Time Warner Losses Harbinger of 2009 Media Outlook

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.

The news:

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?

Digital TV Fiasco Hurts Stations, Aids Online Video

It turns out those pesky radio spots featuring Federal Communications commissioners warning consumers they might only see snow on TV sets without digital connections after Feb. 17 are prophetic. Human nature and government bureaucracy being what they are, it appears last-minute takers for $40 coupons subsidizing the cost of the digital converter boxes are out of luck. With more than 100,000 people on a waiting list for the coupons, the National Telecommunications & Information Administration (NTIA) says it has hit its statutory maximum of $1.34 billion in funding for the program designed to bridge the analog-to-digital gap.

Demand will exceed the NTIA’s authorized limit for 51.5 million coupons, leaving more than 8 million homes without signals and 11 percent of TV stations (about 196) reaching fewer people. Since the government already has raised $20 billion auctioning the 700-megahertz band to Verizon Wireless and AT&T, it is logical to assume funds are available to properly finish the converter coupon job.

This is no ordinary government folly. The digital transition that has been in the works for years now coincides with The Great Recession. Consumers who will not receive their $40 converter coupons in time have choices, all of which benefit big business. They can purchase full-price converter boxes, subscribe to cable or satellite, or invest in a new home digital television center, the FCC advises. Or, they can watch their favorite television programs, news and even commercials when they want to as streaming video online; a relatively cost-effective option that requires high-speed Internet access. Considering that consumers are viewing nearly 13 billion videos online monthly on sites such as YouTube, Yahoo and Hulu.com, according to comScore, the behavioral die has been cast.

A great unknown is whether a large portion of "unprepared" U.S. households will choose to watch TV content on computers, cell phones and PDAs. That puts the onus on television manufacturers to get smart connected interactive home hubs in place before consumers improvise and TVs go the way of land line telephones. Still, the biggest initial losers of this digital transition could be the TV broadcasters and viewers the program was designed to assist.

It's What You Do With What You Have...

The absence of transformative gadgets from Apple and its keynoting CEO Steve Jobs at this week’s Macworld Conference in San Francisco underscores a major theme in this recession year. Apple and other tech giants will produce fewer game-changing devices at a time when economically-squeezed consumers are less apt to buy them. Best Buy already is selling refurbished iPhones at a $50 discount from their launch price 18 months ago. In these difficult times, the issue is not only the cost of the gadget, but the ongoing service.

Now more than ever, the emphasis is on applications and embellishing the basics. Apple today announced variable pricing on iTunes downloads and a mostly DRM-free inventory of major label songs. Fees will range from 69 cents and 99 cents to $1.29 per download depending on song popularity and release date. The variable pricing overshadowed announced enhancements for the likes of iPhotos and iMovies, representing the qualitative software changes ahead for Apple’s iPhone and iPod as well as a new industry-wide modus operandi for 2009. The latest wave of digital interactive devices has hit a plateau of sorts that now shifts the focus to monetizing, enriching and expanding applications on smart gadgets, whose capabilities far exceed their routine use. That is a window of opportunity in a down market for enterprising software and content creators.