By Jon D. Markman
Like Tiger Woods aiming for a field of brilliant green, Westinghouse Electric Corp. is about to make the most important approach shot of its life.
For years the company was among the shyest of the nation’s serious media companies, slowly amassing a portfolio of radio, television and cable properties to go with its gas-powered turbines and refrigerated cars, yet always lagging well behind its competitors in respect and profitability.
But now the $11 billion parent of CBS Inc. is embarking on the upfront network advertising season as the only major U.S. media outfit that receives the majority of its income from broadcasting. According to top Wall Street analysts, that makes the palooka from Pittsburgh more focused than any of its competitors on the amazingly rich prize.
Westinghouse’s hunger to captivate media buyers will grow even more pronounced later in the year when it spins off its industrial units and meets the next century head-on as a New York-based electronic media enterprise. In a sense, the upfront season resembles a debutante ball as much as it does a stroll down one of the fairways CBS is famed for televising; a good showing by its fall lineup this month might finally encourage more investors to consider wedding a chunk of their fortunes to a company whose stock has sunk 2.6 percent a year for the past decade.
Will it be successful? That is up to the vagaries of the public’s taste. But early word from analysts who have examined CBS’ fall lineup suggests that it has a fighting chance to place second in the battle for the ad dollars that will shower on the networks over the next few weeks.
Already, the white-shoe investment-banking firm Lehman Bros. and mutual-fund Goliath Fidelity have thought enough of the company’s prospects to begin acquiring a 5 percent and 9 percent stake, respectively, over the past five months, according to filings with the U.S. Securities and Exchange Commission. Westinghouse chief executive Michael Jordan’s forceful efforts to acquire radio powerhouse Infinity Broadcasting at the end of last year and cable giant Gaylord Entertainment this year have also made a believer out of Ray Oakes, a professor of mass communications at Franklin Pierce College in New Hampshire: ‘CBS is on an upward path; they’re making risky but smart moves,’ he says.
The Tiffany network picked a good time to light up. Upfront sales of network television advertising appears to be headed for another record, with the total value to the networks expected to jump as much as 10 percent over 1996 to top
$6 billion for the first time, according to analysts’ estimates. CBS has solid momentum going in, too, having finished with a slight edge over NBC in the critical May sweeps.
‘The speculation is that the upfront market is going to be very strong,’ says Jessica Reif Cohen, a Merrill Lynch analyst who follows Westinghouse along with NBC parent General Electric Co., Fox parent News Corp. Ltd. and ABC parent Walt Disney Co.
Of course, the ad-buying news over the next month is expected to be best for NBC, as the industry leader widens the gap between itself and the competition by improving its already top-rated Thursday-night lineup.
In the broader corporate space where shareholders live, those upfront estimates indicate that the parent that least needs a boost from its network–General Electric–will get the most out of 1997’s bigger haul of ad revenue. If CBS brings home second-place winnings to Westinghouse, and News Corp. holds its own, Disney will drop seriously out of the money.
News Corp. is used to bad news; its shareholders are long suffering. But what an odd muddle for the mouse: Overall, Disney is expected to continue to grow earnings at a strong 23 percent annual pace in the 1997 fiscal year, according to estimates by Zacks Investment Research. But Cohen expects the contribution from ABC this year to be essentially flat. Last year, ABC earned about $400 million for the country’s second-largest media conglomerate, but that figure was in large part the result of merger-accounting tricks that will disappear after fiscal 1998.
And speaking of neat tricks, the upfront market is expected to improve over the $5.7 billion take in 1996 despite waning levels of network viewership. The reason: Broadcast television still delivers sneaker and film and car makers the largest single bunch of couch-planted Americans at a time. ‘It’s the biggest piece of real estate advertisers can expect,’ says Gary Farber, an analyst for NatWest Securities in New York.
Networks’ ability to pull in more advertising than ever this year owes precisely to the economics of the fracturing of Americans’ entertainment habits. ‘It’s pure supply and demand: If there are fewer ratings points available, the networks will raise prices accordingly,’ says Bob Flood, a media buyer with DeWitt Media in New York.
