For a sense of how blah the Q3 earnings season was, here’s a sample of some of my favorite headlines from analyst reports for the period: About Comcast, “Not Sexy, But Safe (…But Maybe Safe IS Sexy).” About Disney, “Expect No Magic In The F1Q13 Kingdom.” About News Corp, “Still Waiting For More News.” About Time Warner, “Cost Controls Fuel Profit Upside.” And the winner, about Viacom: “Things Starting To Get Less Bad!” All in all, the results weren’t as dreary as you might have expected in a period when ad sales were soft (aside from the Olympics and political spending), TV ratings were down, box office fell, and pay TV subscriptions were flat. The good news from the companies’ perspective is that investors already knew about most of these issues. And CEOs seemed to find it easy to counter disappointing surprises. Some reassured the Street that ad sales kinda, sorta seem to be improving — and that they’re still committed to returning cash to them through stock repurchases or dividends. All in all, the Dow Jones U.S. Media Index is down 2.6% since the beginning of this month, just slightly lower than the benchmark Standard & Poors 500 which is -2.2%. That’s pretty good considering that the Media Index is up 28% so far for all of 2012 while the market is +10%.
Still, CEOs did their best to puff up their results and blame others for their problems. Accounting geeks had fun trying to see whether companies that beat analysts’ forecasts did so based on the success of their core operations, or short term fixes such as cost cuts and unusual deals. For example, DreamWorks Animation’s surprisingly strong results looked extraordinary due to its unexpected renewal of a library licensing agreement with the BBC which accounted for about 28% of its Q3 earnings. (The company curiously didn’t mention this significant fact its press release, which said the results were “driven by the blockbuster international box office success of Madagascar 3: Europe’s Most Wanted.”) You also could play BINGO waiting to hear which of the usual-suspect scapegoats CEOs would cite for their problems. Considering how many blamed the Olympics for disrupting ad sales or movie attendance, I have to wonder when someone will launch a campaign to outlaw this menace to the national media ecosystem. Other disruptive forces include the economy and/or economic uncertainty, the political conventions and campaigns, and Nielsen’s inability to fold tablet and smartphone video viewing into its ratings.
The most interesting addition to the list is the DVR — or, more precisely, the growing number of TV viewers who use DVRs to postpone watching primetime shows for more than three days. CBS’ Les Moonves and Disney’s Bob Iger said in their earnings calls that this helps to explain why NBC is the only network whose primetime ratings are up so far this season, as the Big 4 networks’ collective audience (among the 18- to 49-year-olds they target) is down 8%. The execs say it’s time to change the way ads are sold from the current system — which counts the viewers who watch up to three days after they air — to one that reaches out seven days. While that could benefit broadcasters, several analysts believe the debate glosses over deeper problems. “Last year the broadcast nets had a very good creative season,” says Bernstein Research’s Todd Juenger. “This year, not so much, which amplifies the swing back to cable network viewing” where the total 18-to-49 ratings are up 2% vs last year.
Here are some of the other themes from the Q3 season:
Movies. Total box office was down 6.9% vs last year’s Q3, leading several execs to resort to their familiar excuse that they faced “tough comparisons” — always adding that they remain optimistic about their holiday releases and 2013. Time Warner had a huge hit with The Dark Knight Rises, but that wasn’t enough to compete with last year’s Harry Potter And The Deathly Hallows Part 2. Similarly, Disney’s Brave and Finding Nemo 3D suffered next to last year’s Cars 2 and Lion King 3D. Sony Pictures could have had a winning quarter if it just released The Amazing Spider-Man — but it was offset by disappointing results for Total Recall and Men In Black 3. Viacom’s Paramount fared better (for itself, although not theaters) with its strategy to produce fewer, but more profitable, films. It had just one major release — Katy Perry: Part Of Me — so revenues were way down vs last year which had Transformers 3. But profits rose as the studio managed to release the Perry theatrical film and DVD in the same quarter. Fox also was up, helped by Ice Age: Continental Drift. Meanwhile, NBCUniversal’s Universal Studios had reason to smile with Ted and The Bourne Legacy, and Lionsgate roared over The Possession, The Expendables 2, and Madea’s Witness Protection.
Exhibition execs noted that attendance in the quarter started off strong with The Dark Knight Rises and Ted, but sagged after the Aurora shootings and during the Olympics. There also were fewer 3D films, which meant they sold fewer premium-priced tickets. The average ticket price, at $7.78, was down 2% vs the period last year, the National Association of Theatre Owners says. But the Street remains optimistic about the business, betting that box office for 2012 could be +10% vs last year with eagerly anticipated Q4 releases including Sony/MGM’s Skyfall, Lionsgate’s Twilight: Breaking Dawn Part 2, Warner Bros’ The Hobbit, and Fox’s Life Of Pi.
Ad Sales. It’s unusually difficult to read the state of the market. Ad agencies, usually a bellweather for overall sales, generated disappointing Q3 results. “The truth is, aside from digital media and 2012 Olympic and Political spending, the U.S. ad economy has appeared weak most of the year,” Nomura Securities’ Michael Nathanson says. “Up to this point, no one seemed too concerned. We think worries about 2013 ad growth will soon become a concern.” But media execs for the most part were characteristically upbeat. The Olympics fueled national sales in Q3. Meanwhile, political ads as well purchases by auto companies — which are seeing a resurgence in sales — provided a big boost to local. And now? Depends on who’s talking. CBS says the TV scatter market is “healthy” with prices up by mid-teen percentages over the upfront market. Discovery also sees double digit growth over the upfront market, but it adds a qualifier — calling the market “relatively healthy” with “some pockets of softness with regard to volume.” And News Corp describes the market as “mixed,” with broadcast scatter inventory selling for “a modest premium” over upfront and national cable “a bit stronger.” It also warns that there’s “limited visibility.”
Analysts also noted a potentially worrisome potential trend: Disney and Time Warner reported soft ad sales for sports. That has some wondering: With the recent barrage of pricey sports rights deals, “have the networks created an oversupply similar to what radio did a decade ago?” UBS Investment Research’s John Janedis asks. Although he doesn’t think the networks are vulnerable yet, if the overall market weakens then this is something that’s “worth watching.”
Pay TV. Once again, the industry was in a holding pattern with cable subscriptions down, and telco and satellite up — which can support cases for pay TV bulls and bears. The total number of pay TV subscribers, at 84.4M, is up 26,000 vs Q2, International Strategy and Investment Group’s Vijay Jayant says. Cable lost 339,000 leaving it with 41.4M while DirecTV and Dish Network collectively gained 48,000 for a total of 34.0M, and phone companies led by Verizon and AT&T picked up 317,000 customers for a total of 8.9M. So here’s another quarter with little evidence of widespread cord-cutting, right? Not necessarily. As the economy improves, the number of people buying and renting homes is growing. As a result, Bernstein Research’s Craig Moffett says, the negligible growth in subscriptions suggests that “cord cutting is a reality” — less for techies who prefer to watch video off the Internet than for people who can’t afford the pay TV bundle anymore. Rising costs for cable service “are undoubtedly becoming more burdensome for lower income households, increasing the likelihood that some households are reverting to rabbit ears (cable losses, at least, continue to be concentrated among low-end ‘broadcast basic’ subscribers).”