions in NWS. Chernin and UBS Media analyst held a "fireside chat" that supported the bullish estimates and sentiment surrounding NWS. I've done very well with Disney (DIS) by riding the synchronized growth of the media networks, theme parks, and filmed entertainment that had led to a multiyear run of double digit EBOTDA growth. NWS is about to embark on its own multiyear run of double digit growth starting with guidance for 14-16% growth in 2007. NWS is benefiting from synchronized growth in its US and international cable networks, Sky Italia, digital and broadband efforts led by MySpace, and emerging markets exposure in CEE, India, and Asia. A massive share buyback triggered by the swap of NWS's Direct TV stake with Liberty Capital (LCAPA) would be icing on the cake.

One other company that impressed me was NII Holdings (NIHD). NIHD is not a media company. It is a leading provider of mobile phone services in Brazil, Argentina, Peru, and Mexico. This was my first exposure to the company and I was very impressed by the corporate strategy, execution, and CEO Steve Shindler. The stock looks expensive at 12-13 times EBITDA but the company has a 3 year growth record of 34% in subscribers, 34% in revenue, and 40% in EBITDA. And Shindler noted numerous times that growth is poised to accelerate in Brazil and Mexico. Additionally, free cash flow should surge as the company completes the expansion of footprint across all of Mexico in mid-2007. I have more work to do but this might be a case of you get what you pay for. Being new to this stock, I'd welcome any input form contributors or subscribers.

Tuesday, December 5th

New Media Economics Panel: This panel discussion attempted to explain the economics of ad supported content distribution on the internet focusing on video content that would be supplied by traditional suppliers like Disney, News Corp, Time Warner, and others. There were two conclusions. First, subscription based models would not likely produce enough revenue create profitable models especially considering the potential that online video might replace traditional viewing on TV. The reason for this conclusion is that a historical look at quadruple play household spending in the US shows stability indicating the consumer is not willing to allocate a larger portion of the monthly budget for subscription based video. Second, advertising supported models will work but current projections calling for a multi billion revenue stream from ads preceding "free" online TV shows would take longer to develop than currently forecast. The panel laid out a series of required advertising infrastructure such a critical mass of unique users and uniform technological standards and concluded that the infrastructure wasn't anywhere near ready. If the panel is correct the recent more positive sentiment toward the big entertainment conglomerates may be overly optimistic.

Evolution of Monetization Panel: This panel consisted of a half dozen start-ups that are trying to improve ad buying efficiency using internet tools. The presenters focused on everything form ad creation through ad placement. Much of the commentary went over my head but there was one interesting moment. UBS Internet Ben Schachter analyst asked the panelists to raise their hands if they were worried about Microsoft as a competitor. Two hands went up. Schachter then asked about Yahoo. Three hands went up. Finally, Schachter asked about Google. All six hands went up. My takeaway was that Google's strategic plan appears to be reaching the entire advertising economy from end-to-end.

Sundance Channel: Larry Aidem, President and CEO of the Sundance Channel, provided an overview of the company's strategy. Sundance is primarily a movie channel featuring independently produced and financed films. Sundance is privately held with ownership spilt among NBC, CBS, and Robert Redford. The channel appears in premium tiers of Dish and DirecTV and on digital tiers of cable operators. The present subscriber base is 25 million. Another 9 million subscribers have access to Sundance via a VOD channel. Like many cable channels, Sundance is trying to increase its originally produced content. Sundance is also looking to increase its sponsorship revenue. Presently, the channel sells no traditional commercial time. The promotion model is similar to what you see on local publlc TV channels. Sundance appears to be a valuable niche asset for NBC and CBS and either would likely want to add the channel to its stable of cable of networks. However, Redford doesn't sound like a seller. Sundance's value comes from the fact that it has 70% brand awareness (likely due to the success of the Sundance Film Fesitival) in the U.S. and its viewership is affluent. Given its status as a private company, there is no direct investment takeaway from the Sundance presentation. However, the presentation does reinforce the desire of many newer channels to be very niche oriented. Additionally, Sundance is another reminder that cable networks face increasing program costs as the growth in affiliate fees is moderating.

JC Decaux: This French company is one of the world's leading outdoor advertising companies with unusually large exposure to street furniture and transportation (buses, airports). I attended to learn more about the outdoor advertising market, which is one part of traditional advertising I know least. The presentation noted that worldwide outdoor advertising growth is around 7% and stable, far better than most other traditional media. Outdoor's competitive advantage is that people are more mobile allowing outdoor ads to reach consumers who are fragmenting time spent with other traditional media. There seems to be plenty of room to grow as outdoor represents just 5% of total worldwide advertising market and the three major players, Clear Channel, JC Decaux, and CBS, have market shares of just 12%, 10%, and 9%, respectively. JC Decaux indicated very firmly that it would bid for Clear Channel Outdoor (CCO), if the new private equity firms are sellers. This presentation was bullish for CBS and Lamar Advertising (LAMR).

Cable Networks: David Zaslav, currently in charge of NBC Universal's cable networks but on his way to become CEO of Discovery Communications discussed broad trends in the cable network industry. This was the first presentation I have seen which acknowledged this formerly double digit growth engine for entertainment companies was maturing. Industry revenues have been driven by subscriber growth, affiliate fee inflation, ratings growth, and CPM growth. Zaslav indicated that each of these revenue streams was slowing to low mid single digits. Offsetting positives are greater inventory sellout ratios and development of ancillary revenue streams such as VOD and online. International efforts are also beginning to mature. However, digital initiatives come with added costs and protecting current networks requires a greater investment in programming. Realization that cable networks are now an upper single digit growth business is a negative for Disney, Time Warner, News Corp, Viacom, and EW Scripps. However, I'd still much rather be a cable networks company than a newspaper, radio, or broadcast TV company.

