Execs see slower economy, even if we don't hear it from them

Let's end right now any discussion about whether media and entertainment companies will feel a pinch from a sluggish U.S. economy. Anyone who listened closely should have come away from the just-ended quarterly earnings season with the understanding that at least local advertising markets already are seeing a drag. Plus, now there are signs that European economies are starting to feel the squeeze, which could mean added challenges for media companies with significant business on the continent.

Sure, entertainment executives didn't always answer earnings-call questions about a possible U.S. recession in much detail, but the writing on the wall was there.

News Corp. chairman and CEO Rupert Murdoch put it most bluntly, saying, "There's no doubt the consumer economy is stressed."

He and president and COO Peter Chernin went on to argue that News Corp. is better positioned than ever to weather a weak economy and outperform most peers. But Chernin pinpointed local ad markets as key challenges when he said of the current quarter, "We are seeing a little bit of a slowdown in TV station pacings."

CBS Corp. CFO Fred Reynolds also highlighted TV station momentum as slower than projected, even though he emphasized that record political ad revenue is helping his company and that talk of an economic decline might be overstating things.

"I'm not sure we see a recession because we are still seeing growth," he said. "I think we see things slower." Slow enough, at least, for CBS to recently lay off people at many TV stations to reduce costs in a lower-revenue-growth environment.

Smaller sector players also tooted their own horns, acknowledging clouds on the economic sky almost as an afterthought.

"We're off to a good start in 2008," Martha Stewart Living Omnimedia CEO Susan Lyne said. "This strong performance demonstrates the resilience of our brands, especially given the challenges facing the broader advertising and retail markets."

At TV station group Belo Corp., CEO Dunia Shive similarly garnishes a positive forecast with sprinkles of economic angst. "While local and national spot revenues are currently pacing better than (in the) first quarter, we can't predict with certainty where the second quarter will finish given that economic conditions continue to be soft," she said.

Re-reading these comments makes the conclusions reached by Merrill Lynch North American economist David Rosenberg in a pre-Memorial Day report less surprising. "(Recent) data flow confirmed that a recession began in the first quarter of this year," he wrote, warning that despite a recent return of bullishness to stock markets, investors might have to brace for another market correction this year.

Similarly, Pali Research analyst Richard Greenfield recently urged Disney investors to stop buying the stock by slapping a "neutral" rating on it.

"We do not believe the parks are recession-proof, and we find it hard to believe that weak consumer confidence will not begin to have an impact as we move into fall," Greenfield said. That's because people are deciding now — in a weak economy — whether to go to Disneyland and other parks this year.

Even if the U.S. economy begins recovering in the back half of 2008, concerns about the outlook in Europe are on the rise. Citi Investment Research recently mentioned video game companies, Marvel Entertainment and News Corp. as entertainment firms that could be hurt given their sizable revenue from there.

Despite being considered recession-proof, gaming companies in particular "seem to be at risk should European consumer demand slow meaningfully," Citi chief U.S. stock market strategist Tobias Levkovich says.

Bottom line: Whatever the rhetoric from entertainment executives might be, economic weakness looks set to remain a drag on media companies all year long.

Georg Szalai can be reached at