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Media Marketplace: Worst Case Watch

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Anyone who has ever had to endure the vascular tumult of migraine is intimately familiar with the “aura” stage, a period marked by sensory disturbances that serves as a sort of disquieting early-warning system to the skull-shattering attack to follow.

We find ourselves now in the aura of an economic migraine that is going to greatly destabilize the TV business in the early quarters of 2009, although some entities will suffer more than others.

Last week, the National Bureau of Economic Research confirmed what most already know, declaring the U.S. economy to be in a recession. Given the nascence of the downturn (the NBER said the contraction began in December 2007) and current projections for the first half of ’09, this recession could prove to be the most severe in 50 years.

The human cost of the economic crisis is now manifesting itself across the media landscape, as last week saw mass layoffs at Viacom and NBC Universal.

In a bid to mitigate a precipitous drop in ad revenue at MTV Networks, Viacom pink-slipped 850 workers, an offensive it believes will save between $200 million and $250 million in 2009. Meanwhile, NBCU was busy processing the first of what will add up to 500 job cuts, hacking away at its NBC News and broadcast operations while leaving the cable unit relatively unscathed. (Last Friday, the Labor Department reported 533,000 jobs were lost in November—the most in 34 years—rocketing the unemployment rate to 6.7 percent.)

The Viacom and NBC cuts are just “the tip of the iceberg,” said Barclays Capital analyst Anthony DiClemente. “Given the magnitude of layoffs across corporate America over the past several weeks … further work-force reduction announcements should be expected from the other large-cap media companies.”

The MTV Networks face a variety of challenges, and in 2009 the group will likely weather some profound reversals. Ratings at the flagship channel have plummeted, as MTV averaged just 743,000 nightly viewers in November, a dropoff of 39 percent versus the same time a year ago. Third-quarter viewership was down 18 percent.

Deteriorating economic conditions have reduced visibility around large-cap media to the extent that many companies have scotched any long-term earnings guidance. In an effort to cut through the fog, many analysts are drawing up a number of different projections for early ’09, including some rather dire “worst-case scenarios.” Should consumer spending and unemployment trends continue through the first half of the year, Viacom could see its domestic ad revenue drop as much as 15 percent, according to Pali Research analyst Richard Greenfield.

Even as the ad business goes into sharp decline, other cable outlets may not get scuffed up as vigorously as MTVN. The Turner nets, NBCU Cable and Discovery are expected to lead the way in 2009, thanks to the dual-revenue stream, deflationary broadcast viewership and CPMs that average out to about one-third the cost of time on network TV.

Discovery CEO David Zaslav said he expects his nets to deliver positive ad-sales growth in the fourth quarter, after notching a 4.6 percent increase ($249 million) in the prior three-month period. “Fifty percent of our revenue comes from subscriber fees, which goes a long way toward limiting our exposure in the ad market,” Zaslav said. “We’re better positioned than a lot of other media companies.”

DiClemente said the ’09 downturn could spell an 8 percent drop in ad revenue for the broadcast nets, which will have to brave a perfect storm of ratings erosion, a moribund auto industry and a pending pullback of upfront commitments. According to Nielsen data for the November sweeps, the five broadcast nets lost 10 percent of their aggregate nightly audience, while 12 percent of adults 18-49 churned away. Season to date, those numbers are closer to 15 percent.

Some of what lies in wait for broadcast is a function of what turned out to be a bad bet on the upfront. Heading into the 2008 bazaar, buyers were certain they would see a 2-3 percent decrease in earmarked TV dollars; instead, the market grew 5 percent versus the previous year. The rush to move scatter dollars into the upfront was “the worst possible thing that could have happened,” said Larry Novenstern, executive vp, director of national electronic media at Optimedia.

Given the confluence of macro and microeconomic disturbances, fourth-quarter scatter is stillborn.

“Nobody’s buying anything,” said one ad-sales chief, who spoke on the condition of anonymity. “Even with GRPs where they are, you’re still looking at having 15 percent of your inventory left to sell in the first quarter, with no takers.”

In UBS’ worst-case scenarios, ABC and CBS are both looking down the barrel of 15 percent revenue declines in ’09, while Fox’s TV business could fall as much as 24 percent.

To exacerbate matters, a global cut in ad budgets is going to have clients shying away from broadcast’s big-ticket inventory. Speaking at a media conference in New York last week, Nick Brien, CEO of Interpublic’s Mediabrands, said clients will not only cut their budgets but also will demand greater return on investment from their network partners.

Brien also noted that ’09 forecasts will have to be revisited on almost a daily basis, given the volatility of the global economy. “It’s all moving so fast,” he said. “A month ago, I would have said flat spending—now we’re looking at a modest decline.”