Fitch: U.S. Newspaper & TV Broadcasting Outlooks Remain Negative in 2007 (long)

NEW YORK--(BUSINESS WIRE)--With no meaningful catalysts in 2007 to reverse the operational pressure and secular uncertainty facing newspaper and TV broadcasting industries, Fitch expects the event risk environment to remain heightened for bondholders. Historically newspapers and broadcasting affiliates wielded significant control over access to the audiences in their markets and used this influence to significantly raise prices on advertisers. Now, emerging mediums have granted advertisers alternatives for reaching their fragmenting audience base through less expensive and more measurable means that were previously not as prevalent.

Newspapers will continue to face intense secular issues on the revenue side. Fitch expects national advertising and automotive classifieds to continue to be significantly pressured. Fitch believes these changes are structural, not cyclical, and does not believe the advertising lost in these categories will return to newspapers in any meaningful way in future periods. Help wanted and real estate classifieds sustained growth and profits at many newspaper companies in 2005 and the first half of 2006, but both categories have slowed significantly in recent periods. Fitch expects this trend to continue in 2007, driven by both cyclical and secular issues. The retail category (the largest proportion of newspaper revenue) was less resilient in 2006 than Fitch anticipated going into the year and Fitch now expects this important category might only grow 1%-2% under a base case and it could be flat or down slightly under only a mild stress case. Internet revenue is expected to continue to grow at double digit rates, but Fitch is cautious regarding the profitability profile of this revenue stream compared to the core print product.

On the cost front, it appears that newspaper operators may get relief on newsprint costs as some proposed newsprint price increases have been rolled back in certain markets. However, Fitch expects labor costs (the greatest proportion of a newspaper company's cost structure) to be much more difficult to reduce. Most newspapers have been cutting staff for several years and while they may not yet have achieved optimal utilization of their staffs, Fitch believes that cultural issues and union affiliations could obstruct meaningful labor-related cost cutting. Recent turmoil in the newsroom at the LA Times, the union demands at the Wall Street Journal and the resolution to strike by the unions at the Philadelphia papers support Fitch's cautious stance regarding labor-related cost cuts. Fitch continues to believe that there should be opportunities to take costs out by centralizing some functions and better leveraging the scale associated with portfolios of papers; however, these actions typically require investment, lead time, coordination and execution and it is uncertain whether management teams will aggressively pursue these more difficult cost reduction opportunities given the acute pressure on their stock prices.

As stated previously, Fitch also believes that broadcasting companies will face headwinds on the revenue side in 2007. Fitch anticipates that content owners will continue to gain power to the detriment of distribution outlets, as the proliferation of these mediums will likely mean that any one outlet is expected to draw smaller audiences, lower ratings and could pressure ad rate increases. Fitch believes these meaningful secular threats could be incremental to these other forms of volatility to which broadcasters are typically exposed (including cyclical, political and Olympic factors), heightening the risk for bondholders in a downturn.

There are several key broadcasting trends in 2007 that could have a meaningful impact on the segment going forward. The cooperation between networks and affiliates for distribution of digital/video on demand will be a lingering question mark. Fox affiliates were able to share digital revenue streams with the Fox network in an agreement announced in April 2006 in a deal viewed as 'affiliate-friendly'. However, CBS announced an agreement with Comcast in September to allow VOD in markets where CBS does not own stations; potentially shutting out non-owned CBS affiliates from VOD revenue streams of CBS content in their markets. Next, digital initiatives are in their nascent stages of development for most broadcasters and companies have yet to prove that they can attract audiences and monetize the viewers with meaningful pricing economics. Companies will continue to be challenged to invest in digital initiatives without incurring redundant costs that should be taken out of the traditional advertising model. Also, the challenging upfront may have demonstrated that the economics of the business are changing. Absolute advertising levels were down only slightly, as several broadcasters supported revenue through additional inventory sales rather than garnering historical CPM (cost-per-thousand) increases. Fitch believes that the 2006-2007 upfront signaled a shift in power toward advertisers. Lastly, political advertising reached record levels in 2006 and likely masked some underperformance in other categories for certain broadcasters. Broadcasters that rely on these volatile revenue streams (over which they have little control) and do not align their cost structure to match declines in core business lines could see meaningful margin compression and be more susceptible to economic weakness in a downturn.

