Bernstein Research’s Todd Juenger seems to think so based on his light-hearted, and occasionally acidic, effort this morning to develop awards for media business types who don’t qualify for, say, the Academy Awards. (For example, his “Best Actor” award to the executive with the highest earnings goes to CBS’ Les Moonves who made about $70M in 2011.) The stand-out line, though, summarizes his view about what it takes to be a Big Media CEO: They ”are rewarded mostly for doing nothing but collecting affiliate fees and buying back stock,” he says. “It takes a lot of guts to deviate from that formula, given the safety and reward that can be gained by sticking to it.” Juenger also nails the Alice In Wonderland logic companies use to justify CEOs’ jumbo-sized pay — especially when the compensation shows little correlation to stock performance over the last three years. For instance, he notes that “The top two earners over the three-year time frame, by far, are the CEOs of CBS ($171M) and Viacom ($162M), proving it’s especially lucrative to be a media CEO working for Sumner Redstone when he thinks you’re a ‘genius’ (CBS) or a ‘genius and the wisest man I ever met’ (Viacom).”
The annual event winding down in Las Vegas probably won’t, but it should. Electronics manufacturers filled 1.9M square feet with products including many that could lead Big Media off what TiVo CEO Tom Rogers playfully refers to as the “digital cliff.” Instead of developing strategies to deal with the challenges, most companies “kick the can down the road,” he tells me.
He makes a compelling case. For example, several products likely will lead advertisers to wonder how long they should continue to pay big bucks for TV air time. It isn’t just that viewers can automatically zap a message with a device like Dish Network‘s Hopper with Sling DVR. (Or TiVo, for that matter.) People can simply ignore ads by shifting their attention to a smartphone or tablet computer. Cheap and powerful tablets were ubiquitous at this year’s show — sales will be huge this year — and Nielsen says that 41% of owners use them daily while they watch TV.
Investors are still celebrating the new year after lawmakers in Washington agreed to deficit reduction legislation that will derail a package of spending cuts and tax increases that many economists say could have triggered another recession. Media stocks are largely up today, with Lionsgate hitting an all-time high, and conglomerates including CBS, News Corp and Time Warner touching 52-week highs. The Dow Jones U.S. Media Index is +2.7% in early afternoon trading, ahead of the Dow Jones Industrial Average and Standard and Poor’s 500, which are both +1.7%. Viacom (+5.7%) is a standout among the leading Big Media companies. The increase follows a report this morning from Lazard Capital Markets’ Barton Crockett who says that the entertainment company “should benefit from a sentiment swing” as ratings stabilize at networks including Nickelodeon and MTV. Following Viacom among the industry leaders: News Corp (+3.7%), Time Warner (+3.0%), CBS (+2.8%), Comcast (+2.5%), Discovery (+2.6%), Sony (+2.3%), and Disney (+2.0%). Other big gainers today include LIN TV (+7.2%), National CineMedia (+6.4%), and Martha Stewart Living Omnimedia (+6.1%).
The competition was tough — most media stocks not only appreciated in 2012, they handily beat the benchmark Standard & Poor’s 500 which was up 13.4%. Comcast led the pack of Big Media conglomerates with shares +57.6%, followed by News Corp (+43.0%), CBS (+40.2%), Disney (+32.8%), Time Warner (+32.4%) and Viacom (+16.1%). Sony was the only member of this group to lose ground, falling 37.9% as it struggles to fix its global TV and electronics sales operations. Within the universe of other companies that we track most closely, the biggest winners were Carmike (+118.7%), Lionsgate (+97.1%), AOL (+96.1%), Lin TV (+78.0%), and Sirius XM (+58.8%). The losers: Best Buy (-49.3%), Martha Stewart Living Omnimedia (-44.3%), Sony, Rovi (-37.2%), and Facebook (-30.0% since it went public in May.).
The 40th annual UBS Global Media and Communications Conference wrapped up today, and I can’t recall when I’ve seen so little energy at this industry institution. Sessions highlighted the growing fissures between pay TV distributors and programmers. But the debates weren’t filled with passion. There was little gossip about potentially big deals, mostly because companies aren’t making them at a time of so much uncertainty. Big Media execs didn’t even try to dazzle attendees with clips from their upcoming productions. (The movie business seemed to be an afterthought amid the discussions about changes in technologies, business models, and the health of the economy.) There also were several important no-shows at UBS: Comcast, Sony, and Lionsgate didn’t make it. And while Joel Klein provided an enlightening presentation about his new education initiative at News Corp, investors would have appreciated hearing more about what’s happening at a company that’s undergoing a major transition. It may be that CEOs are just exhausted; they now make presentations at investor confabs throughout the year.
