Big Media’s Q4 earnings season pretty much wrapped up last week. And the most startling takeaway is how quickly moguls have overcome their fears about the lousy economy and pay TV cord-cutting. That was becoming a big concern three months ago. Execs including Time Warner Cable’s Glenn Britt and Dish Network’s Charlie Ergen warned that cash-strapped subscribers would ditch pay TV and watch shows for free from an antenna – and perhaps a low-cost Internet video service such as Netflix or Hulu Plus – if program prices continued to soar faster than inflation. The anxiety was so palpable that I wondered whether execs were angling to use the economy as a scapegoat for some of their own bad decisions. But in the Q4 conference calls I listened to over the last few weeks, moguls returned to their usual assurances that all is well. They also seem to think that means the pay TV oligopoly can continue to charge consumers higher prices. ”We’re not seeing some great interest in cord-cutting because I think, generally, consumers are happy with the quality and the variety (of channels) that they’re getting, and the price-to-value relationship is generally good,” Disney CEO Bob Iger said. He and others signaled that they’re in an arms race to deliver hits: Viacom said its production costs will grow by low double digit percentages for the rest of its fiscal year. Discovery said expenditures would grow by high single digit percentages in 2012. Time Warner said that its figure would rise by at least mid-single digit percentages. Investors fear that the additional spending will squeeze profits. But moguls said not to worry: They’ll reign in other costs, and hope for the best. News Corp COO Chase Carey says that this is “a great time to be a content leader.” And Time Warner CEO Jeff Bewkes assured analysts that “our best years are ahead of us.”
The message for consumers, though, is mixed. Britt says that the pay TV audience is bifurcating between the haves and the have-nots. ”We’re going to focus more attention on products and services that best meet each group’s needs rather than pursuing traditional one-size-fits-all solutions,” he told analysts. That was before this past Friday, when he seemed to wave a white flag in his campaign to fight high-priced sports channels, and package deals that require operators to pay for networks that few subscribers watch: Faced with mounting pressure by basketball fans who wanted to see the historic scoring run by New York Knicks point guard Jeremy Lin, Britt agreed to end the 48-day blackout of Madison Square Garden’s regional sports channel MSG and its low-rated music service Fuse. If the No. 2 cable operator can’t stand up to MSG, then it’s hard to imagine who will draw the line against rising programming costs.
It won’t be Comcast. The cable giant and owner of NBCUniversal made that clear last month when it cut a 10-year deal with Disney that guarantees growing rates for its channels including ESPN, the highest-priced basic cable network. Comcast CEO Brian Roberts told analysts that he hopes to keep consumers in the pay TV corral by offering new services such as TV Everywhere which streams content to digital devices. As a result, his new programming deals will last longer than previous ones and have “broader On Demand lineups and more flexibility to deliver this content to more devices in and out of the home than ever before.” Comcast, Time Warner Cable, and DirecTV say that their outlays for the networks they carry will grow by a little under 10% in 2012. That annual increase appears to be the new normal. “I would hardly see, at the moment, (growth in programming costs) going back to those days of 3% or 4%,” DirecTV CEO Michael White said. Even if cost increases slow in 2013 and 2014, he added, “it’s still going to be elevated relative to historical levels.”
Here are some other themes from the latest earnings reports:
Movies: Virtually everyone had a mixed story to tell about Q4′s surprisingly soft box office results. Just three months ago Regal CEO Amy Miles told analysts to expect “a relatively easy comparison” for the end of 2011 since holiday sales in 2010 were “disappointing.” Instead she had to explain the 7% decline in the latest quarter — which she attributed to scheduling glitches. For example, studios realized it was wrong to release lots of kids’ films (with their low ticket prices) on Thanksgiving weekend, and to make fans of action movies choose in mid-December between Paramount’s Mission: Impossible — Ghost Protocol and Warner Bros’ Sherlock Holmes: A Game Of Shadows.