Rogers Communications (RG): RG is the largest wireless company in Canada with a 37% market share. RG is also the largest cable company with a 29% share. For comparison, Verizon and Cingular each have about 25% of the US wireless market and Comcast has about 44% of US cable subscribers, but less than 30% of total multichannel TV subscribers. RG has been growing rapidly. Wireless in Canada is closely tracking the US adoption curve but got started several years later. Penetration is just 54% and is likely to growth by 5% per year for several more years. RG is unusually well positioned as it operates the only GSM network in Canada. RG's cable business is closely paralleling the strong growth in US cable with a mix heavier in high speed data but much lower in VOIP telephony. I was very impressed by this presentation, as I expected to be. I plan to buy RG on a modest pullback and may decide not to wait.

Grupo Televisa (TV): I have written favorably about TV before and deeply regret not having bought the shares despite my bullish outlook. TV dominates Mexican TV with its four channels garnering a steady low 70% share for many years. The company also supplies its TV content all over the world including as the dominant supplier to Univision. Over half of TV's revenue and EBITDA comes from TV Broadcasting, while an additional 20% comes from Sky Mexico, a satellite platform comparable to DirecTV. These core businesses should continue to drive solid double digit growth and margin expansion after a lull in 2007 when growth will be held back by the 2006 boomlet driven by the World Cup and Mexico's Presidential election. Promising new growth initiatives include 40% ownership of a new free-to-air TV channel in Spain and launch of a gambling business in Mexico encompassing bingo parlors, sports betting a second national lottery. The next time emerging markets sell-off and drag TV shares down, I plan to take a long-term position in this very high quality company. I hope that the shares won’t have moved up too much more before that happens. Take a look at a chart of the stock form last May and June to give yourself an idea of what might happen.

Disney (DIS): DIS shares hit a new 52 week high yesterday following comments by CFO Tom Staggs at the UBS and Credit Suisse conferences. While still cautioning investors that there are many headwinds for FY07 ending September, Staggs offered plenty of positive comments that increased investor confidence in the outlook for another year of double digit growth. Notable positive comments included (1) DVD sales of Cars are tracking equal to The Incredibles, (2) the ad market for ABC and ESPN is solid but not spectacular, and (3) the current quarter attendance and hotel occupancy at the domestic theme parks is holding up well against the toughest comparison of the year. Tough comps, loss of tax benefits, Pixar dilution, and other factors still present a growth challenge in 2007 for DIS, especially on the EPS line. However, on the operating income line, the outlook appears to be firming assuming the economy holds together. DIS also gets a boost from the weak dollar which helps foreign travel to the US parks. I remain long DIS and added positions in new accounts in the last two weeks.

Wednesday, December 6th

Verizon Communications: I sat it in on the VZ presentation to get an update on its FiOS deployment, the rebuild of its twisted pair copper network with fiber to the home. Despite the heavy dilution from FiOS, I think it is the correct strategy if VZ if going to hope to remain competitive with the cable industry in providing broadband and telephony to the home. While cable companies dispute VZ's statements, VZ claims it has achieved 14% penetration where it has rolled out FiOS. With a 2010 target of 6-7 million customer households, FiOS will begin to bite the cable industry in a few years. However, I think cable remains in a very strong position for 2007. Regarding VZ shares, broadband, business, and wireless are nice growth engines but investors have low confidence in VZ's forecast that FiOS dilution will peak in 1Q07. Were that to change or if additional dilution were the results of substantially greater than expected subscriber growth, VZ shares would likely be good performers again.

AT&T: T has shown great earnings growth as a result of synergies achieved in a series of mergers including Cingular/AT&T Wireless and SBC/T. The next big deal is the BellSouth merger which is stuck at the FCC. Assuming the deal closes, merger savings and additional cost cutting will drive earnings and likely lead T shares higher. However, I think T is making a big mistake by using a fiber to the node instead of fiber to the home strategy. T will have an inferior product and will not garner the massive cost savings from an all-fiber network. I think the decision to go fiber to the home will ultimately lead to the acquisition of Dish Network. Synergies won't be as high in that merger. T shares offer nice upside if the BLS deal is approved but I won’t be along for the ride because of my view that in the long-term the company will be in a weak competitive position.

Economics of Film: I sat in on a fascinating panel discussing the recent trend for movies to be financed by hedge funds. A representative from Creative Arts Agency and another firm that helps to validate the deals explained the history of film financing, how the current deals are structured, and why the financing of films is changing. Basically, the idea is to use capital markets theory so that film financing drives a more efficient production and marketing process for movies. Presumably, returns will be more stable, benefiting all parties. I suspect this won’t work in the long run because too much money will flood into film financing and investors will gradually reduce the hurdle rates for deals. Ultimately, it will produce a bubble in production much like Wall Street IPOs produce bubbles in other industries. That said, for movie studios, the new financing strategy might make their results more predictable as they trade upside for predictability and effectively become marketers and distributors while leaving equity mostly in the hands of the financiers. The exception to this would be when a studio owns its own intellectual property (Pirates of the Caribbean for Disney is a great example) or proactively decides it wants to develop the intellectual property. No immediate investment ramifications from this panel but if the new financing strategies actually improve the predictability and stability of the studio's filmed entertainment businesses, a higher multiple could be awarded to this operating income.

