Economic slowdown hits Hollywood's backyard

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What a difference a few weeks makes for Leslie Moonves.

The CBS Corp. CEO said in an earnings call Feb. 28 that he was "not seeing a recession" in day-to-day operations. But at the McGraw-Hill Media Summit on March 14, he was less sanguine about the dreaded "R" word.

"If there's a downturn in the economy -- and clearly there is -- and it affects some of our businesses at their fringe, with radio and TV stations, we do things to change it," Moonves said.

Such is the delicate dance moguls like Moonves are engaging in as they come to grips with the prospect of a recession.

And no conglomerate might feel the pain deeper than CBS, which relies to a greater degree on ad revenue than its studio peers. Which isn't to say the likes of Disney or Viacom are immune.

With a media economy that has never been larger, more diversified and more global, experts disagree on how exposed some sectors are. A prolonged downturn, however, likely would spare no one.

"Every company is different, but all will suffer to some degree," longtime media analyst and investor Hal Vogel says.

Conventional wisdom used to be that content companies were recession-resistant, except perhaps for ad-driven businesses like network TV.

But the current economic sluggishness could bring with it a decline in consumer spending on entertainment, especially after years of ballooning movie ticket prices, increasing studio dependence on consumer products like DVDs and cable bills that often top $100 a month.

For that reason, Wall Street lately has taken a particularly grim view of big media stocks, with nearly all trading at close to their 52-week lows. Even with an across-the-board boost from the Fed's interest-rate cut Tuesday, The Hollywood Reporter Showbiz 50 stock index closed Thursday at $1,062.12, off 22% from its peak of $1,375.53 in early November.

Predictions aren't any more bullish.

Goldman Sachs recently cut its stock targets for entertainment firms by 10% "to better reflect the impact of a recession." Standard & Poor's media and entertainment credit analyst Heather Goodchild predicts that the coming quarterly earnings from media companies will show some first "mild effect" from a recession.

The gloomy outlook is causing moguls to prepare their sprawling businesses for a downturn.

Moonves is taking a proactive stance, assuring Media Summit attendees that "there are ways to adjust how you operate your business, how you sell your business. There are cutbacks in some of the personnel that we have, and some of the cost structure, and we are able to manage it."

Still, Wall Street has fired a few arrows at CBS.

"CBS continues to be the most unfavorably positioned company in our entertainment coverage universe," says Goldman Sachs analyst Ingrid Chung, who forecasted below-Street consensus estimates for 2008 that call for revenue of $14.06 billion, down minimally from $14.07 billion in 2007, and a virtually unchanged profit of $1.23 billion.

JPMorgan analyst John Blackledge predicts that the company's radio unit could see revenue fall from 2%-6% in a recession, while its TV revenue could register a 0.5%-1.4% gain. Bernstein analyst Michael Nathanson has estimated that CBS Corp.'s earnings per share could take a hit of up to 20% in a recession.

Moonves has tried his best to put a positive spin on the criticism. "It isn't 100% recession-proof," he acknowledged of the content business at the confab. "Having said that, it is less affected by a downturn than an awful lot of things."

Analysts haven't been kind to Disney, either.

Nathanson says the company could see a 12.3% drag on earnings per share largely because it takes in 21% of its revenue from advertising and a sizable 25% from its theme park operations, which are vulnerable to declines in travel and tourism. Citi Investment Research analyst Jason Bazinet recently downgraded shares of Disney to "sell."

But Disney's most recent fiscal first-quarter earnings showed no such sluggishness, and CEO Robert Iger told CNBC he was pleased with the pacing of the parks and cruise business for the rest of the year.





Analysts also note that Disney, like all its studio peers, is a much different company than it was during previous recessions.

"Disney's earnings mix has shifted notably away from theme parks since the 1990-91 recession," Pali Research's Richard Greenfield says.

Yet Iger also is preparing his troops for what might lie ahead. He told a CNBC audience that "there are circumstances in the marketplace that are really changing, whether it's oil prices or what's going on with the mortgage crisis."

NBC Universal's TV networks are similarly exposed to a weak economy, even though parent GE doesn't break out specifics for the division.