Studios also tried to make the best of the situation. Disney explained that while its film revenues were down in a quarter when The Muppets was compared with 2010′s Tangled and Tron: Legacy, the profit margin improved — the studio is simply releasing fewer movies. At Viacom’s Paramount the strong sales for Paramormal Activity 3 helped offset the expected losses from Mission: Impossible (the company had to record the hefty production and marketing costs in the quarter even though most of the sales come later) and the weaker than expected performance of The Adventures Of Tintin. News Corp’s Fox delivered surprisingly strong results from Alvin And The Chipmunks: Chipwrecked — and especially from digital deals and the home video performance of Rio, Rise Of The Planet Of The Apes, X-Men: First Class and Mr. Popper’s Penguins. Time Warner crowed about its record year with the last Harry Potter, but warned that it probably won’t be able to match the profit performance in 2012. And at Sony, filmed entertainment revenues grew with home video contributions from The Smurfs, but the disappointing performance of Arthur Christmas and high marketing costs resulted in a drop in operating income.
Ad Sales: The worst seems to be over, for now. “We’re encouraged by the tone in the market,” Viacom’s Dauman says. CBS’ Les Moonves says that ads in the scatter market are fetching about 15% more than comparable spots did in the upfront market — with especially strong demand from auto companies. Discovery CEO David Zaslav also says that the year is off to a “solid” start with low double digit price increases, better than he had forecast. And Scripps Networks president John Lansing said that the company expects the housing market to improve “particularly in the second quarter and then moving on through the rest of the year.”
Digital: Moguls are divided between those who want to roll out TV Everywhere as soon as possible, and those who want to wait until they’re sure that they like the arrangements. Carey is in the first camp: “All of us have to do a better job,” he says. “It’s taking too much time.” Bewkes is with him, although he tried to be more positive. He says that he’s “optimistic that the industry will get past the minor concerns that they have” and begin to “drive consumer awareness and consumer usage” of TV Everywhere. But Discovery CEO David Zaslav says that, while he likes the TV Everywhere concept, “it really is going to depend on us coming to an agreement with the distributors on what’s fair value for all of our content on TV Everywhere.” Moonves also wants to be sure first that Nielsen is counting mobile viewers. “I would prefer to keep the system where the commercial load is exactly the same, and we get paid the same, whether it’s TV Everywhere, whether it’s online or on the air,” he says. Until pay TV providers work out all the kinks, “we’re able to sell (CBS’ programming) wherever we want.” Indeed he says that CBS may develop a show for Netflix — which a year ago was seen as the enemy that TV Everywhere would help to defeat.
Pay TV: Trends are still hard to read. Cable companies lost fewer video customers in Q4 than they did in the same period a year ago. Indeed, Comcast’s loss of 17,000 subscribers was its smallest decline in five years. At the same time, customer growth was strong at Verizon FiOS (+194,000) and AT&T’s U-verse (+208,000). There was weakness, though, at DirecTV which added 125,000 U.S. subscribers — far fewer subscribers than it picked up last year, and well below expectations. What does it mean? It could be that the economy is coming back, and DirecTV had a weaker-than-expected quarter because so many of its prospective customers signed up in Q3 to take advantage of its NFL Sunday Ticket promotion. Or it may be that satellite companies are losing market share to cable and telco companies that can package video subscriptions with broadband. “Everyone is aggressive,” DirecTV’s White says. “I fully expect this to be an interesting transition year.” We’ll know more later this month when Dish Network, Cablevision, and Charter present their 2011 year-end report cards.
Stock Buybacks: They’re still popular with investors, but don’t affect stock prices as much as they did last year. Buybacks “are now fully modeled by us and no longer represent a sectorwide source of earnings revisions,” Nomura Securities analyst Michael Nathanson says. Still, we saw some announcements of new purchase plans from DirecTV ($6B repurchase plan) and Time Warner Cable ($4B).