This was the quarter when Facebook left behind memories of its troubled IPO last year: As it reassured investors that it has a strategy to sell ads on mobile platforms, its shares closed Q3 at $50.23 — a 101.9% gain since the end of June. That’s the biggest jump on the list of media company stocks we track. The sector did well as the economy, and advertising, improved: The Dow Jones U.S. Media Index rose 8.3% beating the Dow Jones Industrial Average (+1.5%) and Standard & Poor’s 500 (+4.7%). Radio company Cumulus Media came in second in our group, rising 56%, followed by Netflix (+46.5%), Best Buy (+37.2%), Pandora (+36.6%), and Yahoo (+32%). Among Big Media companies, Viacom (+22.9%) saw the biggest improvement followed by Time Warner (13.8%), CBS (+12.9%), Comcast (+8.1%), Disney (+2.1%) and Sony (+1.7%). We left Fox and News Corp off the list for this quarter; their stocks were essentially brand new after Rupert Murdoch’s company split in two at the end of June. Companies that probably were glad to see the quarter end include 3D technology company RealD (-49.6%), Barnes & Noble (-19%), Rovi (-16.1%), and Outerwall — the parent of DVD rental kiosk owner Redbox — which was -14.7%.
Encouraging data about jobless claims, and the Federal Reserve’s signal that will continue its stimulus program by buying bonds, sent the markets to all-time highs today. The Standard & Poor’s 500 closed +1.3% to nearly 1,707 — the first time it closed above 1,700. And the Dow Jones Industrial Average was +0.8 to 15,628. Media companies did even better as the Dow Jones U.S. Media Index ended the day +1.5%. Big Media companies were all up led by Sony (+4.4%) followed by CBS (3.9%), 21st Century Fox (2.5%), Viacom (2.2%), News Corp (+1.8%), Comcast (+1.7%), and Disney (+1.1%). CBS, Comcast, and Time Warner hit 52-week highs. Other winners in media included DreamWorks Animation (+8.8% following strong Q2 earnings), Starz (+7.4%), and Time Warner Cable (+3.2%). The handful of losers included The New York Times (-3.4%) and DirecTV (-2.0%) both on disappointing earnings reports.
Allen & Co Hollywood moguls are arriving at the 31st annual Allen & Co investment conference in Sun Valley starting today — and this time there’s something fun awaiting them. For years now the mogulfest has been mostly a showbiz snorefest with not a single entertainment panel on the official schedule. But my sources say this year’s features a Friday media panel consisting of Rupert Murdoch, John Malone, and Barry Diller. In other words, a trio of enemies who have sued or badmouthed each other so much over the years that it’s hard to imagine them sitting in the same room much less conferring politely together. The other sessions appear to be way less enticing:
Wednesday: Sports discussion featuring NFL Commissioner Roger Goodell; Presentation by Google co-founder Larry Page.
Thursday: Panel entitled ‘Cyber Insecurity’; Economic growth discussion led by NYC Mayor Michael Bloomberg; Presentation by the President of Mexico; Discussion about the future of universities moderated by Andrew Ross Sorkin.
Friday: Panel about the environment; Interview of King Abdullah II Of Jordan conducted by Tom Brokaw; Media panel with Rupert Murdoch, John Malone, and Barry Diller; Interview of Facebook COO Sheryl Sandberg by Charlie Rose; Political discussion with Jeb Bush and Bill Bradley.
Saturday: Discussion with Bill and Melinda Gates.