Fitch continues to believe the pure-play affiliate broadcasters are most exposed (among broadcasting players) to deteriorating credit quality as these entities have high fixed-cost structures, are not well diversified, and do not control a large portion of the content that they broadcast. Time-shifting technologies such as the DVR and the sale of content by the networks could seriously alter the viewership of primetime television that affiliates rely on to promote their evening news. Media companies that own network affiliates and/or newspaper or radio businesses should be better positioned to withstand declines to their television broadcasting business due to modest diversification benefits, but Fitch is cautious regarding the secular challenges facing these other business lines. Fitch believes the large network conglomerates with owned and operated (O&O) broadcasters would be least affected by any potential decline in broadcasting ad rates as they benefit from diversified revenue streams and the ability to sell content to VOD platforms, as well as embed content with product placements and/or commercials, thereby providing at least a partial offset to any decline related to VOD and/or DVR technologies.

Present pricing and cost dynamics support extremely strong EBITDA margins in the industry (30%-50%); however, Fitch recognizes that given the meaningful level of fixed costs, profit in the broadcasting industry could decline two to three times more than any change in revenue (excluding major moves by broadcasters to take out fixed costs). Similar to newspaper companies, many of the broadcasters have partially unionized workforces, which could make cutting costs in a timely manner somewhat difficult particularly if companies believe that top-line declines are cyclical instead of secular and fail to plan their cuts accordingly. NBC's announced restructuring in October 2006 demonstrated the network's recognition of the need to re-align its cost structure given the potentially changing economics of the broadcasting industry.

Fitch believes there could continue to be de-consolidation in both industries as recent one-off sales of assets to strategic and financial buyers have commanded meaningful premiums to public multiples. This disparity makes it likely that (non-duopoly) equity funded acquisition activity would be dilutive, potentially providing an incentive for debt funded acquisitions which would be negative for bondholders. Also, these single-asset prices could be pressured as new supply could outstrip demand. New York Times, Emmis, Clear Channel and Tribune, among others, are either in the process of or may divest TV stations in 2007. Given the stock price under performance in both industries (newspapers down over 10% and broadcast affiliates down approximately 6% compared to the S&P 500 up 12%), Fitch is cautious regarding how divestiture proceeds will be used in many cases and expects that it is likely that funds will be distributed to the benefit of equity holders rather than bondholders.

Fitch expects that shareholders will continue to place pressures on these companies, forcing management teams to further re-evaluate capital structure philosophies. In addition, the significant levels of private capital in the market place make some of these companies potential candidates for leveraged buyouts, raising the event risk profile for investors. While there continues to be many uncertainties, Fitch continues to believe that credit ratings are largely at the discretion of management teams and that if they choose to dedicate free cashflow to reduce debt even under a secular decline, many could retain their ratings. The question remains whether management teams and their boards can withstand pressure in the face of declining stock prices and maintain bondholder protection at consistent levels. Developments in the industry and how companies under Fitch's coverage adapt both operationally and financially will determine the ratings effect, if any, going forward.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Newspaper Print Ad Sales Seen to Fall Newspaper Print Ad Rev Expected to Decline 1.1 Percent for 2006 NEW YORK (AP) -- Newspapers' print advertising revenue is expected to decline 1.1 percent for the full year but stabilize to roughly flat growth in 2007, according to an industry trade group. If the 2006 forecast holds, it will be the first full-year decline in print ad revenue since 2002, according to the Newspaper Association of America. Next year's forecast has plenty of gloom, including declining print ad spending from local auto dealers and job recruiters, but the data show expected improvements in other key print ad categories. The NAA plans to publicly present its forecast Monday. Revenue from print advertising, which makes up the bulk of overall revenue for newspaper companies, is expected to fall to $46.9 billion this year, hurt particularly by continued migration of ad dollars from big national advertisers. In 2007, the NAA expects print ad revenue to be only marginally higher. As the latest figures show, print ad dollars have been pinched as readers have a myriad of sources for news and entertainment and marketers have growing sources for their campaigns, including online properties. Newspapers, though, are garnering a healthy dose of online ad sales. The NAA expects revenue from online ads to grow 28.7 percent this year to $2.6 billion and to slow to a 22 percent gain in 2007. Online ad gains haven't been enough yet to offset stagnant print ad revenue, but the NAA expects online revenue to continue to grow as a percentage of newspapers' overall ad revenue, up to 6.4 percent in 2007. On the print side, the NAA expects ad revenue from big national advertisers to recover somewhat next year after an expected 5.4 percent decline this year to $7.5 billion. In recent years, major national companies like movie studios, auto makers and telecommunications companies have been leading the ad migration away from newspapers. The newspaper forecast also shows improvement in retail advertising, or display ads for grocery chains, electronics stores and other merchants. Retail advertising is expected to increase 1 percent next year to $22.5 billion, compared with a 0.2 percent estimated increase this year. The category has been hurt as big department stores and other retailers consolidate. For 2006, classified ad revenue is expected to decline 0.9 percent to $17.2 billion, and decline 1.3 percent next year. Classified ads for real estate have been growing at a torrid pace, which the NAA doesn't expect to continue as the housing market shows signs of cooling off. The NAA comprises more than 2,000 newspapers in the U.S. and Canada representing 90 percent of daily newspaper circulation.