Still, several stood out. Here are some of the highlights:
CBS’ Les Moonves: He delivered the week’s funniest line when he referred to actor Angus T. Jones as “that kid on Two And A Half Men who’s getting paid $300,000 per episode to talk bad about me.” (Jones recently called on people to stop watching the show due to its “filth.”) Media’s chief salesman says that ad sales are strong at his broadcast network. Auto and retail companies are helping to drive scatter prices up by mid to high teen percentages over the upfront market, and the Super Bowl is almost sold out with spots going for as much as $4M. Once lawmakers deal with the so-called fiscal cliff, Moonves expects the economy to take off. He also forecasts that ads soon will be sold based on the number of people who watch up to seven days after they air — up from three.
For a sense of how blah the Q3 earnings season was, here’s a sample of some of my favorite headlines from analyst reports for the period: About Comcast, “Not Sexy, But Safe (…But Maybe Safe IS Sexy).” About Disney, “Expect No Magic In The F1Q13 Kingdom.” About News Corp, “Still Waiting For More News.” About Time Warner, “Cost Controls Fuel Profit Upside.” And the winner, about Viacom: ”Things Starting To Get Less Bad!” All in all, the results weren’t as dreary as you might have expected in a period when ad sales were soft (aside from the Olympics and political spending), TV ratings were down, box office fell, and pay TV subscriptions were flat. The good news from the companies’ perspective is that investors already knew about most of these issues. And CEOs seemed to find it easy to counter disappointing surprises. Some reassured the Street that ad sales kinda, sorta seem to be improving — and that they’re still committed to returning cash to them through stock repurchases or dividends. All in all, the Dow Jones U.S. Media Index is down 2.6% since the beginning of this month, just slightly lower than the benchmark Standard & Poors 500 which is -2.2%. That’s pretty good considering that the Media Index is up 28% so far for all of 2012 while the market is +10%.
Lazard Capital Markets’ Barton Crockett seems to think so in a thought experiment this morning. Asked to envision a change that could reshape the long-term prospects for media — part of Lazard’s Imagine That collection of analyst essays — he says that it “could be good for content-owning conglomerates” if consumers began to use the Internet to just subscribe to the channels that they want. To be sure, the analyst doesn’t see things changing soon; he says that the current system of pay TV bundling is “resilient, and not crumbling.” Still, he challenges the conventional wisdom that media giants would find themselves on a toboggan ride to financial ruin if consumers escaped from a system that requires them to pay for channels that they don’t want. Crockett bases his conclusion on two assumptions: Consumers would continue to spend $78B a year on pay TV. And, in a post-bundle world, content creators could collect all of that instead of settling for the $32B in program fees that they currently receive from distributors. Actors or producers wouldn’t try to appeal directly to consumers, cutting out Big Media companies, because they need someone who will “write big checks, and take care of the administrative hassles of marketing and distribution,” he says. “Anyone can make a singing competition, but networks like Fox and NBC can make them popular by touting them to large audiences, and investing large sums for the highest profile judges and best production values.”
Apparently so, according to writer Derek Thompson’s well researched and engagingly presented, but unfortunately misguided, article about pay TV pricing (“Prisoners of Cable“) in the latest issue of my favorite magazine, The Atlantic. He acknowledges that the seven largest Big Media companies — including News Corp, Viacom, Disney, and Time Warner — “use their oligopolistic power” to give cable and satellite customers a simple choice: either buy “a bloated offering of channels at an arrestingly high price” or go without. “Cable’s proposition to consumers is simple: if you want the new, good, TV shows, you need the bundle.” That’s unfair, right? Not to Thompson. The system that makes people pay for channels they don’t want also gives us classy fare including HBO’s Game Of Thrones and AMC’s Mad Men and Breaking Bad. “Indeed,” Thompson says, “it’s no accident that as pay-TV has proliferated, and costs have risen, we’ve also entered a golden age of television.” And even though “as a monthly fee, cable feels like a rip-off…as hourly entertainment, it’s not.” The proof: The bundle only costs 20 cents an hour for the average four-person home that watches as much as four hours a day. The kicker: “more than 100 million households still think the price is worth paying.”
Wall Street’s Big Media bulls have had a great run. Stocks for the group of companies that includes Disney, News Corp, Time Warner, CBS, Viacom, and Discovery have outpaced the overall market for more than three years. And just this year, the Dow Jones U.S. Media Index has appreciated 35% while the benchmark Standard & Poor’s 500 rose 15%. Yet I’ve been struck lately by the growing number of reasons to suspect that the joy ride is about to end. They started to crystallize for me today when I read Cowen and Co analyst Doug Creutz’s “State Of Big Media” report making the case to remain “moderately positive” about the sector. Like most of his analyses, it’s smart and identifies the important questions that the Street will want CEOs to address in the upcoming Q3 earnings season. But Creutz’s case for remaining optimistic is so meek that you’d think it was prepared by the guy who coached President Obama for his first debate with Mitt Romney.