Time Warner (TWX): Jeffery Bewkes held a bullish fireside chat with UBS Media analyst Aryeh Bourkoff in front of a full ballroom. Bewkes is normally a good speaker but I thought he showed an unusually high level of self-confidence. I mentioned this fact to several big-time buysiders in the media world who all agreed with my assessment. I think this is actionable as it indicates TWX is going to report a strong fourth quarter and provide solid 2007 guidance. Notable among Bewkes comments were: (1) AOL's advertisng business is performing very strongly in 4Q, likely showing another quarter of 40% plus growth, (2) the recent trend of slower than expected VOIP telephony adds at Time Warner Cable is likely to reverse, and (3) there is no margin pressure in 2007 in almost all of TWX's businesses. If my feeling on 4Q06 and 2007 guidance proves accurate, I think TWX shares could trade up to $22-24 over the next few months. This is a more bullish outlook than I had previously expected and is largely the result of an unexpected highly positive vibe emanating from AOL. I totally whiffed on AOL so far, expecting the new strategy to fail.

NTL Incorporated (NTLI): NTLI announced before its presentation that it would be dropping its pursuit of ITV. Surprisingly, this did not result in a pop for the stock. I think the reason why is that in its attempts to explain to investors why the ITV was a good idea, the company endorsed the bear case that the competitive environment in the UK creates a headwind that even the Virgin rebranding and execution of merger synergies and NTL operational upgrades will not be able to overcome. Furthermore, in response to a question, management said that it "had better opportunities" than to buyback stock. Given that the company was willing to massively increase leverage to buy ITV but is not willing to increase leverage to buyback stock, a poor signal was sent. All that said, If NTLI shares traded lower ahead of the expected improvement in operational and financial metrics in 2007, valuation could get attractive enough to entice me back into the shares.

Liberty Global (LBTYA/LBTYK): Liberty is a large international cable operator with 13 million customers in 17 countries. Run rate revenues and EBITDA are $6.3 billion and $2.3 billion, respectively. The company is most focused on Europe but has significant exposure in Latin America and Japan. Recently, the company has been selling and buying cable assets which has mostly shifted its asset base in favor of higher growth markets, particularly in Central and Eastern Europe. An astute investor asked why the company wasn't growing faster (11% revenue, 15% EBITDA last quarter) given its heavy capital spending (almost twice as high as a percent of sales than US cable companies). The gist of the question was that Liberty wasn't earning a good return on its spending, while foregoing free cash flow that could be returned to shareholders. Management effectively responded by noting that today's heavy spending was extending the double digit growth profile many years into the future. Management also noted that despite the heavy spending and lack of free cash flow it was in the process of completing its third dutch auction share repurchase this year without pushing debt levels anywhere near the danger zone. I think management won the argument and have no intention of selling the shares I have owned in my personal account for many years. I guess that is a recommendation to buy the shares at current prices.

Charter Communications (CHTR): Aryeh Bourkoff introduced CHTR by noting that based on the massive dollars in private equity, CHTR's lousy balance sheet with a 9:1 ratio of debt to EBITDA was obviously the envy of companies everywhere. Given that cable stocks trade at less than 9 times EBITDA, I still see CHTR equity as effectively worthless. However, the CHTR shares have tripled and yesterday Aryeh raised his target to $4.50 while another analyst launched coverage with a $4.50 target. I see four reasons why CHTR shares have been rising and each could justify the new targets. First, restructuring of debt has pushed maturities out several years dramatically increasing the time value of CHTR's optionality. Second, a strong high yield market might be opening opportunities for further debt restructuring. Third, the sharp rise in value of Comcast shares has increased subscriber values to the point that CHTR's equity might have actual, not theoretical value, at current valuations. If that is the case each move up in Comcast increases the value of CHTR's tiny equity value geometrically. Fourth, the pending creation of a publicly traded Time Warner Cable that is likely to acquisitive, along with Comcast's willingness to expand its footprint, suggests that CHTR has greater options to fix its balance sheet through assets sales should it so desire. I like cable and I don’t mind leverage but I'll settle for Liberty Global and Comcast where upside exists but the risk profile is much lower. CHTR is just a bit too aggressive for me.

Thursday, December 7th

Mark Cuban, HD Net: Mark believes that TV will continue to dominate video delivery. His rationale is as follow. First, he sees HDTV's on the same price performance curve as PCs' meaning that the more and more households will have HD capabilities over the next few years. Second, all the studies show that once consumers have HD, their viewing habits change in that they immediately seek out HD channels at the expense of analog channels. Third, there are bottlenecks in the broadband networks that will prevent massive downloading of HD video programming. The files are just too big. Fourth, put the first three factors together and viewers will not be satisfied with the experience of watching TV on their PCs or in analog form if an iTV device does allow transfer of files on the PC to the TV. Cuban's view is bullish for multichannel TV providers such as Comcast and DirecTV. As usual Cuban addressed lots of other topics including his view that Google should not have bought YouTube, his bullish trading call on Yahoo for 2007, and the massive contracts filling up the roster of the NY Knicks.

