Biz banks on recovery
Sept. 11 events affect all, ad biz may be slow to awaken
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So it's small wonder many now say a change for the better will come with a simple change in the calendar. The National Bureau of Economic Research said recently a recovery could take hold as early as summer.
Others believe it will take longer for TV advertising to rebound substantially.
"Even if we come out of the recession, the advertising environment is likely not to come back until the fall at the earliest," said David Davis, senior VP at investment firm Houlihan, Lokey, Howard & Zukin in Los Angeles. "So it could be until the fall of 2003 that we're back on track for ad growth."
A recent Standard & Poor's report suggested advertising will be flat in early 2002 and start to pick up thereafter. But the ratings service cautioned that the "fairly optimistic outlook relies on nothing else going wrong."
Amid such uncertain conditions, congloms are expected to continue emphasizing cost controls in addition to simple revenue growth.
"Even if ad expenditures remain rolled back 10% across the board, it would have zero impact on profits," Houlihan Lokey's Davis said. "You're going to see leaner and meaner -- and slightly more profitable -- entertainment companies over the next three to five years."
Wall Streeters believe cost-cutting initiatives will lead to some pruning of nonstrategic assets by media groups. In 2002, entertainment/media congloms may shed various investments in outside companies, and even bigger media mergers are considered possible as congloms struggle to find the right mix of entertainment operations.
Meanwhile, even the past year held considerable good news for many congloms -- if you knew to look for it. More often than not when discussing the corporate balance sheets, media execs touted the columns listing income from film operations.
That's quite a notable new pattern, as it developed just when media moguls like News Corp.'s Rupert Murdoch and Disney's Michael Eisner were showing signs of utter boredom with the motion picture biz. Studio parents chopped the number of releases and production budgets, and sloughed off distribution rights to co-production partners far and wide.
Then along came a recessionary environment, blowing broadcast advertising ice cold but leaving diversion-seeking Americans still flooding local megaplexes, pushing domestic B.O. toward record highs. "Most of the vertically integrated congloms found out just how cyclical advertising can be, and this was the first such year since many of those conglomerates were formed (in the 1990s)," said analyst Jeffrey Logsdon of investment firm Gerard Klauer Mattison in Los Angeles.
"But I snicker some when I hear about the newfound affection for feature films," Logsdon cautioned. "It might be better said that there is a great enthusiasm now for film libraries."
That's because theatrical releasing is no longer seen as an end game unto itself but reps part of a larger film-division strategy. Ancillary film revenue is increasingly important, with DVD/homevid particularly vital.
Overall, most media stocks will likely close this year with a lower share price than in 2000. But if '01 was something of a rough ride for U.S. congloms of all stripes, mediabiggies were a bit more varied in how they tried to cope with the challenging marketplace.
AOL TIME WARNER (see stock chart)
Early in the year's final month, chief exec Gerald Levin dropped a bombshell: The 62-year AOL Time Warner chief would be turning over the CEO reins at the world's biggest media conglom to co-chief operating officer Richard Parsons.
Levin will take early retirement in May, walking away from a film, TV, publishing and online empire whose years-long construction he personally directed. Still, the news wasn't expected to rock the corporate ship and may be most notable for the elevation of Parsons over co-chief operating officer Robert Pittman.
Meanwhile, the year is otherwise ending on a good news-bad news note for the New York-based behemoth.
"Harry Potter and the Sorcerer's Stone" produced its first $150 million in domestic grosses in an amazing eight days, and by the end of the film's first week in release Warner Bros. had already begun lensing a sequel. Studio is on track to surpass $1 billion in B.O. for its slate for only its second time ever.
At the same time, some troubling reports of stagnating subscriber growth at America Online circulated on Wall Street. The dial-up market is close to saturation, with AOL accounting for a staggering 33 million subs, compared to the 7 million for MSN and less than 5 million for EarthLink, its nearest rivals. Continued online revenue growth depends on converting substantial numbers of dial-up subs to broadband cable Internet access, and the Street is not convinced AOL has a workable strategy in place yet.
