As competition forces changes in newspapers’ revenue model, the industry will need to transform its cost structure to reduce the fixed costs associated with print-centered distribution, or default risk will grow, according to Moody’s.
“Currently, a structural disconnect exists in the newspaper industry’s cost structure,” Moody’s says. “Just 14% of cash operating costs, on average, are devoted to content creation — the primary value creation activity — while about 70% of costs support the print distribution model and corporate functions. The remaining 16% of cash operating costs relate to advertising sales — another critical task that drives the majority of newspapers’ revenue. The overall imbalance limits the industry’s flexibility to overcome competitive threats.”
Most newspaper companies have moved only slowly away from in-house print production and distribution, said Moody’s. Thus, high operating leverage for the industry remains, and is creating intense pressure on cash flow as revenue declines.
Our outlook on the newspaper industry’s credit fundamentals remains negative, based on our expectation that advertising revenue will drop upwards of 25% in 2009, before a slow economic recovery sets in next year.
“Even so, we expect ad-revenue will decline about 10% in 2010, and that the major ad categories—such as classified and retail ads—won’t fully recover to pre-recession levels, dealing a blow to the industry’s long-term profitability.”
“Ultimately, we expect the industry will need to reverse the vertical integration strategy through cross-industry collaboration and outsourcing print production and distribution processes … Although newspapers may lose some of their in-house control over press time, they would also release resources to beef up investment in content and technology.”
While Moody’s does not anticipate a widespread shift by issuers to an online-only business model as the revenue loss is too significant at this point, such a change would meaningfully lower operating costs. Reducing the frequency of print editions is a hybrid approach that may result in cost savings while preserving newspapers’ value-added service for advertisers.
“Newspaper companies’ credit ratings have moved considerably lower over the last few years, but additional downward pressure remains … If newspapers can’t monetize the content in new digital channels at the same level as with print, or cut structural costs enough to keep up with the changing competitive environment, the prospect of additional recapitalizations or shutdowns will grow, adding further pressure to ratings.”
For details, see Newspaper Industry Costs: Out of Balance.
Technorati Tags: Block Communications, Freedom, Gannett, Gatehouse, McClatchy Company, Media, MediaNews, Morris Publishing, New-York-Times, newspapers, tribune-company, washington_post
Fitch Ratings has issued a bleak prognosis for the recovery of corporate credit conditions. Even with positive economic growth from 2010, due to the time lag in achieving “trend” growth - the point at which recovery begins to manifest itself in corporates - the agency still does not forecast a return to more benign credit conditions for its corporate portfolio until mid-2011.
As a result, the current heavily negative bias to corporate rating actions represents a forward-looking assessment, rather than a reaction to current earnings reports.
From a financial perspective, those issuers most exposed to downgrades will be those where economic conditions both generate a material increase in leverage (through gross debt increases or depletion of operating cash flow), and, also, where a rebound in future profitability will be unlikely to restore the financial profile within the foreseeable future, Fitch says. Also more at risk are sectors or companies where an individual business model or industry position is likely to exit the current recession in a materially impaired condition.
Typically, vulnerable companies are more likely to be in the manufacturing and media sectors.
Issuers where Fitch’s forecasts indicate more financial resilience to the current economic stress include those where either current Fitch forecasts indicate profiles staying broadly within the tolerance bands for the current rating, or where a more material increase in leverage is offset by the potential for strong recovery as and when the economy recovers.
Typically, these companies are more likely to be in the energy, telecom and non-discretionary consumer product sectors, and services such as health care and education.
A final category of vulnerability relates to the most difficult area to forecast - liquidity. Fitch’s report notes that the hurdle for ‘access assumption’ - the assumption that an issuer can generally access funds both on reasonable terms and with no material delay - rises in current conditions from investment grade to mid- to high-investment grade for many industries. Exceptions to this include defensive sectors such as major telecom companies and regulated utilities.
Thus far in 2009, liquidity pressure in western economies from the rationing of bank refinancing has been in part offset by surprisingly robust corporate access to both investment-grade bond and equity markets. Bond market funding has also typically been inexpensive on an all-in basis, with spreads at record highs offset by interest rates at or near record lows. Fitch, however, regards this level of access, notably for ‘BBB’ and lower rated entities, as vulnerable to further deterioration in sentiment.