Insight Communications: Insight is a private cable company, 50% owned by Carlyle and 50% owned by Comcast. Insight is the 8th largest cable operator in the U.S. with 1.4 million customer relationships in Indiana, Illinois, and Ohio. I sat in on this presentation to get a sense for what Comcast's intentions are toward Insight. Insight CEO Michael Willner pretty much admitted that the company would not exist in its current form within two to three years. Both sides are currently allowed to trigger an event that would rationalize the ownership structure. Despite lots of prodding from UBS Media analyst Aryeh Bourkoff, Willner refused to say whether a transaction was imminent. One other takeaway form this presentation is that the triple play bundle of TV, broadband, and phone works just fine in small and mid-size markets where population densities are lower and satellite TV penetration is higher. I'd expect Comcast to own 100% of Insight soon but don’t see it as something that will move Comcast shares.

Mediacom Communications (MCCC): MCCC is a smaller cable operator passing 2.8 million homes, mostly in markets sized from 50-100. MCCC is heavily leveraged. The company is producing double digit revenue and EBITDA growth but its growth rates significantly lag the industry. This is likely due to stiff competition from satellite companies in the smaller markets the company serves. I see little upside in MCCC shares because of relatively weak operating momentum and lack of free cash flow to pay down debt. Additionally, the resolution of MCCC's dispute with Sinclair Broadcasting (SBGI) over retransmissions fees will pressure margins next year as programming expenses, already at a premium to other larger cable operators, rise further. If I were interested in a highly leveraged play on cable, I'd go with Charter Communications.

Craigslist: Jim Buckmaster, CEO of Craigslist, gave a very interesting presentation in Q&A format with UBS Internet analyst Ben Schachter. Buckmaster stated that Craigslist puts the needs and wants of its users ahead of corporate goals. Craigslist is more interested in doing what it views is good for society than in maximizing profits. While this viewpoint was met with snickers and laughter by the audience, it was also clear that the company is growing rapidly and producing plenty of profits. Overall, I found the discussion refreshing as it led me to question conventional wisdom. As an investor, I found the discussion troubling for newspaper companies, whose classified ads are under direct attack by Craigslist. Growth at Craigslist could also limit the opportunity for Yahoo, Google, and other internet companies to capitalize on the local classified business.

Comcast (CMCSK/CMCSA): Comcast made a bullish presentation emphasizing its "accelerating revenue and operating cash flow growth." The gist of the presentation was that for the next few years, the trends driving this year's mid-teens growth are likely to remain in place. Furthermore, no significant rebuild of the networks is required to drive growth residential growth at least through 2007 and probably 2008. Capital spending will rise as more and more customers take the triple play but the returns on this variable, success based spending are very high, Comcast says north of 30%. There will also be a boost in capital spending of up to $250 million in 2007 as Comcast prepares to more aggressively enter the small and mid size business market. Expect to hear more about this opportunity in the next few months when it is positioned as almost as large as the current residential business with the ability to drive growth in 2008 and beyond. Comcast was trading at $26 at the 2005 conference when I was a lonely bull. I am a lot less comfortable with the shares at $42 and the bull side of the trade very crowded with portfolio managers and analysts. Howeve,r I think Comcast's operating results will surprise to the upside in 4Q06 and estiatmes for 2007 will head higher. This should be enough to drive the shares toward new analyst targets in the upper $40s. That is enough to keep me bullish on the shares.

I hope you enjoyed my coverage of the conference. I want to thank UBS and their analyst team, including Aryeh Bourkoff (media), Ben Schachter (internet), John Holdulik (telecom), Brian Shipman (publishing), and Matthieu Coppet (media strategy) for putting on another fine conference and welcoming Northlake Capital Management.

Posted by Steve Birenberg at 11:47 AM | Comments (0)

December 01, 2006

Bud Latest Company To Shift Advertising Mix

Advertising Age is reporting that Anhueser-Busch (BUD) "2007 media plans call for significant increases in marketing spending." However, not surprisingly, the company plans to shift its mix in favor of digital advertising. This is good news for internet advertising driven stocks, most likely those with strong positions in branded advertising such as Yahoo (YHOO). On the flip side, the losers appear to the broadcast television networks.

BUD's Chief Financial Officer, Randy Baker, told an investor meeting that the total advertising spend was going to rise significantly but the mix of media purchased would change "to reflect the viewing habits of our consumers." Baker noted two key mix shifts. First, more money will be spent on cable TV networks and less on broadcast TV networks. Since Baker noted that BUD's massive spending on sports would unaffected, this implies that prime time network TV would bear the brunt of the mix shift. ABC is owned by Disney (DIS), CBS is owned by CBS Corporation (CBS), FOX is owned by News Corp (NWSA), and NBC is owned by General Electric (GE). Fortunately, DIS, FOX, and GE also own a broad array of cable networks so the loss at the broadcast networks will be softened. CBS has extremely limited exposure to cable networks. The numbers here aren’t huge, BUD spent under $300 million on network TV in 2005, but given the high operating leverage in the network TV business, this is still a meaningful shift.....

The second shift is from traditional media to internet. This is old news. BUD made its intentions clear several months ago, while other large TV advertisers like Procter and Gamble (PG) have announced similar moves. In this case, only NWS through MySpace has any real hope of recapturing lost network TV dollars.

Yesterday, I discussed how advancing technology benefits content producers like DIS, NWS, CBS, GE, and Viacom (VIA). The news out of BUD reminds us that closely related technology changes are also working against these same companies.

I continue to believe that due to the momentum of its major operating businesses DIS is the best positioned entertainment conglomerates. NWS should enjoy a similar syncing of its major operating units beginning in 2007, while also benefiting from MySpace. Consequently, these are top two choices for current investment.

