The $25 billion one-time charge at its cable, publishing and AOL segments announced by Time Warner and nearly $400 million in fourth quarter charges resulting in essentially flat 2008 earnings underscore media and entertainment industry vulnerability in this recession year. In addition to advertiser and consumer spending pullback, media companies also are wrestling with their own structural issues and financial commitments as well as the weakness of third party vendors.
Time Warner’s previous forecast for 5% growth in 2008 adjusted operating income has been reduced to a mere 1%. The culprits include a $280 million legal judgment against Turner Broadcasting related to the sale of its sports team, the loss of rent from bankrupt tenants (Lehman Brothers) of its Time & Life Building in Manhattan, and potential credit losses due to troubled customers such as bankrupt Circuit City.
Time Warner also concedes a “more challenging economic environment” and strained advertising at AOL and its publishing assets. JP Morgan analyst Imran Khan partly attributes Time Warner’s revised guidance to an 18% year-over-year decline in AOL advertising revenues of about $64 million as marketers shift from display to search. An estimated $15 billion of the $25 billion write-down will come from Time Warner Cable, the second largest domestic cable operator which expects to record a loss for 2008. As a result of the impairment charge, Time Warner expects an overall operating loss in 2008 compared to $8.9 billion in operating income in 2007.
What it means:
Media companies will continue to be hurt by reduced consumer and advertiser spending while wrestling with less obvious financial demons including economically ravaged third parties, shortcomings in their own operations and meeting their own financial commitments. While the shift to emerging digital business models and revenue streams prevail, it won’t offer much immediate relief. Time Warner will have the advantage of $9 billion in proceeds from its Time Warner Cable spin-off, putting it in the company of cash-rich peers like News Corp.
Still, a bevy of unknowns and unsettled business are festering just below the radar at many media concerns. AOL is an example of a business model change complicated by a severe economic downturn, the value of whose business has been written-down on other occasions. Bernstein Research analyst Craig Moffett suggests Time Warner Cable’s decision “could prompt Comcast to examine its franchise rights more closely.” Hypothetically, a similar 40% reduction in fair value, comparable with Time Warner Cable’s announcement, would yield a $13.7 billion pre-tax write-down for Comcast this year, Moffett says. Writing down the value of AOL and other Time Warner businesses is an exercise other media companies are sure to endure as valuations continue to fall and readjust. Time Warner and other major media companies’ problems in 2009 will not be limited to a 10%-plus decline in US advertiser spending, flat online ad spending and a mere 5% growth in pay-TV, according to Goldman Sachs. The real question is how much of a financial hit could be represented in 2009 by all the other unknowns?