His report to clients, that was not released publicly but that helped to boost media stocks Monday, broke what has been Wall Street's tepid support of traditional players so far this year.
Television will "thrive in many cases due to increased competition for their product by distributors" and 2010 advertising growth could surprise to the upside. The biggest unknown continues to be how broadcast networks and TV stations will evolve into a subscription-fee model, Swinburne said.
The advertising-dependent broadcast networks/TV station model cannot complete with high-margin pay-networks and its news monopoly has been eroded by the Internet, making it the media version of "the long-distance/RBOC" artificial construct from telecom, he said.
Morgan Stanley upgraded the media sector to "attractive" amid historically low media stock prices. It specifically upgraded Walt Disney Co., CBS Corp., Time Warner and Scripps Network Interactive, while downgrading Viacom and Discovery. News Corp. remains unchanged.
Despite secular risks in DVD, measured media and local TV revenues, Morgan Stanley says it expects 15 percent to 17 percent earnings per share growth in the media sector over the next 12 months. Here are some of the reasons why:
- Television usage is growing in comparison to radio and newspapers, In the first quarter, television usage grew at roughly the same rate as total Internet usage.
- Pricing power exists because television content creation has high barriers to entry and suppliers are fairly consolidated.
- National brand advertising is fundamentally different from call-to-action advertising such as classifieds, local auto and real estate upon which newspapers and radio depend.
- Television is shifting from an advertising-dependent to a subscription fee supported model. Some of the incentive comes from continuing DVR dilution of advertising effectiveness, and increased competition from telcos and cable for affiliate pricing of pay-TV networks.
- Historical GDP correlation suggests US ad spending could grow two to three percent in 2010, which could be doubled by media conglomerate-owned cable networks such as HBO and TNT (Time Warner) and ESPN (Disney).
- Declining home video revenues and increases in digital distribution will be slower than expected, while the film industry reigns in its production budgets and marketing spend amid historical box office returns the first half of 2009.
- Content supplier leverage and global demand for US television and movie content will rebound to new highs. "This is one US export business that we think could not be replicated at lower cost structures in emerging markets," the report said.
A "bullish" Morgan Stanley has raised its across the board estimates for advertiser spending to two percent in 2010 that will see all traditional media companies return to positive, albeit marginal, growth, with only Viacom and News Corp. straggling at a negative one percent. Broadcast TV will slump to 1997 adverting spending, or $39 billion in 2010, cable TV ad spending will return to 2008 levels of $27.3 billion. Overall US advertisers spending will fall to 2002 levels, or $167 billion, the report said.
Although the media group is "attractively valued" relative to the market, there is room for expansion relative to the S&P 500, which the media industry underperformed by 14 percent on a cumulative basis since the beginning of the recession. That same point was embraced by a story in this week's Barron's that argued, "The reality is that the best-managed media and advertising stocks are unwarrantedly cheap."