For details see “Corporate Forecasts: Macro-Level Assumptions: April 2009 Update“, which outlines Fitch’s principal assumptions driving its internal forecasts for corporate performance in the next two years.
Technorati Tags: consumer staples, corporate-debt, credit-ratings, education, energy, health care, manufacturing, Media, telecom, utilities
After growing by 10% last year online advertising in the US is projected to fall 5%, according to media analyst Screen Digest.
“Online display advertising grew by ‘only’ eight percent for the full year, i.e. much lower than its previous growth of 26% in 2006 and 31 per cent in 2007. Screen Digest analysis has highlighted the very shocking four per cent year-on-year decline of Display advertising in the last quarter of 2008. The fall of the Display category would have been deeper had it not been for the growth of the online video format that nearly doubled in 2008. Screen Digest estimates that online video (pre-roll) ad sales reached $1.2m, up 64% over 2007.”
Search has remained much more dynamic than online Display in 2008 and, at least up to the third quarter, it seemed to be recession-proof, Screen Digest says. The format is highly accountable and scalable, while Display internet advertising, now a mature medium, suffers the same cost-per-thousand deflation affecting all other branding media.
“However, following the acceleration of economic recession in the fourth quarter, both formats have suffered: Search has seen growth rate halved whilst Display has experienced negative year-on-year quarterly growth for the first time since the dotcom crash of 2001-2002. Online Display, Search and Classifieds are also suffering from the particularly bad state of three critical client sectors: automotive, real estate and finance.”
Overall, the total internet advertising market will shrink by five percent (-4.8) in 2009 and only stabilize (+0.4 percent) in 2010.
Screen Digest now predicts that all categories and sub-categories except video will decline in 2009. Banner advertising (-8.8%) will not be fully compensated by the double digit growth of online video, so that the Display category will be down 3.6%. Search will shrink by two per cent and non-Display categories such as Classifieds will experience double digit falls.
Technorati Tags: advertising, Media, online-advertising, online-media, search
Lauren Rich Fine digs into the future of the mobile industry in a new ContentNext report and, by and large, likes what she sees. The report places a particular emphasis on M&A and VC funding activity, and provides “a glimpse into how mobile content (games, music, video, and social networks) will become a thriving business, through either paid or ad-supported models.”
ContentNext’s database of 1,115 transactions shows $343 billion of investment and M&A activity in the mobile sector over the past 38 months. Excluding carrier deals there was still $40 billion of money committed to the sector with the greatest sums directed towards content and software & services. 613 deals, or 55 percent, were done by strategic investors.
Activity has slowed down but deals are still getting done and for good reason: there is no question that mobile is the next disruptive technology.
Other key findings:
- The rapid improvement in user experience (courtesy of, in large part, the iPhone) and acceptance of a phone being more than a phone will likely cause huge dislocation in many areas. Content owners, again, are likely to be on the defensive.
- Increasingly, prognosticators are referring to phones as having the potential to be a mobile PC; while likely directionally correct, we think it is a premature call.
- The economic downturn could hamper the ability of the carriers to grow the average revenue per customer/unit (ARPU) through content and service packages, but it could push more consumers to become wireless-only customers. If consumers face difficult spending choices, it isn’t completely crazy to imagine a pick-up in mobile video services in lieu of home cable, although near term it is more likely to drive increased PC internet access.
- While mobile advertising and marketing has yet to live up to expectations, the medium is increasingly becoming accessible and scalable and the creative is improving such that there are a growing number of campaign success stories. Notwithstanding a weak economy, we think this is a sector that can do well near term as marketers seem to be embracing its lower out-of-pocket cost combined with targeting capabilities.
- Location-based services (i.e. locally targeted) are in early innings and we think they will have dramatic implications prospectively as they will heighten the ability to target marketing messages, could really open up the local ad market, and add a new dimension to social networking.
- Video usage should increase dramatically as the experience is improving daily; however, concern and confusion about cost and hardware could mute near-term growth.
