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Media Analysts Have Low Expectations for Film, TV Companies

Posted on: Thursday, 4 August 2005, 00:00 CDT

Aug. 3--Media industry analysts are warning 2005 could shape up as a year of "Bad News Bears" for some of the giant film and TV companies.

The U.S. box office is sagging. DVD sales gains are slowing. Advertising revenue at broadcast television networks is slipping as ratings drop. And the growing popularity of digital video recorders has advertising and television executives worried.

"If these trends continue, the filmed entertainment and broadcast television segments could pressure the performance of the large-cap media companies over the next several years," media analyst Lowell Singer of investment firm SG Cowen cautioned investors yesterday in a research report.

The variety of concerns along with questions of how much growth potential remains for the industry are reflected in drooping stock prices this year for media giants including Time Warner, Viacom, Walt Disney Co. and News Corp.

Time Warner is the first of these to report on the latest quarterly earnings today. Analysts will be looking for signs of how well it is addressing the industry's problems plus the company's own challenges at units such as America Online.

The film industry's domestic box office revenue is off 9 percent so far this year, totaling less than $5.3 billion, the lowest level since 2001.

Analysts are debating how much of the relative blame lies in high ticket prices, the rapid availability of home videos and weaker movies.

At the same time, the cost to produce and market a film has jumped an average of more than 7 percent a year between 2001 and 2004, according to industry statistics. And the number of films released widely -- in more than 3,000 U.S. theaters at once -- totals 36 so far this year, compared with 24 a year ago, putting more pressure on marketing costs.

"We remain concerned about the economics of the studio business," Singer said.

Those kinds of concerns were balanced by the soaring popularity of DVDs in recent years, but that trend may be slowing sooner than expected.

DVD sales have totaled $6.95 billion this year as of June 18, up nearly 5 percent from a year ago. But that's a slower pace than the double-digit gains of previous years.

"We expect low-single digit domestic DVD growth in 2006, leading to a likely double-digit decline in domestic DVD sales in 2007," Goldman Sachs analyst Anthony Noto said in a report. "Additionally, the marketing and distribution costs of DVDs could be on the rise as the shrinking DVD release window is resulting in films coming out on DVD faster than ever and staying on shelves for shorter periods of time."

That trend has walloped DreamWorks Animation, whose "Shrek 2" DVD sales have been disappointing, and Pixar Animation, which said "The Incredibles" was falling short of expectations on DVD.

Although ABC, which is owned by Disney, has seen ratings rise, thanks to hits such as "Desperate Housewives," overall viewership for the broadcast networks declined in the 2004-05 season.

And advance ad sales in the so-called up-front period for the 2005-06 season dropped 1 percent, to $9.2 billion, despite a big gain for ABC, according to SG Cowen.

Much of the audience has gone to cable TV networks, which gained 12 percent in the up-front period to $7.2 billion. But the growing attractiveness of online advertising also threatens to siphon off revenue, analysts say. "Ad spending is migrating away from broadcast television," Singer said.

In addition to industry woes, analysts will be focusing on more particular developments at each media company.

For Time Warner, they will be looking for signs of whether AOL's attempt to attract more visitors and ad revenue by expanding its non-subscription offerings is working and how quickly Time Warner Cable's digital phone service is catching on.

At Viacom, which reports earnings tomorrow, analysts will seek an update on plans to split CBS and other slow-growing units from MTV and other faster-growing operations, which some analysts say will not be enough to raise perceptions of the company's value.

At Disney, which reports Tuesday, analysts will want signals of whether its theme parks can recover as quickly as the company expects, whether ABC's ratings success can be expanded and whether Robert Iger, who is taking over as chief executive, can clinch a distribution deal with Pixar.

And at News Corp., continued success of "American Idol" will be overshadowed by questions on what the sudden resignation of Lachlan Murdoch as deputy chief operating officer will mean for father and chairman Rupert Murdoch's succession planning.

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Source: Newsday, Melville, N.Y.

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