Cable Pros See Slow Growth in a Bad Economy
The panelist with the most bearish view on nearer-term expectations was Jessica Reif Cohen, a VP and managing director of Merrill Lynch & Co. Inc.
"The expectation is that this [economic downturn] is going to be very long and very deep and very painful," she said, noting that one of her firm's economists believes a housing recession started 18 months ago, followed by capex recession six months ago, and a consumer recession here in the fourth quarter of 2008.
Reif Cohen, who covers the cable, satellite, and entertainment industries, doesn't see a recovery starting until the second half of 2009, preventing companies from posting positive growth until the first quarter of 2010.
However, industries that have strong cashflow and are self-financed should remain stable enough to weather the worst. "Cable fits that bill very well," she said. Big cable operators, she added, "are very liquid… with fairly strong balance sheets."
Although cable's positioned to survive a turndown, some operators have shown they are not completely immune. (See Europe Hit With Big Telecom Jobs Cuts, Cox to Cut 460 Jobs, Comcast Makes Cuts Out East , and Time Warner Cable Braces for Bad Economy.)
Cablevision Systems Corp. (NYSE: CVC) COO Tom Rutledge was not about to make any bold predictions on when things would turn around, but he was there to witness the earlier S&L crisis, when slower housing construction bred a capex slowdown. Subscriber additions slowed, but the business remained stable from an operating cashflow perspective, and business "boomed" when the economy recovered. He said a sluggish advertising business will hit programmers much harder.
David Zaslav, president and CEO of Discovery Communications Inc. (Nasdaq: DISCA, DISCB, DISCK), said his company is protected by a dual revenue stream that includes advertising and carriage fees from cable operators and satellite and telco TV partners. "But we are captive to the marketplace to some extent," he warned.
Discovery, he added, has seen the overall cable business grow 9 percent this year, aided by "reasonable" pricing, which is typically 35 percent lower than ads placed with local broadcasters. "That has been a helper," he said. Discovery is bracing for a slower fourth quarter, "but we are holding our own," Zaslav said. "In the first quarter, the advertisers haven't really started to flee yet."
David Verklin, CEO of the MSO-backed Canoe Ventures advanced advertising service bureau, said there is "no question" that clients are reducing their ad spending. (See Verklin Picked as Cable's Canoe Captain and Canoe Ventures: What It Is, What It Ain't .)
That means advertisers will make a "retreat to quality," he said, noting that, while newspaper and radio advertising are getting hammered, the outdoor ad industry is still strong. "A picture on a stick is pretty good in the age of TiVo Inc. (Nasdaq: TIVO)," he joked.
Despite the current state of the economy, Reif Cohen said she is "a huge believer in television advertising." Given the hierarchy of where advertising is going, the cable networks are "at the top of the totem pole," she added.
RealNetworks Inc. (Nasdaq: RNWK) president and CEO Rob Glaser predicted that the downturn will spur more partnerships and revenue sharing models that spread the risk. "That kind of model is more appealing in more uncertain times," he said.
— Jeff Baumgartner, Site Editor, Cable Digital News