And I you are wondering why BUD feels the need to significantly up its marketing spend, look no further than shipment growth of just 2% for the first three quarters of 2006. #2 and #3 brewers, Coors and Miller are faring no better, with Coors up less than 2% and Miller seeing a 2% decline in shipments. Traditional media may face secular challenges, but apparently they aren’t alone.

Posted by Steve Birenberg at 11:50 AM | Comments (0)

November 30, 2006

Technology Advances Assist Media Growth

Rob Martorana, my editor at, and I had an email exchange the other day surrounding the advances in digital technology for media playback. Rob was discussing his new 30GB iPod with accessories, his new high def cable set top box, and his first experience watching a DVD in the new blu-ray format. The gist of our conversation was that new technology can drive the business for content producers, especially the ability to exploit a quality library of media.

Yesterday,I received another reminder of this when Bernstein Research put out a research report on Corning (GLW) discussing the high likelihood that 70 inch flat screen TVs will be on sale in the next few years. According to Bernstein, an 80 inch flat panel LCD TV would weight the same as a 36 inch CRT TV. Bernstein's pricing model indicates that by 2010 a 70-80 inch flat panel LCD TV might retail for $3,000, which would be "roughly the same percentage of US average disposable income as a PC in 1996." Furthermore in 1996, PCs had a "40% household penetration."

Now I suppose not everyone has wall space for a 70-80 inch TV, but the mere possibility supports the idea that producers of high quality video content stand to benefit as technology advances lead consumers to upgrade their equipment and refresh their libraries.

The winners would be video content creators like Viacom, Time Warner, Disney, News Corp, CBS, and Lionsgate. Multichannel TV distributors like Comcast, Echostar, DirecTV, and Time Warner Cable would also be indirect beneficiaries as consumers opt for broader packages of services that are delivered through advanced set top boxes. Distributors of User Generated content like Google's You Tube also would benefit.

I'll be attending the UBS Media Conference in NY next week where I hope to here more about the impact of new technologies on the media business.

Posted by Steve Birenberg at 11:47 AM | Comments (0)

October 22, 2006

NBC's Strategic Changes: The Future of Network TV?

I think the money quote from last Thursday's widely discussed article on steep cost cutting at NBC Universal came from Bob Wright: “As we reprioritize ourselves toward digital, we’ve got to be as efficient in our current business as possible.” The reality is that analog is under pressure due to continuing moderate viewership declines, alternative distribution channels like the internet and iPods, and ad-skipping friendly digital video recorders. The big TV networks have long been able to offset sliding ratings with prices increases but recent trends suggest that the additional challenges of digital technologies has finally restored balance to the pricing battle and CPM growth has stalled....

NBC’s response is a massive cost cutting program design t save $750 million against projected 2006 revenue and operating profits of $16.5 billion and $3 billion, respectively. The cost cutting is supposed to be across the board but it appears that primetime programming expenses, particularly in the first hour, and news will bear the brunt.

As far as saving money on programming, NBC wants to have more reality type programming in the opening hour of prime time. The Peacock network trails its rivals at CBS, ABC, and Fox in this regard, so I’d view this partially as a catch-up move and not a groundbreaking announcement. That said, entertainment executives do seem to recognize that the economics of content production breakdown as talent and other production costs soar while pricing power dissipates.

On news, there have been cutbacks for years and rumors of massive changes such as a joint venture between CNN and the news divisions of ABC, CBS, or NBC. The reality is that the internet handles news better than TV except for breaking news on big stories. Maintaining a huge news gathering and content distribution system just doesn’t make sense as consumers increasingly turn to the internet for timely and accurate reporting.

This story is likely to reignite the debate about how TV is headed the way of music, newspapers, and radio. The acquisition of YouTube by Google (GOOG) merely reinforces this view. However, I maintain that TV viewing habits are much more deeply ingrained and that the alternatives are much worse substitutes that is the case for these other traditional media. Consequently, I expect the erosion of TV economics be much more gradual than has been the case for newspapers and radio, especially the recent acceleration in challenges faced by those industries.

Additionally, the TV networks are owned by the same companies that are the content suppliers so unlike radio or newspapers, the transition to new distribution channels opens up a revenue opportunity. I don’t think selling ads on of selling shows on iTunes for $1.99 can make up for the loss of pricing power on network TV, but it does provide a growing revenue stream against the slow erosion in network TV economics. You can’t say the same thing for newspapers or radio.

When the YouTube generation ages by 10 or 15 years, the economics of TV might breakdown more rapidly. For now, it will be periodic shifts in sentiment that hurt the stocks. But sentiment swings widely on Wall Street so don’t get overly concerned if the death of TV becomes a big story again for a few months.

Posted by Steve Birenberg at 05:11 PM | Comments (2)

October 13, 2006

Updated Advertising Forecast For 2007

Yesterday, Merrill Lynch analyst Lauren Fine lowered her 2006 and 2007 forecasts for U.S. advertising. Lauren has been ahead of the curve this year with below consensus forecasts for advertising growth so this is a call worth paying attention to, particularly for 2007.

Based upon Merrill’s forecast for nominal GDP growth of 4.5% and real GDP growth of 1.8%, Lauren is now calling for 2007 U.S. advertising of $298 billion, a gain of 2.8% vs. her prior forecast for a gain of 3.5%. Lauren lowered her forecasted growth for all the major traditional media categories but slightly raised her estimate for internet advertising growth.