Adds Bruce J. Raabe, a media analyst at Collins & Co. in New York: ‘Even if advertisers have 50 choices of places to put their money today, they’re sticking with the top three.’
Flood, who purchases time for clients including BMW luxury automobiles and Rite-Aid discount drug stores, says he is expecting a 7 percent to 10 percent jump in CPM, or cost per thousand viewers, from the networks. He sees NBC getting the high end of the scale because of the popularity of shows such as Seinfeld and ER, and he sees ABC getting hammered. ‘The ABC schedule doesn’t look like it will justify a premium at all,’ Flood says.
Industry observers say that the bottom-line results of a hit show cannot be underestimated. The fact that NBC can occasionally charge up to $1 million a minute for Seinfeld–though it typically gets more like $400,000 to $700,000–is just the tip of the iceberg. Because upfront advertising is bought in packages, NBC leverages the power of a Seinfeld to force media buyers to buy its less-attractive shows. Networks without hits have far less ability to channel dollars into their marginal or experimental efforts.
Pricing power, of course, is precisely the way General Electric chairman Jack Welch built his once-sleepy manufacturer of dishwashers and jet engines into the country’s most successful conglomerate, with 1996 sales of $78.5 billion and a market capitalization of a whopping $204 billion. Just look at the company’s profitability: Last year, GE’s gross profit margin was 64.5 percent, compared to 43.7 percent for Disney, 39.4 percent for Westinghouse and 14.3 percent for News Corp.
Margins like that brought General Electric $22.1 billion in earnings in 1996 before interest, taxes, depreciation and amortization expenses, a common measure of cash flow in the media business that is known by the acronym EBITDA. The EBITDA take for its competitors: Disney was barely in hollering distance at $6.9 billion, then came News Corp. at $1.5 billion and Westinghouse in the hole by $351 million.
Paradoxically, General Electric requires the least out of its network division, since its GE Capital subsidiary–a worldwide financial services giant–does the bulk of the heavy lifting for shareholders. In 1996, NBC’s $5.2 billion in revenue contributed just 6 percent to GE’s total. In contrast, ABC supplied 22 percent of Disney’s $18.7 billion in revenue; Fox supplied 26 percent of News Corp.’s $10.2 billion in revenue; and CBS supplied just over 50 percent of Westinghouse’s $8.5 billion in revenue.
The genius of GE, according to analysts, is its management’s ability to apply its considerable wattage on running NBC efficiently even though the network is such a minuscule part of its earning stream.
For a study in contrasts, look at the distractions suffered by its competitors. Not long after Disney acquired ABC, it got badly sidetracked by chairman Michael Eisner’s flub in hiring ex-agent Michael Ovitz as president. And News Corp.–the world’s largest newspaper publisher–seems always on a manic-depressive tear of self-destruction, battling with its partners over satellite launches, diluting its stock to buy a supermarket coupon maker, piling on debt to buy a motion-picture company and confounding investors with an ambitious, costly attempt to buy the Los Angeles Dodgers.
‘What separates GE from the others is focus, a much stronger balance sheet and extreme profitability,’ says Tom Burnett, director of research at Merger Insight in New York.
Westinghouse Electric Corp.
Anyone skeptical about management’s zest to improve its lineup and grow earnings need only look at the company’s most recent set of filings with the SEC. There, clear as its network’s trademark eye, lies evidence that Michael Jordan received a big part of his ceo compensation last year in the form of options to buy 1.1 million shares of Westinghouse stock at a strike price of $20.72 a share. That means he’s got to improve the stock price at least 10 percent from its current level just to make the options worth a penny.
More importantly, analysts point to the former PepsiCo executive’s efforts to both grow revenue and slash expenses in ways large and small. He was recently reported to be in talks to take the first U.S. stake in a major Russian television broadcaster. He is in the process of selling off the old William Paley art fortune from Black Rock’s corporate headquarters. The company’s radio group posted a surprising 18 percent jump in sales in the year’s first quarter, powerfully outperforming the industry. And the strong push to build for the future by investing in more cable and radio content, as well as owned-and-operated TV and radio stations, is a sharp contrast to former owner Laurence Tisch’s stingy and shortsighted ways.