- For the U.S. mobile market to really open up and allow phones to be used both as payment mechanisms and for commerce, a better payment system needs to be in place; near term, at least for micropayments, the carriers could be key.
The full 45-page report, The Changing Mobile Industry and What It Means for Media Executives, is available here.
Technorati Tags: Apple, content, ContentNext, iPhone, M&A, Media, mobile industry, mobile-devices, telecommunications, venture-capital
Illegal downloads could be costing the music industry $10 billion — the very amount by which the global industry has declined since 1999, according to a recent report from ContentNext.
“Playing a New Tune: The Music Industry’s D-I-Y Era” authored by former newspaper analyst Lauren Rich Fine examines the changing value chain in the music industry as it has migrated to the Internet, looks at the state of the most significant online alliances/initiatives, and charts the M&A and venture-fund activity have helped shape the industry over the past few years.
Among the highlights:
- Entrepreneurial artists have more opportunities than ever to make it without the backing of a label;
- Transaction activity in the music industry has been robust from 2006-08, with over 150 deals valued at $11.2 billion;
- The music industry is still searching for a business model as the Internet has cannibalized CD sales, yet the pace of innovation and sense the industry has come close to bottoming makes it seemingly safer for investment;
- MySpace Music has a lot of competition.
The full 34-page report is available here.
Meanwhile, Barry Graubart at ContentMatters has Five Questions for Lauren Rich Fine, on the topic of the outlook for traditional media.
Technorati Tags: M&A, Media, music-industry, MySpace, online-music
Could this be the year mobile advertising finally comes of age? Deloitte certainly thinks so. In its annual media and entertainment sector predictions. Deloitte says that although it has been a disappointment so far, mobile advertising could be one of the few bright spots in the media and entertainment landscape this year.
…in a global advertising environment characterized by double-digit decreases, mobile advertising may be one of the few growth areas in 2009. Its market share may more than double, albeit from a small base, and there are likely to be thousands of large advertising campaigns, costing over $2 billion.
With near saturation of cell phone usage in many countries, mobile advertising represents an attractive and largely untapped market, Deloitte says. Mobile phones commanded even greater public attention in 2008 with new “smart phone” models, enhanced web-based capabilities, and the growth of the cell phone application market. Mobile advertising may represent a low-cost, high-impact alternative to traditional advertising methods. The 2008 US presidential election used cellular texts and advertising to powerful effect and will probably form the model of campaigns in 2009.
Standard & Poor’s also sees a sunny future for mobile advertising, in its latest Industry Report Card: From Big Chill To Ice Age For U.S. Media And Entertainment Issuers. “Statistics show that more people, albeit from a low base, are beginning to use their mobile devices to search for products and services. A Kelsey Group study said that 15.6% of mobile users used their phones to search the Internet for local products and services, compared to 9.8% a year ago. In addition, 14.3% of mobile users search outside of their local area, up from 6.4%. Hardware sales data suggest that more even people will have the ability to surf the Internet on their mobile devices. According to Mobile Phone Track, 71% of all handsets purchased in the U.S. can play video, 60% have expanded memory, and 55% have GPS technology. The same study found that near half of U.S. users employ mobile devices for phone function only.”
We believe that the emergence of a significant mobile ad revenue model will depend on mobile user habits expanding to include purchases of goods and services, and functions such as in-store use of mobile advertising offers or coupons, or even watching primetime shows while commuting.
Deloitte also predicts the possible end of the era of free online content from services such as YouTube, Facebook, Twitter, and Flickr. Firms have utilized these sites for viral marketing, product testing, connecting with employees, and many other innovative business practices. The sheer volume of traffic appears to be reaching a critical mass.
In 2009, storage costs for many sites could exceed $100 million. Revenues, primarily in the form of web-based advertising, will struggle to keep up. Beginning in 2009, these free content services may begin to contract or start charging upload fees. Such a scenario would have broad impacts both for viral marketing as well as the size of the consumer market who continue to utilize the sites.