In fact, excluding the $3 billion, or 22% gain for internet advertising, Lauren’s estimate for 2007 U.S advertising growth would be just 1.8%. Internet advertising represents $3 billion of the projected $8 billion gain for total advertising, or 41% of the incremental growth....

Looking at the traditional advertising media, Lauren lowered her forecast for newspapers to -1.5% from a prior forecast of 1.1%. I think this is the low estimate on the street. It also includes online classifieds so the negative growth in print advertising is even larger.

For broadcast TV, Lauren’s estimate is for growth of -1.2% pulled down by fact that 2007 is not a political year. Cable TV ad growth will be the healthiest among traditional media sectors at a gain of 5.8%. Nevertheless, this forecast is lowered from a previous estimate of 7.2%.

Radio and Magazines are each projected to grow by 1% in 2007, down from previous estimates of 2.2% and 2%, respectively.

Historically, advertising has been a cyclical growth industry, tracking nominal GDP when economic growth is rising. The current ad cycle has seen traditional media advertising track well below nominal GDP largely as a result of share loss to the internet. In turn, traditional advertising has suffered a loss of pricing power.

Right now, with the stock market apparently buying into a soft landing scenario, lowered advertising forecasts have little impact on media stocks. However, if Lauren’s below consensus view proves accurate and investors begin to fear a hard landing, the ramifications for media stock performance could become significant.

At a minimum, what appears to be a structural slowdown in advertising growth for traditional media should keep the pressure on public and private multiples of media stocks, rendering historical valuation levels irrelevant and sustaining the secular headwinds faced by the sector.

Posted by Steve Birenberg at 01:22 PM | Comments (0)

August 30, 2006

Cruise-Paramount Split, Part 2

Here are some further thoughts on the Cruise-Paramount split (Part 1). This post takes to look at Tom Cruise as a business by comparing the profitability of his two most recent films.

Cruise's last film prior to Mission: Impossible 3, (MI3) was War of the Worlds (WOTW) which grossed $594 million worldwide. MI3 grossed $393 million. According to, WOTW had a production cost of $132 million and MI3 had a production cost of $150 million. It is probably safe to assume that marketing expenditures on both films were similar and recent press reports use a figure of $100 million for MI3. Press reports also indicate that Cruise's production company had a deal with Paramount giving it 10%-20% of the worldwide box office gross before theatre splits. A good rule of thumb for DVD revenue is 1 times the domestic box office. For WOTW, domestic box office was $234 million, while MI3 pulled in $132 million. Another good rule of thumb is that TV rights are sold for 35% of domestic box office.

Let's look at the theoretical profits on each film assuming Cruise gets a 15% cut of the gross:

On WOTW, Cruise's production company would have pulled in $90 million. Paramount's take of the box office would be 55% of $594 million, or $327 million. Steven Spielberg directed WOTW and it is probalby fair to assume that he had a similar gross participation deal to Crusie. Subtract Cruise adn Spielberg's takes, and Paramount is left with $146 million, leading to a loss of $85 million on the theatrical run against production and marketing costs of $232 million. DVD revenue of $234 million could have had an operating margin to Paramount as high as 60% (Paramount's DVD costs likely included a participation for Cruise adn Spielberg). That is $140 million in operating profits to Paramount from home video. TV rights including domestic network, domestic cable, domestic pay TV and all international is another $80 million to Paramount at a margin that could be as high 80%. Add another $65 million in operating profits to Paramount. So before merchandise sales, on WOTW, Paramount might have had an operating profit of $120 million against production and marketing investment of $232 million. Not too bad.

On MI3, the numbers aren't quite so good for Paramount but are still pretty darn good for Cruise. 15% of worldwide box office brings Cruise and his production company $59 million. Paramount's take of the $393 million box office is $216 million. Deduct Cruise's cut and Paramount is left with a loss of $93 million on the theatrical run after production and marketing costs of $250 million (I've read on a usually reliable blog it could be as high as $280 million). Since the DVD market has weakened considerably over the past year and MI3 wasn't a smash hit, let's say DVD revenue is 80% of domestic box office at a 50% margin reflecting higher marketing and distribution costs. That still leaves around $50 million in profits from the home video window for Paramount. Again, let's adjust TV rights downward to account for the lower popularity of MI3, say 25% of domestic box office still at an 80% margin. That is another $25 million in profits to Paramount. So all in, MI3 will probably lose $10 million or $20 million, maybe as much as $50 million if the production budget really was as high as $180 million.

Now let's turn to negotiations over Cruise's new deal....

Paramount figures Cruise is broken goods, suffering a permanent lowering of his appeal. They baseline the MI3 results and decide to take a hard line in negotiations on a new deal. Cruise is insulted and has advisors whispering in his ear that hedge funds will pony up $100 million if he self produces. Despite his bad press, in Hollywood Cruise is known as a hard worker when it comes to promoting his films, even if he is increasingly difficult to work with on the set because of his religious beliefs and star treatment requirements.

What makes the most sense for all concerned? Cruise and Paramount go their separate ways. Cruise banks on his enduring popularity and gains a greater degree of control. Redstone spouts off about how Cruise's erratic behavior reflects poorly on Paramount and Viacom (VIA). Redstone has an excuse if Cruise hangs his shingle with another studio and produces a few more $500 million plus global blockbusters. Everything works out fine for all concerned.