Cable systems continue to be a big area of cash-flow focus at conglom, but the year ended with rival Comcast having outbid AOL Time Warner in heavy competish for AT&T's massive cable system.
AOL TW shares have been stuck below their 52-week trading average for several weeks, though several year-end seshes were marked by a renewed interest in media stocks among investors.
DISNEY (see stock chart)
Late-year box office success by Disney/Pixar tooner "Monsters, Inc." put some much-needed bounce into Mouse House movie operations, but it won't be enough to push the Burbank-based studio parent back into the top spot in the B.O. market share race.
Meanwhile, theme-park attendance was battered by the nation's reluctance to fly, and advertising at ABC and the Mouse's cable webs remained sluggish.
Disney executed a major cable-web acquisition during the year, grabbing Fox Family Channel from former owners News Corp. and Saban Entertainment for $5.2 billion. Mouse rebranded web as ABC Family.
Conglom is considered a possible buyer of some TV stations in 2002, and potential asset sales by Disney include the disposition of Major League Baseball's Anaheim Angels and the National Hockey League franchise the Mighty Ducks.
Banc of America Securities analyst Timothy Wallace lowered his price target on Disney shares to $25 from $32 on Nov. 27. Disney shares were trading only a few dollars above their 52-week low in late December.
MGM (see stock chart)
For years, the Street has waited patiently for topper Alex Yemenidjian to follow through on a pledge to turn MGM into a vertically integrated media conglom. Most recently, the dapper studio boss indicated he believed broadcast weblet Paxson could prove a useful acquisition.
Such a transaction would go far in altering MGM-watchers' impression that the day is rapidly approaching when controlling shareholder Kirk Kerkorian will move to cash out, perhaps by selling the library-rich lion to a content-hungry giant such as Disney or Bertelsmann.
But studio execs insist strongly that the Santa Monica-based company -- slated for a move to Century City in 2003 -- is simply not for sale.
MGM is due for the next installment in its mega-successful James Bond film series in November, but a high-profile "Pink Panther" pic won't come together until 2003. Meanwhile, MGM shares -- which had mostly treaded water in '01 -- lately were bobbing toward the higher end of a 52-week trading range.
NEWS CORP. (see stock chart)
Conglom topper Rupert Murdoch joked back in March at a biz confab that he didn't want to spend the rest of his life negotiating to buy satcaster DirecTV. Then he spent most of the balance of the year doing just that --only to lose out to bidding rival EchoStar, the other big U.S. satcaster.
The setback triggered broad speculation Murdoch would aggressively lobby U.S. regulators to nix EchoStar's $28 billion DirecTV buy as monopolistic. But he's also expected to add to international satcasting holdings this year in an effort to salvage his Sky Global concept involving a publicly floated package of pay TV assets.
Murdoch is also said to be mulling a takeover move involving a key division of Germany's Kirch Group.
In recent months, News Corp. shares have hovered within several dollars of the stock's 52-week low. By December, John Malone's Liberty Media re-emerged as conglom's biggest shareholder for the second time, though Murdoch continues as News Corp.'s biggest holder of voting-share stock by a wide margin.
News Corp. stock was trading roughly midway between '01 highs and lows at year's end.
SONY (see stock chart)
Sony had good reasons to count its blessings last year.
That's because its lack of broadcast holdings meant the Tokyo-based conglom wasn't hurt as much as rivals by advertising's dramatic downturn. Technology continues to be a more important bottom-line driver for the diversified consumer-electronics giant than it is for other media congloms.
Meanwhile, there's a companywide push at Sony to shut down or sell off any nonstrategic assets that don't turn a profit. In fact, even more core entertainment operations have come under great scrutiny.
Conglom's film ops have retrenched, and Sony recently shuttered its network-programming operations. In addition, Sony and Liberty Media struck a $2.7 billion deal with NBC to sell the partners' holdings in Spanish-language broadcaster Telemundo to the Peacock.
Against this backdrop, Sony's videogame unit -- driven by sales of the PlayStation 2 products -- marked its first profitable quarter in almost two years in October. But a looming showdown with Microsoft's new Xbox game platform could prove bloody.