[Washington DC] Late-Night Newscasts See Big Drop In Viewers A precipitous decline in late prime-time viewership took its toll on 11 p.m. weeknight newscasts, according to Nielsen figures for TV's November "sweeps" period that concluded yesterday. All three local stations that have network programming after 10 p.m. -- WRC (Channel 4), WJLA (Channel 7), WUSA (Channel 9) -- saw late-newscast viewership plummet by more than 10 percent compared with last year. Total weekday viewers at 11 p.m. fell from 463,000 last November to 382,000 at those stations -- a decline of nearly 20 percent. The stations were hurt in no small part by the sharp decrease in ratings among the network lead-in shows; at 10:45 p.m., local weekday viewership fell by more than 25 percent (from 673,000 to 505,000). At WJLA, the drop was most drastic. The station's 11 p.m. viewership plunged by about 35 percent compared with last year (from 123,000 to 79,000). The ABC affiliate got no help from such anemic lead-ins as "The Nine," which was just put on hiatus. Bill Lord, WJLA's vice president of news, said that overall, the station's prime-time lineup performed well, led by such midweek hits as "Grey's Anatomy" and "Lost" -- but those programs air at 9 p.m. "The thing that concerns me is the lead-in," he said. "It's an ongoing issue with us."

Ratings from the year's four sweeps periods are used to set rates for advertisers. WRC led at 11 p.m., but weekday viewership of its newscast was down 11 percent (from 200,000 last year to 178,000). WUSA (Channel 9) declined by about 15,000 viewers, to 125,000. At WTTG (Channel 5), the 11 p.m. newscast -- which debuted in July -- drew 80,000 viewers. (Last year, the station's "Geraldo at Large" had 68,000 viewers at that time.) The station's 10 p.m. newscast, though, was down -- from 174,000 viewers to 160,000.

Chaos 2.0 To Witness The Collapse of the Old Model, Stay Tuned To Your Local Station A few layoffs at a local NBC affiliate in Washington, DC. In the overall scheme of things, who cares? You should, because what happened at WRC 4 this week is the leading edge of the End of TV As We Know It. Under cost pressure from its owner-operator, NBC, WRC severed ties with four of its most familiar news personalities -- just as rival WUSA 9 did a couple of years back. No problem, says management, people will still watch us for our way of doing things (which, by the way, if you care about news, is already worse than pitiful). Former market leader WUSA, of course, had offered exactly the same assurances. Now its 5 p.m. newscast is in fifth place, behind four other newscasts and "Judge Mathis," and its 6 p.m. languishes in fourth. Local broadcasters depend on two things for the bulk of their revenue: ad inventory allotted to them within network shows and their ads on local news and the prime-access that follows. But rapidly shrinking network audiences will soon devastate prime-time ad revenues, and local cost-cutting will decimate local news budgets, starving the goose that lays the golden egg.

Think about 2007. No election to pump up the local ad markets. No Olympics. And, as for prime time, the nets are bypassing their affiliates with online distribution. Long ago we predicted blood in the streets. Next year, it will begin to flow.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.