Except that if I were a Viacom shareholder, I'd sure be hoping that Sumner is right about Cruise's future. Cruise was the only bankable star on the Paramount lot prior to the arrival of Spielberg, Dreamworks and Brad Pitt. Pitt has brought in $1.4 billion domestically on 22 pictures, or $64 million per film. Cruise has brought in $2.7 billion on 27 films, or $100 million per picture. Spielberg has brought in $3.4 billion on 23 pictures, or $150 million per film. Sumner thinks Cruise has peaked but since 1998 Cruise has grossed $1.3 billion, while Spielberg and Pitt have each grossed $700 million.

Posted by Steve Birenberg at 12:41 PM | Comments (0)

August 28, 2006

Cruise-Paramount Split, Part 1

Given all the publicty created by the split between Tom Cruise and Paramount, I thought I'd offer some impressons from the perpsective of the stock market. The following post is my first impressions, while a second post due to go up later this week provides greater detail on the economics of Tom Cruise as a "subsidiary" of Paramount's owner, Viacom (VIA, VIA.b).

It is hard to say much that is relevant to stock prices as far as the Tom Cruise-Paramount split is concerned. I do think that this is much more about money than Tom Cruise's behavior. The two are linked, apparently tightly linked in the mind of Viacom (VIA, VIA-B) chairman and controlling shareholder Sumner Redstone. Redstone and many others think that Cruise's bad press led the latest Mission Impossible film to fall short of box office expectations. It is hard not to agree with that assumption. The bigger question is whether future Cruise films were likely to suffer the same fate. And that is important because despite his hefty paydays, prior to this film Cruise has been a huge money maker -- arguably the only huge money maker -- for Paramount.

Cruise appears to have had a very generous deal at Paramount, providing his production company funds for overhead and a percentage of the worldwide box office gross. Importantly, the gross points came whether Paramount made a profit on the film or not. Consequently, the real problem here is not Cruise's behavior but the fact that production and marketing costs have gotten completely out of control. Mission Impossible III grossed $400 million worldwide at the box office and is likely to bring another $150 million to $200 million plus in DVD revenue and TV rights. A project with up to $600 million in revenue likely won't make any money for Paramount because the studio allowed the production budget to go over $150 million and spent another $100 million on marketing....

Remember studios only collect about 55% of each box office dollar. So for Mission Impossible III , Paramount's share might be around $215 million. Subtract the off-the-top take of Cruise's production company (rumored at anywhere from 10%-20% of total box office), and Paramount is left with $155 million against a production and marketing expense of $250 million plus. Oops. And with a slowdown in the DVD profits due to higher marketing and distribution expenses and a falling ratio of DVD revenue to box office revenue, Paramount's hopes of making decent profits on Mission Impossible III look bleak, while Cruise's production company walks away with $60 million or more.

Thus, despite press reports playing up Cruise's "behavior," I think the split was a business decision by both sides. The contract between Paramount and Cruise was up. Paramount wanted a better deal. Cruise felt the deal being offered wasn't good enough. End of story -- except that Redstone took it to another level with his aggressive comments about the split.

Does this episode represent a change in how studios will deal with stars? Maybe. Will Cruise's new, self-financing strategy represent the future? Maybe. Will studios finally attempt to better control budgets so that $500 million or more in worldwide gross isn't break-even? Maybe.

Is there a lesson for investors in stocks of companies that own movie studios? Yes. It's a tough business with erratic profits, high risks and impossible-to-analyze financials. So the next time you see an analyst report that puts a premium multiple on EBITDA produced by a studio, be skeptical.

Posted by Steve Birenberg at 08:44 AM | Comments (2)

February 08, 2006

Positive Sentiment Change For Media Stocks?

Breakup Time Warner! Univision for sale! Knight Ridder up for auction! Viacom splits in two! Clear Channel spins off its billboards and concert business! Cablevision is paying a special dividend – maybe not! Disney sells radio! Disney buys Pixar! Liberty Media splits off QVC! DirecTV is buying back $3 billion of its shares, Comcast is buying $5 billion, Disney is buying another $5 billion, Time Warner is buying $5 billion, Viacom is buying its shares, CBS is paying a decent dividend.

What the heck is going on? Obviously, big traditional media is under pressure and in some cases responding with asset sales, share buybacks, or dramatic corporate restructurings. I've been following media stocks for 20 years and one thing that has always been bullish has been merger and acquisition activity. Until recently, all the media M&A has been in Europe. Not coincidentally, European media stocks have performed much better than their U.S. peers.

So the question becomes will the flurry of M&A in the U.S. finally capture the attention of investors and lead to a rally in the shares or will overwhelming concern about future growth rates and the sustainability of free cash generation keep valuations depressed?

I mention this today because Wednesday was the first time in a long while that pretty much every media stock on my monitor, almost 50 of them, was up on the day. The stocks were up all day, even in the morning when breadth stunk and the major averages were barely up or underwater.

Yesterday morning marked the simultaneous reporting of the Icahn breakup plan for Time Warner and the potential sale of Univision. Did this represent the bottom? Will the shares see better performance in the months ahead?

I think the answer might be yes. Recent days also saw a great response to a good quarter by Disney and a nice bump for DirecTV after a decent quarter. Disney offers solid double digit growth. DirecTV is transitioning to a controllable growth strategy, trading subscriber growth for sustainability. Is the market's response to the quarters of these two companies a sign that a change in sentiment is at hand? I think so but the names that will lead are those that combine M&A potential, free cash flow dedicated to shrinking the capital base, and most importantly a growth profile over the next few years. DIS is the best of the big caps, while Central European Media Enterprises (CETV) is the best of the small and mid caps.

