TV Networks Weathering the Storm

The New York Times is featuring a piece today about how the television broadcast networks are managing to stay afloat during these turbulent times- while other forms of mass media are suffering significantly.

Just this week as well, AdAge noted we are now two years into the worst advertising recession since the Great Depression, and yet even coupling this with massive fragmentation of audiences as a result of new digital media platforms, the television networks seem to be holding their own. Though ratings across the board are not what the networks might have hoped driving future make-good pressure on inventory, it may be indeed this massive audience fragmentation that is actually helping these networks the most right now as they still command sizable audiences night after night. Today, no other media source consistently delivers the kind of audiences night after night that broadcast network television does, and though it’s not what it once was, it’s still a pretty great business to be in.

According to the New York Times article, CBS (NYSE: CBS) stands in the best position to capitalize going forward, with their usually positive CEO, Les Moonves stating, “We have zero make-goods. Demand is not what we would like it to be, and scatter is basically flat with what the upfront pricing was.”

This is hardly the bullish tone Mr. Moonves has touted in the past, but it is an enviable position most other media CEOs would love to be in right now. In the deflationary environment we are now in, holding pricing firm is a tremendous achievement unto itself. Just last month, the Radio Advertising Bureau reported the single worst month ever recorded for the radio industry, and the media is filled with a number of stories of how new media outlets are struggling to find revenue sources in this great depression for advertising.

Though CBS is leading the pack, ABC (NYSE: DIS) and Fox (NASDAQ: NWS) appear to be doing just fine right now with ABC launching a number of new shows and Fox getting ready to throw its trump card with the latest season of American Idol. Even with the threat of a SAG strike looming, the television networks should maintain as they are able to switch to lower cost re-runs and reality programs to ride out any strikes. As predicted in my article almost a year ago (Seeking Alpha, January 18, 2008: Writers Strike Barely Impacts the TV Networks), I again see no long lasting threat to the TV network businesses should a broader strike hit Hollywood- though the ailing film industry could be significantly impaired by one.

Only NBC (NYSE: GE) seems to be the laggard in this sector, but personally I think there is a much bigger play going on with NBC right now that will ultimately make it the biggest winner overall. While executives Jeff Zucker and Ben Silverman take quite a beating in the industry press for current low ratings and low revenues, they are clearly retooling NBC in the Six Sigma spirit that parent General Electric pioneered- streamlining, cutting costs, and maximizing efficiency in every minute aspect of their production and distribution processes. Such things as eliminating the costly and unreliable pilot process, foregoing expensive upfront presentations and parties, returning non-profitable time periods back to the affiliate body, shuttering also-ran Weather Plus after buying market leader Weather Channel, and replacing expensive dramas with Jay Leno are all moves that will pay nice dividends for NBC down the road.

While many in the press focused on NBC’s retaining Leno as a move solely to keep him from going to the competition, I see a much shrewder move here as well as they now have a much more cost effective way to program the 10 pm time slot. Sure, Leno is personally getting a sizable paycheck and perhaps the ratings won’t be as high as a scripted drama could be, but Leno’s cost is nowhere near that to program that time slot five nights a week otherwise. When factoring in the element of risk, it is a no-brainer as NBC now has a guaranteed star with the strongest work ethic in the business filling that spot 5 nights a week. They may make less, but they’ll risk less as well allowing them to make calculated gambles elsewhere. Among these gambles, I see Silverman’s vision of bringing more “event television” to NBC, much like the networks had with miniseries and other one-time-only programs in the late 1970’s. This is truly the kind of appointment television that no one will want to DVR for fear of missing the watercooler talk the next day.

Again, just as I wrote in my January 2008 piece, CBS is the closest way to play the network television sector, and at a $7.56 closing price on December 29th presents a fantastic buying opportunity overall. In this market, it seems that any of the network parents are excellent buys right now though.

Disclosure: Author holds no positions in stocks listed above

Comments

[Robert H. H...:]

I found the NYT article to be anything but optimistic for the broadcast networks.

Yes, declining audiences overall mean that there is scarcity value associated with those shows that still deliver, which has sustained some pricing power. And pre-selling inventory in the upfront (as in any business) means current economic conditions will have a lagged effect on broadcast ad sales. But the fundamental trends for broadcast networks and their local affiliates are anything but bright.

The networks are in the business of selling people's attention. And they face more competition for people's attention than at any time since the the commercialization of the technology a half century ago. Moreover, they industry operates with cost structures, guild rules and operating practices largely established under conditions of benign regulated oligopoly.

Finally, most of the regulatory, geographic and distribution structure of the industry is predicated on over-the-air transmission of local content (basically news) that is largely irrelevant to the 85% of the market that subscribes to cable or satellite services.... or relies on the internet for news.

How much longer will local news ("four alarm fire on Pine Street, film at 11:00") support this outdated business model?

2008 Dec 30 11:21 AM

[J.P. Hannan:]

Robert, thanks for taking time to comment.

With respect to the future of the tv business... while I think your thoughts about local news and affiliates are completely valid, I'd point out that nowhere in my article or the NY Times piece does it discuss the business of local tv. This is where the medium is in transition- no longer can the whole industry be painted with one broad brush.

The economics of network tv are very different than local tv, and getting further and further apart every day (please see my article TV Networks Reach Fork in Digital Road seekingalpha.com/artic...). The same can be said about network vs local radio.

In my opinion, it all comes down to content. Those mediums that control their own content, like the tv networks, will succeed in the digital realm. Those who don't, like some local stations, simply won't.

Newspapers should also be included in this- properties that still break news like the WSJ and NY Times will find their home in the digital world, but those who simply repackage AP stories are destined to fold.

Happy New Year.

2008 Dec 31 06:13 AM