However, NBC Uni has expanded its cable portfolio and international business by investing in such growth markets as Japan, India, Germany and the U.K., which could insulate it against declines in U.S. ad spending.

Sterne, Agee & Leach analyst Nicholas Heymann notes that recent cost-cutting by the company should soften any economic blow.

"NBC Uni has moved to save about $50 million by 'skipping' (and changing) the upfronts and ordering far fewer shows," Heymann says.

Overall, GE has projected at least 10% operating income growth for NBC Uni this year. "Cost reductions will be a critical part of achieving this," Heymann says.



News Corp. chairman and CEO Rupert Murdoch acknowledged at a recent investor conference that he has become "more pessimistic" about the economy. His recession defense has stressed the company's diverse holdings.

"We are no longer dependent on the strength of one market or medium," Murdoch said in the conglomerate's latest earnings call, highlighting international expansion and subscription businesses as key to riding out economic downturns. He pointed to such recent acquisitions as MySpace and satcaster Sky Italia as well as the acquisition of TV assets in hot foreign growth markets like Eastern Europe.

Analysts expect that News Corp. will outperform its peers, but Goldman's Chung says that operating income growth will slow to 11% for first-half 2008, down from the 23% in second-half 2007.

Like its peers, Viacom's Paramount studio could suffer if a recession causes fewer viewers to line up for its summer blockbusters. But with a stable of such younger-skewing TV networks as MTV and BET, it might be more insulated from a downturn.



"Most of our traditional lead advertiser categories -- including movie studios, quick-service restaurants, beverages and games -- historically have been recession-resistant industries," Viacom president and CEO Philippe Dauman said in his latest earnings call.

Stanford Group analyst Frederick Moran projects 5% revenue growth in the company's cable networks unit this year and 5% growth in its entertainment division, with overall operating income before depreciation and amortization up 6%.

Time Warner is one of the biggest media conglomerates, but so far it rarely has been mentioned by Wall Street observers as being especially vulnerable to a recession. To some degree, that is because of the Street's focus on how new CEO Jeffrey Bewkes will restructure the company and its units.

But analysts also argue that TW is less exposed than many of its peers because it derives much less of its total revenue (19%) from TV networks. Such divisions as AOL and Time Warner Cable are considered by many to be more recession-resilient, though it remains unclear whether an ad spending downturn might affect high-growth digital properties and how the mortgage crisis will impact cable subscriber growth.

Nonetheless, TV network ad concerns recently caused Miller Tabak + Co. analyst David Joyce to lower his 2008 revenue forecast for the company by nearly $300 million and his operating-cash-flow projection by about $220 million.

Plus, S&P's Goodchild says that cable networks haven't shown enough measurability for marketers compared to online and other digital media, which in a recession could lead to advertising-revenue share shifts to newer forms of media.

Sony is perhaps most recession-resistant of the media conglomerates given that it doesn't operate a TV network division.

"Their entertainment business wouldn't see much of an impact," says Daniel Ernst, an analyst at Soleil-Hudson Square Research. "Their TV (work) is mainly in syndication, so they are not tied to ad dollars.

"Where it does have an impact is in the electronics business," he adds. "An economic slowdown will certainly slow adoption curves" for new tech gadgets.

Observers say that Sony and other consumer electronics giants already have seen some early pricing pressures, signaling that consumers might have started reducing their discretionary spending budgets. The Commerce Department recently reported that U.S. retail sales fell 0.6% in February, even though analysts had expected a slight increase. Electronics sales were down 0.4% for the month.

But video game hardware and software sales rose 34% for the month, which Ernst says bodes well for Sony's gaming division.



The good news is that media stocks generally emerge from a slump ahead of other industries once consumers start spending again and ad dollars flow more freely.

"Investors may look to buy cyclical stocks like media players as an economic recovery occurs because advertising demand should re-accelerate," Moran says.

Back in the 1991 recession, shares of Disney predecessor Capital Cities/ABC, Time Warner, CBS and Paramount doubled or even tripled coming out of that economic slump.

There already are those who have turned bullish on sector stocks, including Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets, who in January started recommending media and retail stocks as having upside.

But until the overall economic outlook smoothes out, the industry likely is in for a bumpy ride.   
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