Posted by Steve Birenberg at 04:22 PM | Comments (0)

December 29, 2005

Thinking About The Movie Business

I wrote the following for while vacationing last week in chilly Bayfield, WI on the shores of Lake Superior:

I've been working "lightly" this week, spending time with my family at our place in Northern Wisconsin on the shores of Lake Superior. We have a blanket of snow about a foot deep and since there are only a few hundred people up here this time of year the environment is best described as pristine. Even better, we don’t have to go anywhere unless we want to, so commuting in the snow is not an issue.

The closest movie theatre is 25 miles away in Ashland, WI. It is an old theatre with a half dozen screens. Tickets are just $6 and popcorn and candy will only cost you $1 each. Our teenagers will actually go to the movies with us while we are up here since they don’t have to worry about bumping into their friends at the mall, so we decided to take in the two big blockbusters of the holiday season: King Kong and The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe. Both films were very well reviewed and in our family both actually exceeded expectations. I think it was the simple stories with special effects that didn’t come across as technology. Each film reminded us of something that would have been made in Hollywood decades ago....

Of course, I can’t go to the movies without thinking about the movie business. Both these pictures have huge production and marketing budgets. I believe King Kong cost over $200 million to produce and Narnia around $150 million. Marketing budgets for each film will exceed $50 million. With this in mind, while sitting in the theatre, I began thinking again about movie industry accounting and remembered a post I recently found on a Yahoo! Finance Message board. I contacted the poster and got his permission to reproduce it, so here is the best explanation I've ever read about movie accounting with my clarifications in parentheses:

Say Box office of $100M (for Lions Gate Entertainment production Saw II). Theatres keep roughly half, plus or minus adjustments for co-op advertising, advertising credits, etc., leaving $50 million for LGF to divvy up as manager of the clearinghouse. LGF takes out a 30% (plus or minus) distribution fee, plus all out of pocket print and advertising (P&A) costs. Assuming $20 million P&A, this puts $15 million (net) in LGF pockets and leaves $15 million in the pot. There could be participations from this $15 million for producers, writers, directors, in front of the camera, behind the camera, under the executive producer, who knows. Say $5 million. LGF then would get its costs advanced for the negative costs, plus an interest factor. Say another $5 million. This leaves $5M to divvy up (with producers as "profits").

Next is DVD/ home video. This is where the industry is still in lala land. Even though it costs $2 max for the DVD production, packaging, and artwork, generally the contracts provide for a cost of sales allowance of 50% or more. Sometimes it is as little as 20% that goes to the profit split from the sale of DVD's.

Other ancillary revenue steams include say $5 million from cable (and broadcast TV) licensing. Right off the top to LGF is a 20% to 30% distribution fee. Then more allocated marketing costs, more participation costs, plus, of course, the residual deals with SAG (Screen Actors Guild). Wait until they start packaging Saw, Saw II with other films in marketing deals. Allocations have to be made to each film.

What is amazing to me is that some of these analysts say they can figure it out before hand. Right! All the contracts are confidential, unless it goes to court. Of course, they never go to court as the attorneys meet at The Ivy, cut a deal, and no one knows.

So there you have it. No wonder my major screw-up this year was LGF, a pure play movie and TV studio. Thanks to my Yahoo poster buddy who I can vouch for as someone who knows what he/she is talking about.

Posted by Steve Birenberg at 09:12 AM | Comments (0)

September 25, 2004

Media Stocks

I am a long-time investor and analyst in media stocks of all shapes and sizes. I like media stocks becuase the business is fairly simple, free cash flow capabilities are excellent, and US companies have an unrivavled global competitive position. Presently, Northlake's model portfolio contains two media stocks, Central European Media Enterprises and NTL, Inc. Those stocks have performed well in the last 18 months but most media stocks have not.

One of my key Wall Street contacts in the media sector is Lauren Fine, newspaper and ad agency analyst at Merrill Lynch. Lauren had a peice out last week from which I excerpted the following:

Advertising Week in NYC has fueled a variety of discussions regarding the health of advertising, the growth of Internet advertising (up 43% in Q2), and the imminent changes in the network TV model due to increased penetration of broadband and PVRs.

We maintain the view that advertising is still a vibrant field and believe that creativity is improving rather than worsening. A proliferation of media outlets combined with muted demand (stemming we believe from a combination of modest economic growth and questions regarding return on investment) are limiting the gains of traditional media relative to past cycles.

On the margin, underlying demand for advertising is not improving, notwithstanding comments made by Unilever and Colgate that increased marketing is constraining their earnings performance or GM's accelerated advertising efforts to further its incentive program.

I agree with Lauren's assessment and this is the reason that Northlake is not presently using traditional large cap media stocks like Time Warner, Viacom, Clear Channel, Tribune, or Comcast. I am starting to look a little more carefully at these stocks, however. Traditional media stocks are trading at their lowest multiples of cash flows in years suggesting that Lauren's and my viewpoint is becoming widely held. The key to making money on Wall Street is to recognize when conventional wisdom is fully reflected in stock prices and taking the opposite side of the trade. We may be nearing that point on broadcast television, radio, and cable stocks so our antennae are up our research efforts increased.

Posted by Steve Birenberg at 03:31 PM | Comments (0)