Add one network TV hit, and improve margins by a percent or two via cost-cutting or layoffs, and Jordan may soon look to shareholders a lot more like his Chicago Bulls homonymic counterpart. ‘The beauty of the media industry is that things can change in such a short period of time; it’s all about content,’ says Raabe, the Collins analyst.
General Electric Co.
With 150 factories in the United States and 100 more overseas, GE might well be said to be in the business of manufacturing money. So powerful is chairman Jack Welch’s vision to own only subsidiaries that are No. 1 or a strong No. 2 in their field that the giant company’s stock is anything but muscle-bound: It rose 45 percent in 1995, 40 percent in 1996 and is already up more than 22 percent this year.
The company’s recent history is not without major embarrassments–such as the misguided purchase and sale of scandal-plagued investment banker Kidder, Peabody a few years ago, an expensive recall of flawed turbine engines last year, and the 1995 loss of a $111 million patent infringement case filed by the inventor of magnetic resonance imaging–but the growth motor keeps on chugging. General Electric has scored a key success in launching more than a dozen satellites over the globe.
And GE Capital Financing, owner of assets as diverse as Minebea Credit in Japan, Banco Alianza in Mexico and First Colony life insurer in the United States, accounted for $23.7 billion of the firm’s sales last year.
In company like that, the breathtaking $13.2 million a year payout to the actors of Seinfeld that NBC recently undertook is hardly a profit dent worth complaining about.
This year, ho-hum analysts expect GE to grow another 18.1 percent.
News Corp. Ltd.
Australian newspaper baron Rupert Murdoch has grown revenue like mad through an often enigmatic march of acquisitions over the past decade, but the glory has not been shared with stockholders. Ten thousand dollars invested in News Corp. shares on the first day of 1990 would be worth about $25,100 today; the same $10,000 invested with GE would be worth about $44,800. (Don’t even think about poor Westinghouse shareholders; they’d be holding less than $5,600.)
The reason, in three words, are debt, dilution and delusion. ‘News Corp. is hard to get your hands around; what’s the strategy, where are they going?’ says Tom Burnett, research chief at Merger Insight. ‘And the balance sheet is so piled with debt that investors are just scared away. A serious rise in interest rates could sink the whole ship.’
The upfront season is particularly important for Murdoch, because Fox has been his company’s principal driver for earnings growth over the past three years. The company’s prominence in the satellite broadcast business of Europe and Asia–and, soon, Latin America–is its high-tech PR showpiece. But the margins in the heavens for BSkyB, JSkyJ and Star are surprisingly thin. And Cohen, the Merrill Lynch analyst, complains that the balls of reflective metal are beaming down a pretty flat revenue stream. All of which makes the company’s attempts this season to build solidly on its success with The X-Files, Millennium and pro football even more critical.
Walt Disney Co.
Chief executive Michael Eisner received options to buy upwards of 8 million shares of stock as part of his salary package this year. That’s a good enough reason for him to figure out how to make the heavily leveraged acquisition of ABC work.
So far, however, the effort has fallen flat. And according to Farber, the NatWest securities analyst, ABC won’t do any better next season as it will lose momentum by revamping its entire lineup. If NBC is expected to get 10 percent more in upfront money this year, according to First Boston media analyst Laura Martin, CBS will be up 5 percent to 8 percent, Fox will be up 3 percent to 5 percent and ABC will be lucky not to slip back.
Do Disney shareholders care? Not really. ABC accounts for less than 10 percent of Disney’s cash flow, and the company is such a stellar grower of revenue that a lousy year on the tube is expected to have a negligible impact on the stock price. Merrill’s Cohen believes that if Eisner’s talented creative types are able in 1998 to set ABC back on the path of glory it enjoyed when he was a programming whiz kid, it will add impressively to earnings.
Copyright ASM Communications, Inc. (1997) ALL RIGHTS RESERVED
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