Media CEOs don’t run their companies by themselves. Having looked at chiefs whose pay is out of whack, and those who are paid the most, here are others of note: the five best compensated company chairs, COOs, CFOs, and General Counsels as well as 10 other execs with standout compensation. We find that the five highest paid chairs collectively made $106.5M (+4.1% vs. 2011), with the COOs at $136.2M (+7.5%), CFOs at $77.9M (-15.0%), and General Counsels at $42M (+6.4%). Keep some caveats in mind with these results: I looked only at chairs who aren’t also CEOs, and there aren’t that many. (To avoid duplication, I combined the compensation that Sumner Redstone collected at CBS and Viacom, and that Charles Dolan received at Cablevision and AMC Networks.) Also, it’s often hard to define the roles that execs play. For example, Disney and Comcast don’t list a COO and Comcast’s CFO is also the Vice Chairman. So these compensation figures from company proxy statements can help you to see how the media power elite stack up, but only tell part of the story. Finally, remember that the SEC requires companies to provide compensation information for their five top executives. It’s safe to assume that several unlisted execs at big companies were paid more than some listed execs at smaller ones. Here’s how some of media’s top non-CEOs fared in 2012:
Bernstein Research’s Todd Juenger says today that it’s a possibility after CBS unloads its billboard business. It’s widely believed that the company will use the cash it raises for what the analyst calls “a massive buyback” — possibly as much as $8B, or more than a quarter of CBS’ market value. Ordinarily that would be greeted by cheers on Wall Street. Nearly every Big Media company has a huge stock repurchase plan, part of CEOs’ efforts to appease investors who fear that the industry’s glory days will fade in the Internet era. Moguls may not understand digital media, but they know simple math: Earnings per share rise when a company reduces the number of shares. But if CBS takes the strategy to an extreme with a ginormous repurchase, it may be surprised by the Street’s muted response, Juenger warns. Recalling the infamous scene in Happy Days when Fonzie water-skied over a shark — signalling the audience that the show had run out of ideas — he says the company could create “a seminal ‘jump the shark’ moment, triggering media investors to re-evaluate what all these buybacks — at the expense of doing anything else — are really doing for them in the long run.” In CBS’ case, the company would be “still heavily advertising dependent and heavily U.S.-centric.”
It isn’t a la carte but Verizon’s proposal to tie what it pays to carry TV channels to the number of viewers who actually watch is what big media companies might consider “disruptive”, according to the Wall Street Journal. Verizon’s FiOS TV is the nation’s sixth-largest pay-TV provider and has begun negotiations with some smaller companies about basing what Verizon pays on audience size. Under the established industry model, cable and satellite operators pay a monthly per-subscriber fee to carry channels based on the number of homes the channels are available. Verizon’s chief programming negotiator Terry Denson suggests that in many cases “We are paying for a customer who never goes to the channel”.
Needham & Co analyst Laura Martin says they are — and her new report making that case should rattle media execs. Martin thinks more deeply about corporate strategy and game theory than any analyst I know. And she warns traditional content providers that streaming infotainment companies including Google, Yahoo, AOL, Microsoft and Vevo are shrewdly sneaking up on them by focusing on young people who like to watch videos on mobile devices including tablets and smartphones. The tech companies are “creating short-form premium videos that are difficult to monetize, and therefore largely ignored by incumbents,” who’d rather create hit TV shows, Martin says. The big guns have to pay attention to conventional programming: Attractive shows help to keep pay TV subscribers attached to today’s high-priced packages. “Unbundling threatens up to 50% of the total revenue of the TV ecosystem,” Martin says. But media money follows time, and as mobile devices become more popular we could see “advertising share shifts away from TV and toward the new premium-video online ecosystem.” The big producers are “fighting over the 0-2% viewing growth pie rather than the 50% viewing growth pie.” Martin says that she’d “feel better” about the long term prospects for Big Media “if they were allocating …
With apologies to Bill Maher, here’s a New Rule for Big Media CEOs when they decide to raise their dividends or announce a major new stock-repurchase initiative. They have to stop insisting that it’s a sign of confidence and strength in cases where they’re just bribing investors to keep them from fleeing.
