Fitch Ratings says media credit outlook stable


Fitch Ratings, in its latest report (12/3) said its credit outlook for the media and entertainment industries is stable now that the worst of the advertising downturn has past, but noted that risks are still present in the broader economy. This is certainly more optimistic than its October report.

Fitch believes the risk of a double-dip recession remains present going into 2010. With political and Olympic ads tightening available ad inventory, Fitch expects ad pricing to stabilize (flat to plus/minus low single digits) in 2010 against weak prior-year comparable periods. Fitch has ratings on more than 20 companies in the sector, including CBS Corp., Time Warner Inc. and the Nielsen Co.

Fitch believes that some mediums will be left behind even in an ad recovery. Fitch expects print mediums, namely newspapers, yellow pages and consumer magazines, to be down again off very easy comparable periods due to permanent shifts in advertiser sentiment and excess ad inventory that will plague the industry for years to come. Radio is likely to be flat to down slightly; and outdoor, which typically lags, should begin a slow recovery later in the year. Broadcast TV will be an early beneficiary of increased ad demand with cable nets and large market TV broadcast affiliates also poised to participate in a potentially modest rebound.

It is Fitch’s view that the economic downturn has begun to reshape the competitive landscape in favor of financially and operationally stronger entities. However, this will be a gradual, multi-year process and Fitch now anticipates the current glut of ad inventory (particularly in local markets) to endure the downturn. Even though owners of these weaker entities may not achieve returns that exceed their cost of capital, balance sheets of weak local players will continue to be restructured, ad capacity from fringe enterprises like the CW and MyNetwork could remain in place, new ownership will delay (what Fitch believes to be) the inevitable failure of certain newspapers and outdoor displays will remain empty rather than be torn down. The affect of this activity will be a degree of pricing and margin pressure that negatively affects all local ad-market participants (strong
and weak alike) in the near term.

Operational considerations
–Audience fragmentation will persist throughout 2010, but, positively, the pace of legitimate new media entrants should slow. Fitch believes the field of legitimate on-line platforms is possibly set in video and music. Fitch does not expect new Internet radio platforms to emerge, and the shift of eyeballs in video will likely occur to existing players, including the conglomerates’ own sites. This will keep recent efforts for cross-media measurements at the forefront in 2010. Similarly, the pace of new cable networks should slow in 2010.

Usage of time-shifting will continue to ramp up in 2010. Fitch remains cautious regarding the touted benefits (to advertisers) of DVR usage. However, it is not illogical to extrapolate results to date (the fast forwarding of commercials is largely offset by increased viewing) with an expanding universe of users, and is already factored into C+3 pricing. Over the longer-term, Fitch continues to expect time shifting to be most detrimental to local broadcast affiliates.

–Recognizing that media conglomerates’ ratings are anchored by their cable networks portfolios,  Fitch does not expect canceling cable subscriptions and going online only (Cutting the Cord) to be a major threat in 2010. While viewers want 100% on-demand optionality, Fitch continues to believe they also want a back-bone of live TV channel line-ups.

–On the surface, the TV Everywhere concept as proposed by Comcast and Time Warner appears to be a sound secular risk mitigation initiative for all parties. However, distribution companies may face challenges in convincing content companies to broadly sign-on. Some content companies may push for incremental pricing on ‘authentication’ offerings in an effort to find revenue growth opportunities and to give consumers a larger choice. Fitch believes any incremental pricing that is packaged in a way that gives the content companies the ability to reach consumers without the distributors runs the risk of having consumers migrate towards a la carte viewing habits.

–Fitch expects the four major broadcast networks to remain in 2010. However, at least one of the four could explore becoming a cable network as early as 2011, and Fitch believes NBC and ABC are the most logical candidates. While the departure of one of the four networks would be detrimental to that affiliate group, it would actually be a material boost for the remaining three networks and affiliate groups.

–Increases in movie piracy will exacerbate existing pressure on DVD sales from the recession and kiosk pricing. Websites and P2P protocols are now available that allow the streaming and illegal sharing of video without onerous download times. Fitch does not expect the theatrical window to be materially affected by piracy due to the viewing experience (social, quality, etc). Movie studios will continue to emphasize cost controls in an attempt to make the theatrical window less of a loss-leader. The FCC’s recent statements on net neutrality that specifically exclude illegal activity are a positive development for content companies. Fitch does not expect piracy to be a material concern for the TV studios so long as incremental pay walls are not erected around TV content.

–Proving that what goes up must come down, Fitch expects pay walls will be erected and dismantled in 2010 as media companies (with print products) experiment with charging users for online content and are ultimately disappointed by the results. With the exception of The Wall Street Journal, The New York Times, smaller local newspapers (that face less fierce cross-media competition) and business to business magazines, most media companies have too many competitors in their content niche to compel users to pay. Free competitors are likely to capitalize on this de facto audience minimization strategy to gain share of viewers, and advertisers will be attracted to mediums and outlets that deliver scale. Any attempt to exact price increases on the remaining paying users is more likely to accelerate their departure toward free alternatives than to offset the ad dollars lost from the lower audience base. Parent companies will seek to halt the death spiral by re-opening most of their content broadly and dedicating efforts toward enhancing the user experience, content delivery/packaging and establishing partnerships with complementary content providers.

Despite the aforementioned fragmentation and secular challenges, the existing major media players will continue to be the largest aggregators. This includes the local broadcasters, which are positioned to gain share from print (albeit, online will capture large portions). Additionally, increases in affiliate fees on cable networks will also continue and should offset weakness in advertising revenue streams and other businesses (DVD, print).

2010 outlooks:
–CBS Corporation (‘BBB’; Outlook Stable)
–Cox Enterprises (‘BBB’; Outlook Stable)
–Discovery Communications LLC (‘BBB’; Outlook Stable)
–Liberty Media LLC (‘BB-‘; Outlook Negative)
–The McGraw-Hill Companies (‘A+’; Outlook Stable)
–News Corporation (‘BBB’; Outlook Stable)
–Thomson Reuters Corporation (‘A-‘; Outlook Stable)
–Time Warner Inc.(‘BBB’; Outlook Stable)
–Viacom, Inc. (‘BBB’; Outlook Stable)
–The Walt Disney Company (‘A’; Outlook Stable)
Publishing, Printing, TV and Radio Broadcasting
–Belo (‘BB-‘; Outlook Negative)
–The McClatchy Company (‘C’; No Outlook)
–R.R. Donnelley & Sons Co. (‘BBB’; Outlook Stable)
–Univision Communications (‘B’; Outlook Stable)
Entertainment – Movie Exhibitors, Music
–AMC Entertainment (‘B’; Outlook Stable)
–Regal Entertainment (‘B+’; Outlook Stable)
–Warner Music Group (‘BB-‘; Outlook Stable)
Business Products/Services, Ad Agencies
–The Dun and Bradstreet Corporation (‘A-‘; Outlook Stable)
–The Interpublic Group of Companies (‘BB+’; Outlook Positive)
–The Nielsen Company (‘B’; Outlook Stable)
–Omnicom (‘A-‘; Outlook Stable)