"That's a pretty intensive war over a lot of dollars," Houlihan Lokey's Davis observed. "The game market is a big one, and for a company like Sony, it's very important. And now, Sony won't just be playing against a relatively horizontal company like Nintendo but against a corporate giant like Microsoft."
By year's end, Sony's share price was fully one-third lower than that it took into 2001.
USA NETWORKS (see stock chart)
Barry Diller's New York-based amalgam of programming and e-commerce assets made its biggest news in the year's final month.
On Dec. 17, USA Networks announced it would deal most of its TV assets back to Universal Studios via a largely stocked-based $10.3 billion transaction with current U parent Vivendi Universal. The remaining assets at USA will be rechristened USA Interactive -- a catchy and useful name that will allow the group to keep its USAI ticker symbol .
But the most profitable businesses left at USA will be cabler Home Shopping Network and ticketing-services giant Ticketmaster -- a situation much like that back in 1997 before Diller acquired most of U's TV assets.
Yet the story of USA Interactive has yet to fully play out.
Containing a handful of online business already -- including ones aimed at travel and hospitality niches -- Diller is expected to use some substantial cash proceeds accompanying his deal with Vivendi U to buy more Netcos. And a sexy takeover of the Amazon.com or Yahoo! variety is even possible.
Prior to the deal with Vivendi, USAi shares were trading mostly in the low- to mid-$20s, roughly mid-range between recent 52-week highs and lows. The Vivendi U announcement perked up the stock for several trading seshes afterward.
VIACOM (see stock chart)
CBS suffered through the ad slump like other nets, though execs took heart in some notable Eye ratings successes. Cable operations also struggled, with Viacom's MTV Networks using the year to fiddle with programming mixes at MTV, VH1, TNN and elsewhere.
In radio, Infinity Broadcasting slugged away under soft advertising conditions and held its own against marketplace competish.
Homevid retailer Blockbuster --82% owned by Viacom -- made considerable progress turning around perceptions it was fighting a losing battle with an outdated technology. But by year's end there were signs of profit-taking by investors in the separately traded stock.
As for prospective Viacom acquisitions, conglom was considered a potential buyer for Univision Communications, a large Los Angeles-based Hispanic broadcaster that's considered a takeover target among Street-watchers. But Viacom effectively bowed out of bidding for Telemundo as too pricey, so it remains a question how aggressively conglom may pursue Univision.
Viacom stock was trading at roughly three-fourths of the value conglom's most widely tracked shares held at the beginning of the year.
VIVENDI UNIVERSAL (see stock chart)
Universal Studios marked a second consecutive strong year at the box office, though the Hollywood unit's theme park activities were hurt by the falloff in visitors after Sept. 11.
But all that was trumped by the announcement that Vivendi U topper Jean-Marie Messier had managed to reverse a 1997 move by then-U topper Edgar Bronfman Jr. and reacquire control of the TV assets that were hived off to Barry Diller back in 1997.
In addition to remaining chairman-CEO at a renamed USA Interactive, Diller now is chief of a newly formed Vivendi Universal Entertainment unit, containing the company's film, TV and theme park operations. He will report to Messier and supervise U prexy Ron Meyer and film boss Stacey Snider.
Meyer and Snider got five-year contract extensions, though those deals did not squelch speculation that the notoriously hands-on Diller would meddle in film and TV ops.
Meanwhile, Vivendi's multinational standing seemed to prove something of a buffer to Sept. 11 fall-out. Fewer investors fled Vivendi shares in the immediate aftermath of the disasters, apparently believing the diversified geography of its operations made the conglom less vulnerable to the economic shakeout.
Vivendi U also concluded a late-year investment in satcaster EchoStar, and even further strategic transactions are considered possible in 2002.
Vivendi shares were trading a bit below a mid-range of 52-week highs and lows prior to the announcement of its deal with USA. Move seemed to stoke Street interest in the stock, which marked notable gains in subsequent seshes -- a highly unusual pattern in the wake of pricey transaction news.
