Delinquent Receivables, the New Wrinkle in Media Earnings -- and Worse to Come
With an economic recovery now unlikely for at least another 12 months, media execs are facing bigger problems with revenue shortfalls, mounting debt, shrinking advertising dollars and a new wrinkle -- delinquent receivables.
Unpaid bills from the business that media companies do with each other are likely to begin taking a bigger bite out of the bottom line, particularly where struggling TV stations and their program producers and syndicators are concerned.
Tribune Co.'s bankruptcy woes are having an adverse impact on the license fees and shared ad revenues generated by multi-year syndication pacts. CBS, for instance, has decided to accept half of a $2.4 million payment due from Tribune to salvage its syndication pact. Tribune is expected to make similar arrangements with NBC Universal, Warner Bros. and 20th Century Fox Television. Young Broadcasting and other TV station group owners filing for Chapter 11 protection from creditors.
CBS, an advertising-dependent, pure-play broadcaster with its own financial struggles, depends on its TV studio for 45 percent of the company's annual EBITDA -- far more than any of its peers, according to Bernstein Research in a client report not available online. CBS is expecting to reap more than a one-third of this year's anticipated $1.9 billion syndication revenues in the third quarter in order to offset losses from its radio, outdoor and broadcasting operations.
By comparison, the TV studio business contributes only 11 percent of estimated 2009 EBITDA at News Corp., nine percent at Time Warner and two percent at Disney. First-run syndication of shows like Entertainment Tonight and Wheel of Fortune and network production of hit series such as CSI that can be rerun indefinitely generate license fees, shared advertising revenues and some barter value.
A growing shortfall in such receivables will require companies to do more than cut costs and lower earnings guidance to beat investor expectations. They will need to come to grips with permanent changes in media industry as well as in macroeconomics -- from the long-term impact of unemployment and tight credit on consumer and advertiser spending to the cost and revenues associated with going digital. Companies straining to pay their bills is one thing. It's something altogether different for companies to budget, forecast and spend against the uncertainty of sweeping technological and economic change.
Richard Berner, Morgan Stanley's chief U.S. economist, makes a compelling case why companies and consumers must adjust to a new economic reality framed by soaring debt that will drive up interest rates, reduce capital and productivity and "imperil" financial stability. Anyone not planning for the worst (how government, corporate and consumer debt is adversely impact each other) will be consumed by what he calls "America's fiscal train wreck."
"I'm shocked at the business mood... that it's going to take five years at least before we see any real growth," News Corp. CEO Rupert Murdoch said at last week's Allen & Co. conference. Some of the reasons:
- Consumers spending, which is 70 percent of GDP, will remain restrained as unemployment rises into the double digits and credit remains tight.
- Corporate spending will remain tight in advertising, marketing, expansion and innovation in the absence of economic clarity.
- Traditional income streams such as syndication will see continued erosion of its customer base. Television viewers are scatteingr to niche outlets, online video and DVRs. Cable networks arer opting to underwrite more of their own original programming. TV stations and international markets under financial pressure are not making as many long-term program buys.
- Digital dollars will not grow fast enough to offset secular and cyclical financial losses. The growth in free, ad-supported online video will challenge rather than enhance conventional content syndication or upfront TV network advertising, which is expected to decline 20 percent this year.