Other important predictions from the study include:
- The rise of 3D movie theaters and digital entertainment venues
- Continued challenges for the print media with opportunities in developing countries
- A critical juncture for digital radio
- Challenges for top live entertainers
- Malvertising, malicious software embedded in online click-advertisements, may infect hundreds of websites and millions of users
Technorati Tags: digital-music, entertainment, Facebook, Flickr, Media, mobile advertising, mobile-devices, mobile-phone, online-media, Twitter, YouTube
It comes as no surprise that venture capital investing in the U.S. fell in the fourth quarter to the lowest level in four years.
Dow Jones VentureWire reports that in the first full quarter since Lehman Brothers Holdings Inc. collapsed, venture-backed companies closed 554 financings, the fewest since the third quarter of 2004, according to data from industry tracker VentureSource, also owned br Dow Jones. The number of deals was down from 620 in the prior quarter and 718 in the fourth quarter of 2007. The drop brought last year’s deal total to 2,550, the lowest since 2005.
The amount invested in the fourth quarter also fell substantially from the third quarter, to $5.5 billion from $7.5 billion. The total for the year was $28.8 billion, below 2007’s $31.4 billion but still slightly ahead of 2006.
The number of deals fell in all industry groups from the third quarter, save for energy and utilities, which recorded 34 deals in the fourth quarter, compared with 32 in third. Information technology remained the largest sector, with 266 deals in the fourth quarter. But this was down from 290 in the third quarter and off significantly from 355 in the fourth period of 2007.
Declining areas are ones where VCs have historically focused such as software, communications, biotech and medical devices that depend on Fortune 1000 corporate buyers, said John de Yonge, research director for venture capital and cleantech at accounting firm Ernst & Young.
Showing a notable increase from the fourth quarter of 2007 besides renewable energy was media content and information, which favors capital-efficient business models and looks to deliver online advertising to consumers, de Yonge said.
He also said he was encouraged to see that VCs had financed 50 companies at the start-up stage in the fourth quarter of 2008 versus 33 in the same quarter of 2007.
Technorati Tags: biotechnology, cleantech, energy, information-technology, Media, medical devices, software, telecommunications, utilities, venture-capital
While traditional media brands dominate web news in terms of traffic, size does not matter in terms of the viability of an online news site.
That’s the finding of a new study, Size Doesn’t Matter: An Analysis of Online News and Political Sites, authored by ContentNext research director (and former Merrill Lynch all-American research team analyst) Lauren Rich Fine.
The report notes the increasing importance of blogs and niche media sites. Alternative media offerings such as HuffingtonPost, Politico and RealClearPolitics saw tremendous growth in traffic during the 2008 U.S. election campaign, as have smaller sites such as TalkingPointsMemo and Redstate.com. While the smaller independent sites do not have the dedicated ad sales teams that the larger brands can deploy, through cost management, they can attain profitability through the use of online ad networks.
The report also looks at recent M&A transactions, noting that only 7 news-related acquisitions have occurred in the past 18 months, with 14 venture investments. Of those seven deals, the largest was a traditional media deal, Cablevision’s acquisition of Newsday. On the venture investment side, two sites, Digg and the HuffingtonPost received large amounts, both 3rd round investments. The remaining investments tended to be smaller, early round investments. According to firms interviewed for the report, this segment is less attractive for investors as returns are not large enough to demand their attention, while their capital needs are small enough so that even a good return would have modest impact on a fund.
One question is whether politically oriented sites will fare now that the elections are over. Gawker points out that weekly page views have fallen sharply from 90 million around election day. Still, the current level of 40 million is nothing to sneeze at.
The report, Size Doesn’t Matter: An Analysis of Online News and Political Sites is available for purchase.
Technorati Tags: content, ContentNext, Media, news, newspapers, publishing
Looks like the traditional media could be in need of a bailout before too long. The secular decline in readership of print products is being compounded by the cyclical economic downturn. Fitch Ratings’ latest assessment is littered with negative outlooks almost across the board of traditional media sectors.
Fitch believes that economic weakness could extend well into 2010 such that the cumulative affect of the downturn in advertising could approach 2001 levels (down 6%-9% in real terms).
Fitch expects that five of the top 10 advertising categories or over 40% of the ad mix will be under meaningful pressure next year: No.1 Retail (12% of total), No.2 Automotive (12%), No.5 Financial Services (6%), No.6 General Services (6%) and No.9 Airlines, Hotels and Car Rentals (4%). In particular, the automotive category (which can represent over 20% of a broadcast affiliate’s revenue) will present meaningful challenges.
