By Steven Perlberg And Shalini Ramachandran
More than $35 billion in market value was wiped out across seven
media companies this week, as investors questioned the future
health of the TV ecosystem.
For decades, television was sacrosanct for advertisers on
Madison Avenue and considered the best way to reach millions of
consumers simultaneously. But with younger viewers decamping for
newer, cheaper and often ad-free digital platforms in droves, TV's
grip on advertisers is looking a lot looser.
Some earnings results this week highlighted the weakness in the
U.S. TV ad market. On Thursday, Viacom Inc., the owner of
Nickelodeon and MTV, said its domestic advertising revenue fell 9%
in the most recent quarter because of a decline in traditional TV
ratings, worse than the 5.5% drop estimated by analysts on average.
It was among the softest results for domestic advertising and
viewership for any of the cable companies, fanning the flames of an
industrywide stock selloff.
Viacom was bad, but it wasn't alone. Discovery Communications
Inc.'s advertising revenue was about flat, while CBS Corp.'s fell
3%. At Walt Disney Co.'s ESPN, ad revenue also fell 3%. Ad revenue
sank 14% in the U.S. at 21 Century Fox's television segment, which
houses the Fox broadcast network, as viewership fell for "American
Idol" and "The Following."
The weak advertising market and fears of cord-cutting proved to
be an expensive double whammy for media stocks. Viacom shares
plummeted 21% in two days. Disney lost $11.5 billion in market
value, an 11% drop since Tuesday, while Fox gave up $9.7 billion,
or 13% in that time period.
Until recently, the advertising slowdown was less concerning to
media-company investors thanks to a growing secondary revenue
stream: rising fees from pay-TV operators to carry channels. But as
Wall Street sees it, an exodus of pay-TV subscribers will undermine
the promise of those rising affiliate fees.
For years, the rise of digital advertising had come at the
expense of other ad budgets, such as print, not TV. But now, major
marketers like Allstate, Mondelez, Wendy's and MasterCard have
moved dollars away from television and into digital, partly to
track down millennials.
"TV dollars started to move to digital about two years ago,"
said Laura Desmond, chief executive officer of Starcom MediaVest,
one of the world's largest ad buying firms.
"The data is clear," she said. "Young adults and increasingly
adults with children are not consuming linear television as they
once did. Advertisers are following the consumer." Starcom
MediaVest buys ad time on behalf of companies such as Procter &
Gamble Co. and Honda Motors Co.
To be sure, the TV ad market remains larger than digital. But
that is expected to reverse in a few short years. By 2018, research
firm eMarketer predicts digital ad spending will total nearly $83
billion in the U.S., while TV will generate about $78.6
billion.
Viacom, which gets about half its revenue from advertising, is
particularly vulnerable in a world where younger viewers are
shunning traditional TV in favor of cheap Web video and digital
pastimes like Snapchat, analysts say. That is because Viacom has
long depended on smaller children to park themselves in front of
Nickelodeon and teenagers to tune into MTV. But now there are
YouTube stars with huge followings and kids' shows on-demand on
Netflix and Amazon.com's Prime Instant Video.
"We can't conceive of any solution that would rekindle interest
of kids and teens to watch linear TV," Todd Juenger, an analyst at
Bernstein, wrote in a research note this week. Mr. Juenger is known
for pointing out that the U.S. TV industry is entering a "prolonged
structural decline," as viewers move from ad-supported platforms to
outlets with no or very little advertising.
Some investors and analysts have said the bleeding this week was
a market correction that finally took into account the looming
threats of cord-cutting and other issues. While the suddenness of
this week's selloff may have been an overreaction, the broad
threats are becoming clearer, said Chris Marangi, a portfolio
manager at Gamco Investors Inc., a major shareholder in U.S. media
stocks.
"Content will always be king" but "the model will have to shift
from a very good business model to perhaps one less good," Mr.
Marangi said. "The multiples probably reflect that today."
The finger-pointing typical of past earnings calls--where media
executives blame measurement firms' inaccuracies for their ratings
woes--seemed more muted this time. Instead, executives stressed
that they were investing in new advertising technology and methods
of counting digital ad impressions themselves that will attract
marketers to their shows.
"It was more apparent this quarter that investors are less
receptive to [media companies] using measurement as an excuse for
poor ratings performance," Mr. Marangi said.
There was an implicit acknowledgment that consumers, trained by
Netflix-like viewing experiences, are increasingly rebelling
against the notion of sitting through a bunch of ads in order to
watch their favorite shows.
"Linear interrupted advertising is clearly not the only or best
way to do it," 21st Century Fox Chief Executive James Murdoch said
Wednesday. Fox says it is in talks with the biggest traditional
cable-TV providers about creating more engaged advertising for
cable on-demand services using technology powered by TrueX, the Web
video ad firm that Fox bought last year. Mr. Murdoch gave the
example that a viewer could choose to engage with an interactive ad
for two minutes on their phone and then get access to an ad-free,
full-length episode on demand.
He also said Fox is working to similarly improve advertising on
its part-owned streaming site Hulu.
"We are encouraged by the early progress we're seeing, and in
fact, we expect and plan to be able to offset the decline we're
seeing in domestic network entertainment advertising by better
monetization of our digital and nonlinear audience over the next 12
months," Mr. Murdoch said.
(Until mid-2013, 21st Century Fox and News Corp, parent of The
Wall Street Journal, were part of the same company.)
Of course, "event" television--where marketers can reach a large
swath of viewers who are tuning in live and unable to skip
commercials--is more attractive than ever, as evidenced by CBS's
comment this week that the network is fetching as much as $5
million for 30 seconds of ad time for Super Bowl 50.
In an effort to evolve, traditional networks are taking a page
out of digital companies' playbooks to prove they, too, can target
ads to consumers, just like the Web.
At Viacom, CEO Philippe Dauman said that 10 of the "largest and
most sophisticated advertisers in the world" from sectors such as
automotive and retail have signed on for Viacom Vantage, the
company's data-driven product that lets marketers target specific
niche consumers begin typical age-and-gender.
As Viacom shifts more of its advertising business to revenue
streams that don't depend on traditional ratings, Mr. Dauman said
the company expects to "resume growth in advertising revenue in the
full fiscal year next year."
Similarly, Time Warner Inc.'s Turner Broadcasting System said
that new targeting and "audience optimization" tools helped it
garner price increases.
"We're in the very, very early stages of seeing TV make a
dramatic comeback on the attractiveness of advertising," said
Turner CEO John Martin.
Suzanne Vranica contributed to this article.
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