This thought struck me in the Q4 earnings season that’s wrapping up. Just about every big company that fell even a little short of Wall Street’s expectations had a new plan to return cash to shareholders. The explanations were consistent. After CBS missed analysts’ revenue and earnings targets, CEO Les Moonves said his accelerated $1B share repurchase reflects “the great confidence we have in our businesses.” At Time Warner — which missed revenue forecasts but beat on earnings — CEO Jeff Bewkes said that it was able to authorize an additional $4B share repurchase and an 11% dividend increase because “we’re at an even stronger position today than we were a year ago.” Then there’s Comcast, which just slightly missed revenue and earnings expectations but raised its dividend by 20% and agreed to repurchase $2B of stock, while announcing that it will pay $16.7B for General Electric’s 49% of NBCUniversal. The moves demonstrate “confidence and optimism in the future of all our businesses,” CEO Brian Roberts said.
They’re right in this sense: Most Big Media companies are part of pay TV oligopolies that still have scandalous power to set and raise prices — mostly by requiring people who want to keep up with the national conversation to pay for dozens of channels that they never watch. Execs also had encouraging reports about current concerns. Generally speaking, ad sales picked up in Q4, and TV viewers returned to the major broadcast networks after the dismal opening weeks of the fall primetime season.
But if executives are so bullish about their companies, then why do they consider it such a great thing to give cash to investors to spend elsewhere? Wouldn’t they demonstrate their faith more persuasively if they used the funds to expand — you know, create jobs — or buy assets in complementary or growing fields? It’s not like we’re still in the depths of the recession when media stocks were such a bargain. CBS shares are more expensive than they’ve been since the end of 2005 when it separated from Viacom. Time Warner’s at a five-year high. And Comcast is at its all-time best. If the investment strategy is to buy assets when the price is high, all I can say is, folks, don’t try this at home.
This is unusual: Wall Street analysts typically pump CEOs for financial numbers when they hold quarterly conference calls to discuss the latest earnings reports. But as Big Media companies gear up for their announcements, BTIG’s Richard Greenfield says this morning that investors need “a better understanding of how management teams of the leading media companies evaluate the potential impact/risks to their businesses” following the horrific shootings in Newtown. Citizens and policy makers are debating whether movies, TV shows and video games contribute to a culture of violence. Greenfield says he doesn’t see an “immediate threat” to Big Media revenues and profits. Still, he wants CEOs to address three issues: Do they believe violent media are part of the problem, and would they participate in a third party, cross industry study of a possible connection? What are the chances that the government will increase regulations on TV content, and are they OK with that? And do they believe that advertisers might boycott violent shows? Although gruesome programs such as The Walking Dead, Criminal Minds and Sons Of Anarchy are popular, Greenfield recalls how grassroots uprisings like the one last year to oppose Hollywood’s proposals to limit Internet piracy can “rapidly change corporate behavior.”
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.”
The benchmark Standard & Poor’s 500 is down 2.3% in mid-day trading. The European Central Bank sent shivers through trading floors after it forecast continued weakness in the Eurozone. In addition, many investors fear that lawmakers in Washington will be unable to resolve the fiscal stalemate following an election that left power split between Democrats and Republicans. That’s put an anchor around most media stocks today, although the sector is holding up better than the overall market. The Dow Jones U.S. Media Index is off about 1.1%. Among Big Media, everyone’s down except for Time Warner (+3.1%) and News Corp (+0.5%) on the first trading day following their encouraging earnings releases for the quarter that ended in September. Viacom is off 1.9% followed by Comcast (-1.8%), CBS (-1.5%), Disney (-1.1%), and Sony (-0.5%). Elsewhere in media, AOL is down 6.4% — a slight pullback following yesterday’s 20.4% jump in response to upbeat earnings. Companies down at least 4% include New York Times, Barnes & Noble, and Sinclair Broadcasting. Those off at least 3% include Apple, Sirius XM, RealD, Dish Network, and Cablevision. The short list of gainers includes Best Buy (+4%) and Netflix (+2%).
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.”