Media firms confront cautious marketing, cord cutting; Viacom takes it on the chin
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A tepid outlook for television ad revenue and concerns about the longevity of the big pay-TV bundle are causing jitters among media investors.
Despite beating analyst expectations for revenue and profit, Viacom Inc. shares were down nearly 7% late Thursday as investors worried about long-term trends. Viacom said some of its flagship networks like Nickelodeon had been relegated to more-expensive bundles for new cable customers at Charter Communications Inc., the second-largest U.S. cable company. In addition, Viacom reported a 4% decline in domestic ad revenue due to continued ratings weakness.
The commentary added to worries that had already been simmering in the market this week.
The S&P 500 Media Index dropped 2.5% Wednesday, and Wall Street analysts said the broad selloff was prompted, in part, by comments from John Martin, chief executive of Time Warner Inc.'s Turner cable networks. Mr. Martin said that economic uncertainty and fewer product launches in key industries such as technology, automotive and pharma early in the year were causing some marketers to limit advertising spending. "Advertisers are holding back a little bit and they're taking a little bit more of a wait-and-see approach," he said.
Still, Mr. Martin said he remains "pretty optimistic about the health of the overall U.S. ad market for the full year."
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On Wednesday, Time Warner reported a 2% decline in ad revenue in the first quarter due in part to lower ratings at its cable networks and less-exciting matchups in the NCAA college basketball tournament, the rights to which it shares with CBS. CBS reports earnings after the market closes on Thursday.
After Time Warner's earnings report, Viacom shares fell 7.5% on Wednesday.
On Viacom's earnings call Thursday, CEO Bob Bakish sought to ease investors' various concerns. Mr. Bakish said there is some "posturing" going on ahead of TV's annual ad-sales bazaar known as the "upfronts," but "the market is pretty good." He said that he and other Viacom top executives have been personally meeting with ad agency heads to discuss opportunities ahead for its channels. "We are definitely feeling good about it," he said.
On the distribution front, Charter recently relegated Viacom channels, including Nickelodeon, MTV, Spike TV, BET, Comedy Central and VH1, to the most expensive "Gold" television package it sells -- reducing those channels' potential subscription revenues. On the earnings call, Mr. Bakish said the Charter dispute "will be resolved."
He noted that the company has been in discussions with cable and satellite-TV distributors about creating a skinny, entertainment-only bundle that doesn't include expensive sports networks. Mr. Bakish said he is optimistic one could launch by the end of this year. It is part of Viacom's effort to prioritize "maintaining the value of the pay-TV ecosystem."
Adding to the negative trends, more customers abandoned cable subscriptions, leading to the worst-ever first-quarter decline in pay-TV subscribers. Analysts at MoffettNathanson estimated 762,000 subscribers cut the cord. Even with growth from new streaming bundles like Sling TV and DirecTV Now, MoffettNathanson said TV programmers suffered steep declines in subscribers.
"Folks are really worried about the loss of high revenue-per-user video subscribers and the weak trends in the ad market," said MoffettNathanson analyst Michael Nathanson.
The domestic ad revenue declines at Time Warner and Viacom mirrored results last week from Comcast Corp.'s NBCUniversal, whose cable networks' ad revenues declined 3% due to ratings weakness. AMC Networks Inc., which reported first-quarter earnings Thursday, saw ad revenue decline 6% due to the timing of original shows airing and lower viewership.
Media companies are echoing advertising companies, which have also recently reported slow growth in North America. WPP CEO Martin Sorrell said last week that despite the Trump administration's positive attitude toward business, U.S. growth was trailing international growth.
"It's not just packaged good clients or the pharmaceutical but across the board, it's a slow start to the year and a deceleration from the fourth quarter of 2016," Mr. Sorrell said during WPP's earnings call last week.
The softness isn't specific to one category. Auto sales are softening and consumer product companies are under pressure to cut costs, including marketing budgets.
Ad spending on national TV rose a paltry 0.9% during the first quarter, according to estimates from research company Standard Media Index. Categories pulling back on spending during the period included automotive, consumer electronics and entertainment companies, the firm said.
Brian Wieser, senior research analyst at Pivotal Research Group, said the softness in the U.S. is partly reflective of more marketers imposing zero-based budgeting -- an approach that allocates funding based on program efficiency and necessity rather than on budget history.
The lackluster marketplace doesn't bode well as TV networks prepare their annual upfront presentations to advertisers, where marketers commit to buying billions of dollars' worth of ad time for upcoming TV season.
John Janedis, an analyst at Jefferies, predicts that ad pricing growth will be up in the mid-single digits and the overall volume of ad dollars being committed during the upfront to be "slightly down."
Write to Shalini Ramachandran at firstname.lastname@example.org and Suzanne Vranica at email@example.com
Corrections & Amplifications Viacom's chief executive is Bob Bakish. An earlier version of this article incorrectly spelled his name. (May 4, 2017)
(END) Dow Jones Newswires
May 05, 2017 02:48 ET (06:48 GMT)