Once again, the time has arrived when analysts, CFOs, and other assorted bone readers are called upon to divine the financial conditions of the coming year. After an exhaustive scientific study of hundreds of economic causalities, DigitalTV-Television Broadcast can state with confidence that large, diversified companies with hefty cash reserves are well-positioned to ride out market uncertainties in 2003. Everyone else had better start looking for new cheese.
Duh.
Anyone who claims to know more than the obvious is fibbing. In reality, the predictive process entails a series of educated guesses, issued forth with a veneer of cool self-possession typically reserved for dating. She who guesses best looks the smartest. Everyone else counts on the improbability of anyone reading what they said a year ago (that goes for trade magazines that look at market realities through rose-colored glasses, hoping to convince manufacturers and readers, who know better, that all is well).
Instead of an outright economic forecast, letâs examine a list of factors and indicators affecting the broadcast sector:
Advertising
Thanks to the Olympics and an unusually hysterical battle for Congress, ad revenues were pulled out of the dregs this year. Political spending alone is expected to total out at an all-time high of around $1 billion, and the subsequent inventory pressure pushed fourth-quarter scatter CPMs to as much as $19, or 20 to 30% more than upfront prices, according to an SG Cowen report. Overall TV ad spending for 2002 is on track to hit its former 2000 apex of $40 billion, while the Television Bureau of Advertising is predicting a 2 to 3% increase for 2003. Thatâs not bad for a year with no worldwide sporting events or major elections, but it's not good enough to impress The Street. Fat chance that $19 CPMs can be maintained amid so much competition, analysts retort. And what about those pesky PVRs? Wall Street awaits a new business model.
From an October 28 Cowen report:
Many broadcasters remain in denial about the ultimate impact of new technology on their business in our opinion. We find the Personal Video Recorder (PVR), which enables time-shifting and the skipping of commercials, especially troublesome... While these devices are already integrated into satellite set-top boxes, we expect [them] to be built into cable boxes in the near term. To make matters worse, we have yet to hear a reasonable competitive response from TV broadcasters.
Bottom Line: Advertising revenues will post modest growth in 2003, but not enough to buffer against pricing volatility and technology that refuses to disappear.
Digital Television
The big question for 2003 is what happens to the stations that continue to miss their on-air deadline, says Gary Arlen, president of Bethesda, MD-based Arlen Communications. "What if a lot of them just say, forget it. I'm not going to build a transmitter in my town. They'll [the FCC] take away his license, but it won't be for years."
Around 800 stations missed their first DTV deadline last May. Most, even the 70 or so that were technically "denied," were granted six-month extensions. As of mid-November, 564 stations had requested a second extension for their DTV build-out. Of those, 62 had been granted.
A spokeswoman for the FCC said the next level of enforcement after a technical denial is a fine. After that, if the offending station still doesn't get a signal on, it could have its DTV license yanked. "That will have to be evaluated on a station-by-station basis," said the spokeswoman.
Complicating enforcement is the fact that 292 PBS and other non-commercial stations not already on the air with a DTV signal are due to have one up in five months. If public stations are not subjected to the same rigor as commercial stations, a hue and cry will ensue. On the other hand, if the FCC deprives Bunker Hill, KS of public television, ditto on the hue and cry. (The Civil War didnât start in Virginia, my friend.)
Elsewhere on the digital front, 2003 is shaping up to be the year cable plug & play sets hit the market. Meanwhile, broadcasters will be transmitting low-power digital signals to televisions that require tuners but not reception. They'll continue to rely on analog and must-carry instead of measuring public temperament for free, over-the-air, multichannel television. If ever there was a time to stop whining and construct the 10-year plan, it's now.
Bottom Line: DTV signals will not generate revenue in 2003, but neither will the FCC go away.
Capital Spending
Capital investment will take two forms in 2003÷compliance and streamlining.
Digital deadlines caused a flush of compliance spending in 2002, a good portion of it on low-power transmitters. About half of the 600 or so stations on the air with a digital signal are using low-power transmitters, according to NAB estimates. Just how long stations will be allowed to use low-power DTV transmitters is currently under review at the FCC.