“Also, advertising inventory has proliferated (from online and emerging mediums as well as traditional ones) since previous downturns. Owners of inventory (predominantly media companies) are likely to compete more heavily on price in this downturn to fill the vast supply of ad space available.”
Sub-sectors of particular concern to Fitch:
Newspapers (Negative Outlook)
Fitch expects newspaper industry revenue growth will be negative for the foreseeable future as both ad pricing and linage will be under pressure within each of the four main components of newspaper companies’ revenue streams: circulation and local, classified and national advertising.
Fitch believes more newspapers and newspaper groups will default, be shut down and be liquidated in 2009 and several cities could go without a daily print newspaper by 2010.
Yellowpages (Negative Outlook)
Incumbent publishers will likely continue to see erosion in the advertiser base and may have difficulty offsetting volume declines with price increases, particularly in local markets that are experiencing significant housing weakness.
Terrestrial Radio (Negative Outlook)
Listenership is likely to continue to fall, available inventory should remain relatively stable, and pricing could be up on some advertisers but not enough to compensate for declines in unit sales. Internet streaming provides additional day parts to sell but should not make a material difference in the financial profile of the broadcasters.
Magazines (Negative Outlook)
Fitch expects the larger players to rationalize available print advertising inventory through consolidation and closing down titles. With limited catalysts for growth in the core print product, magazine publishers have become more proactive online. However, until further evidence of successful execution and monetization is available, Fitch remains skeptical about the ability of magazines to make the digital transition profitably.
For details see, ‘Credit Encyclo-Media: Fitch’s Comprehensive Review of the U.S. Media & Entertainment Sector.
Forrester Research adds to the gloom, predicting further declines in print subscriptions: 10% of newspaper subscribers surveyed said they plan to cut back on subscriptions next year, while 18% of magazine subscribers intend to cut back.
Publishers have not been able to build their digital businesses fast enough to offset print losses, and the economy is making that an even more difficult proposition.
If the economic downturn is prolonged, we expect to see some major publishers go down as their resources dry up.
For details see Print Magazine And Newspaper Subscribers Plan Cutbacks In The Year Ahead.
Technorati Tags: advertising, magazines, Media, newspapers, yellowpages
The outlook for the media and entertainment industry has become even bleaker in recent months, says Standard & Poor’s Ratings Services, as expected higher ad spending in 2008 from the presidential election and Olympics failed to overcome plummeting non-political ad spending.
The softening U.S. economy is to blame for weaker ad sales, with S&P Ratings forecasting a 1 percent rise for 2008 and a scant 0.9-percent increase for 2009. Ad sales rose 0.4 percent in 2007.
Even online advertising has been experiencing a marked deceleration, despite surging past magazine advertising in 2006 and likely past radio advertising in 2008. Challenges are multiplying in the industry as the U.S. economy edges closer to a recession, financial market turmoil continues and consumers tighten spending in ways we had not envisioned.
S&P warns that companies that executed LBOs in the past three years are laboring under particularly onerous debt loads, resulting in more downgrades than upgrades in 2008.
Among S & P’s findings in the media and entertainment segments:
- Broadcast and cable network advertising has remained relatively healthy but the slowing economy is pressuring TV broadcasters.
- Radio advertising declines are accelerating, with local ad revenues falling 7 percent in the second quarter.
- Internet advertising is growing, but at a slower rate than in 2007.
- Magazine advertising suffered its biggest decline in several years, with drug and remedies ads and automotive ads each falling more than 20 percent.
- Newspaper revenues and cash flows will continue to decline in 2009, with five of S&P’s nine rated newspaper companies in the ‘CCC’-rated category, indicating a near-term liquidity threat.
For details, see “Industry Credit Outlook: Local Ad Spending Under Siege in U.S. Media & Entertainment Sectors,” and “U.S. Media and Entertainment Companies: Strongest to Weakest.”
Technorati Tags: advertising, credit-crisis, economy, entertainment, internet-advertising, Media, media companies, newspapers, presidential-election, publishing, radio ad sales, recession, tv ad sales
