Sector outlooks



The cable industry saw no subscriber declines in the past two recessions, but Comcast CFO Michael Angelakis has been outspoken about how the current economic outlook could hurt the largest U.S. cable operator.

"When we see a little bit of a rise in both churn and bad debt, that indicates there's an economic issue," Angelakis told investors in December, making him one of the first media honchos to address the ongoing credit crisis. This month, however, he predicted that Comcast "will ride out this downturn well" and projected at least 8%-10% revenue and operating-cash-flow growth -- decent but below its recent double-digit-percentage growth levels.

The troubled housing market is a key challenge for the sector. With widespread foreclosures, fewer houses being built and fewer people maintaining second homes, several big distribution companies could feel the pinch.

"It used to be, 'People would rather starve than give up cable.' But not anymore," longtime investor Hal Vogel says. "Now, if you can't make your mortgage payment or rent payment, you're not able to make the cable payment."

Goldman Sachs' Ingrid Chung says Time Warner Cable will face increasing competition in a recession environment and that satellite TV giant Dish also is vulnerable.

"Dish's lower-income sub base may be more susceptible to economic weakness," says Bear Stearns analyst Spencer Wang, comparing Dish unfavorably to competitor DirecTV's larger percentage of high-income customers.

"DirecTV's relatively affluent sub base and tight credit policies should insulate it from a spike in churn," Kaufman Bros. analyst Todd Mitchell argues.


TV ad spending saw significant declines in the past two recessions, meaning station groups could be hit hard by another downturn. But this year's record political ad spending (and Olympics advertising) will offset recession-related declines, JPMorgan's John Blackledge says.

Still, he estimates that a recession could shave as much as $65.4 million in revenue off of Hearst-Argyle's estimated 2008 accounts, up to $51.5 million at Sinclair and up to $32 million at Lin. Radio companies, whose stocks already have suffered in recent years, also are expected to feel added pressure.

"Radio fundamentals are tied to the economy," Goldman analyst Mark Wienkes said at the start of the year. "As such and with a deteriorating economic backdrop, we maintain our subdued outlook for radio stocks."


Analysts have said that Internet and video game businesses are among the few "attractive" areas of the industry amid a difficult macroeconomic climate.

"The video game sector appears recession-proof," Wedbush Morgan Securities' Michael Pachter says. Solid software sales growth should continue into early 2009 as the holiday lineup includes such high-priced games as "Guitar Hero III" and "Rock Band."

Vivendi chairman and CEO Jean-Bernard Levy expects his gaming business -- along with his music unit -- to be unaffected by the economy. "We have not seen in the past any tie between economic growth and the consumption of video games and records," he told a recent investor conference.

Such tech-focused sector players as Google and Apple generally are seen as fairly recession-proof even though their stocks have taken hits lately.

"Internet advertising is still growing 20%-plus per year since ad spend still has to catch up with time spent online," says John Kim, managing director of venture firm HIG Ventures.
Meanwhile, digital media and entertainment startups still are attracting venture capital, and it would take a widespread and prolonged recession for that funding to dry up.

"Capital is and will remain available, I believe, for exciting new platforms," says Thomas Byrne, managing director of NBC Universal and GE Commercial Finance's Peacock Equity Fund.

Echoes Kim: "I really doubt funding for digital startups will decline. There is still a lot of money to be invested from (venture capital) funds that have been already raised."