"The reason [the] FCC gave us [the] opportunity to go low power is that there are so few DTV-compatible sets that have been sold, and because of enormous utility costs inherent in running analog and digital side by side," said Dennis Wharton, NAB senior vice president of Communications. Barring a miracle, those conditions arenât likely to change radically in 2003, and all stations that bought low-power transmitters this year aren't likely to dump them next year, as long as they meet regulatory requirements.
"We spent roughly $3 million to install low-power transmission facilities in markets not yet on the air to meet the letter of the law," said Mark Aitken, director of Advanced Technology for Sinclair. "We will do a high-power product, but those markets will go to the end of the line."
Sinclair chalked up around $65 million in capital spending in 2002, with similar spending levels projected for 2003. A majority of 2003 dollars are earmarked for Sinclair's new centralized digital news infrastructure, designed to cut local news costs in half.
"The whole point of centralcasting is to be able to use the technology wisely based upon workflow requirements to create efficiencies," Aitken said. "Nonlinear editing is nothing new, but the price-point has reached greater efficiency than walking tape around."
Efficiency will drive digital production in 2003, one manufacturing insider predicts. "Because certain areas are flat, networks can't increase cash flow, so they look at making production more efficient," he said. Shooting in digital HD tape costs around $1.27 a minute, as opposed to $49.48 per minute for 35mm film. "We canât get cameras out the door fast enough," continued the manufacturer.
One final harbinger of capital spending÷registration for NABâs Vegas extravaganza÷is looking good. NABâs Wharton said about 1,000 vendors have registered for the show so far, as expected. And if you donât know already, Bill Cosby is the opener. Bottom Line: A. Efficiency spending will outpace compliance spending in 2003; and B. Check eBay before buying a new low-power transmitter (or anything for that matter÷there are things up for auction that you just won't believe).
Regulatory
It's a holly-jolly deregulatory administration. Relaxed ownership rules are expected to be unveiled in the spring. A wave of small- to mid-market consolidation won't be far behind, but whether 2003 will be a buyerâs or a seller's market depends on the players. Buyers not leveraged to their nostrils will have cheap money to throw around in 2004; sellers in strong DMAs who arenât on the verge of being crushed by the digital mandate are well-positioned. LMAs will also increase.
Big honkin' mega-mergers are less likely, what with stock prices down from the ridiculously inflated gaga days of two years ago. Even if Rupert swoops in to pick off Vivendi, nothing but ink will be generated in 2003. That, and the usual Congressional scrutiny, requisite mass firings, and typical executive shuffles that are the hallmarks of hefty mergers. Bottom Line: If AOL and AT&T were indicative of anything at all, broadcasters should show some restraint when the ropes are untied.
The Economy
Let's begin with a general overview. The Dow took nearly 100 years to reach 4,000 in 1995. Seven years later, it has more than doubled. From a historical perspective, the economy is taking care of itself.
"We're in an accounting correction," said Nelson Fisk, a financial advisor with Edward Jones. "Warren Buffet is right. This is when the stocks go back to their rightful owner."
GDP, a general indicator of ad spending, grew 3.1% over the last year. Unemployment is holding steady at the 5 to 6% range, neither historically low nor high. The prime rate is lower than itâs been in 40 years, and the Fed just dropped the Federal Reserve rate another half-point to 1.25%...and consumers are still spending money. So far, the economy has held up respectably under the dot-com collapse and the fall out from 9/11.
Now For The "Howevers"
However No. 1
÷War. If it comes, it comes in 2003. Fuel prices will skyrocket, and everything from shipping to heating will be affected. The old saw that war is good for the economy is factually flawed. Only the end of war is good for the economy.
However No. 2
÷The structures that propped up the economy in 2002 may not hold out in 2003. Cheap interest rates led to a one-time flood of cash from refinanced mortgages, according to testimony from Federal Reserve Chairman Alan Greenspan. Free auto financing led to a rush on cars that may very well be over. Workers pressed into higher productivity may be burning out. And the Fed doesn't have much left to cut.
However No. 3
÷The FCC just gave Comcast-AT&T five-and-a-half years to fully jettison Time Warner Entertainment, which would suggest the agency's economists donât expect a full market recovery in 2003.
Bottom Line: Always be on the look-out for new cheese.
Deborah D. McAdams is a contributing editor. She can be reached at: dmcadams@uemedia.com.
