The sluggishness of the US economic recovery has prompted Moody’s Investors Service to revise its outlook for the US newspaper sector from stable to negative and for the cable television sector from positive to stable.
The continuing troubles for newspapers are already well known, so the Moody’s action is hardly a surprise.
Moody’s said it expects newspaper revenue to decline 5% to 6% in 2010 and in the mid-single-digits in 2011, less severe than the 22% drop in 2009.
“Despite this respite in the rate of decline for newspaper advertising, the industry’s longer-term secular deterioration is returning to the forefront,” said John Puchalla, vice president at Moody’s. “Even in a slowly growing economy, the erosion of newspapers’ readership share and pricing power continues unabated as readers embrace free and low-cost content on the web and mobile devices.”
Aggressive increases in home delivery prices have boosted newspaper publishers’ revenue in the short term, but Moody’s said it anticipates more promotional activity going forward as they seek to limit the erosion of circulation.
The industry will make less use of worker furloughs and, in order to attract and retain employees, it may reinstate benefits cut during the downturn. However, newspapers will continue focusing on structural cost changes, eventually leading to more headcount reductions and a slight uptick in severance costs, Moody’s warned.
“Publishers will endeavor to avoid newsroom cuts that could adversely affect content and competitiveness, although we think they’ll be unavoidable,” said Puchalla.
In order to return the newspaper industry outlook to stable, Moody’s said it would need to expect a stronger and more prolonged economic expansion that could relieve some of the secular pressure on newspaper revenues, or further development of user fees and advertising in new distribution channels through pay-walls or other means that would not overly cannibalize traditional print volumes or pricing.
For the cable TV sector, Moody’s said it continues to project revenue and EBITDA growth of 3% to 4% through 2011. As 2010 draws to a close, the rating agency expects lift from the advertising market rebound and aggressive cost cutting initiatives already taken to contribute to revenue and cash flow growth at the high end of its earlier forecasted 3% to 5% range.
However, lingering economic sluggishness, competition from both traditional and alternative outlets, and the maturity of the video offering combine to temper its expectations for growth of subscriber counts, particularly toward the end of the 12- to 18-month outlook horizon.
Moody’s holds a positive bias to its stable industry outlook in light of potentially significant remaining upside in commercial business opportunities and the ability of cable operators to offset eroding economics and subscriber growth with rate hikes. Additionally, normal-course subscriber growth would turn more positive if the economy and/or the housing market were to improve, the credit ratings agency said.
“While credit fundamentals remain strong, recent industry growth drivers such as broadband, digital video and voice will be significantly muted in future periods,” said Russell Solomon, senior vice president at Moody’s. “Wireless substitution and other secular pressures are stalling growth of the voice product and essentially rendering increasingly likely its give-away status as the last leg of the triple-play bundle. Further, the digital video transition is nearing completion, and broadband is approaching more mature penetration levels.”
Moody’s said the video business, still cable’s biggest revenue stream, remains most exposed to potential future customer backlash to price increases, as alternative video options gain greater acceptance in the marketplace.
While demand for the triple-play bundle and advanced video services is still growing in aggregate, the industry is rapidly transitioning to a “zero sum” state with respect to revenue generating units and, ultimately, dollars emanating from each home passed. This will invariably place pressure on ARPUs, or average revenue per customer, Moody’s said.
“We believe that pricing for video service offerings, in particular, has reached an inflection point from which more customers will more actively look to reduce their overall cable bills,” said Solomon. “Moreover, as the cable industry moves to retain customers by offering additional content — either online or through video on demand — margins will likely deteriorate further given the high content costs, without commensurate increases in revenue.”
RBR-TVBR observation: Broadcasters should not yield to the temptation to gloat over these negative comments about two competing sectors. Radio and TV also have a lot hinging on the economic recovery continuing and growing more robust.