Creutz starts by cautioning investors that media stocks have become expensive. The big companies that he covers trade for 14 times earnings, ahead of the S&P 500′s 13.3 times. That’s quite a change from last year when the stocks traded for 11.5 times their earnings, in line with the overall market. As a result, he says, “we think outperformance over the next 12 months is likely to be more modest than that enjoyed over the last few years.” On top of that, the analyst notes that his upbeat case assumes that the economy can “muddle through” the next year. He says that the “#1 risk to Big Media stocks, by a wide margin” is the possibility of a global downturn — which could be triggered if a European country defaults on its debt, or there’s no resolution in the U.S. to the rush off the so-called “fiscal cliff.”
That’s the critically important question that’s being debated across the industry and — finally! — head-on by two of the Street’s savviest analysts: Bernstein Research’s Todd Juenger and Craig Moffett. Juenger kicked things off in a note last week, and Moffett delivered his response today. The core issue is whether millions of consumers will cut the pay TV cord rather than accept ongoing price hikes driven by network owners including Time Warner, Viacom, News Corp, Disney, NBCUniversal, CBS, and Discovery. For competitive reasons, they want to pack more original shows and high-priced sports on to their schedules — and pass the rising costs along to cable and satellite providers. But the pay TV distributors say that they’d need to pass their higher costs on to consumers, and too many are so cash-strapped that they’ll simply cut the cord and watch shows from over-the-air broadcasts or low-priced Internet services such as Netflix. If things continue, the argument goes, then Big Media will have to abandon the lucrative and ubiquitous basic cable bundle that requires customers to pay for lots of channels that they never watch. If that happens, and channels are offered a la carte, no more than 10 would be profitable enough to survive, Needham & Co analyst Laura Martin estimates.
Here’s a synopsis of the arguments Junger makes in defense of programmers — and Moffett’s explanation why he thinks they’re headed off a cliff:
Investors seemed to like almost any business that was tied to pay TV and tech, and that was relatively insulated from the economic turmoil in Europe. The Dow Jones U.S. Media Index rose 11.6% in the three months that ended today, turning in a far better performance than the benchmark Standard and Poors’ 500 (+5.8%) and the Dow Jones Industrial Average (+4.3%). Time Warner led the Big Media pack, with a 17.7% rise in its stock. It was followed by Viacom (+14.1%), Comcast (+11.9%), CBS (+10.8%), News Corp (+10.1%) and Disney (+7.8%). Share prices for Sony — still struggling to right its electronics businesses — fell 17.8%.
Deadline’s Executive Editor David Lieberman talks with host David Bloom in the first episode of Deadline Big Media. Lieberman discusses the face-off this week between CEOs for Dish Network and CBS over ad-zapping technology; Disney’s summertime …
Deadline’s Executive Editor David Lieberman talks with host David Bloom in the latest episode of Deadline Wall Street. Lieberman discusses what’s been driving the huge increase in share prices for News Corp, helped by the end …
There’s a little hyperbole in Nomura Securities analyst Michael Nathanson’s observation that the Q2 Big Media earnings season that wrapped up last week was “one of the most unusual periods [for the industry] in recent memory.” But he’s basically on target. Most companies had something worrisome to report — including softer than expected Q2 revenues, and likely weakness in the Q3 ad market. Even so, media stocks are up, in some cases substantially: Over the last 30 days the Dow Jones Media Index is +7.8% while the benchmark Standard & Poor’s 500 is +4.6%. CBS is the stand out, +14.7%. “Strangely enough, the market didn’t seem to care that much about the specifics,” says Bernstein Research’s Todd Juenger. “In general, media stocks are all in favor, each with its own story.”
What accounts for the euphoria? The most common explanation is that Big Media looks like a safe haven in a weak economy, especially in comparison to other sellers of consumer discretionary items (think Coach, Starbucks, or Best Buy). Giants including Disney, Discovery, News Corp, Time Warner, Viacom, and NBCUniversal make most of their profits from cable networks — and that business has a safety net: Channels still have enough muscle to negotiate guaranteed price hikes from pay TV distributors. For example, Disney’s cable channels are seeing “tremendous price growth,” CEO Bob Iger says. News Corp COO Chase Carey says his networks “have continued to achieve or exceed our targets.” And Discovery CEO David Zaslav says his execs will “be pushing hard to make sure that we get fair value” in carriage deals. CBS chief Les Moonves also crowed about the retransmission consent payments flowing to his broadcast stations. He’s “confident there is significant upside” because “each new deal means increased fees.”
Viacom illustrates the importance of these bullish cable network forecasts. Even though it arguably reported the industry’s most disappointing Q2 revenue and earnings results, the stock is up 8.2% since the announcement. That’s due in part to CEO Philippe Dauman’s claim that Viacom won a substantial price hike from its recent battle with DirecTV. “The battle he conducted against DirecTV was spectacular,” Chairman Sumner Redstone says. “Philippe has the same passion to win that I’ve always had.” But DirecTV CEO Michael White says programmers demanding these big increases celebrate Pyrrhic victories. “The customer at the end of the day is the one getting squeezed and bearing the brunt of these exorbitant price increase demands that are just not sustainable,” he says.