Analyst: Viacom May Miss Out on Ad Recovery

Despite modest improvements on the ad sales front, a longer road to recovery may lie ahead for Viacom, as low ratings and a major gamble on the health of the scatter market have put the MTV Networks at considerable risk.

In a note to investors, Pali Research media analyst Richard Greenfield said the second quarter ad revenue gains notched by Viacom’s cable networks may not be enough to turn the tide in the latter half of this year. “While … ad revenues fell only 6 percent in Q2 2009 compared to 9 percent in Q1, we are less confident in their ability to continue that improvement into the back half of 2009,” Greenfield said, adding that Pali now projects Viacom’s 2010 ad revenue to decline 3 percent year-over-year, versus the firm’s previous forecast of a 2 percent gain.

Greenfield said that the cable unit was particularly exposed to the vicissitudes of the advertising market, as the networks wrote greater-than-average CPM rollbacks and took a hit on volume. “Viacom’s … upfront saw a significantly reduced amount of inventory sold at mid-high single-digit CPM declines, due to ratings troubles over the past year,” Greenfield said. “In turn, with scatter piled up throughout the broadcast and cable industry, the risk to our estimates has increased substantially.”

While Viacom’s CPM discounts weren’t appreciably more severe than the average cable network rollbacks (–5 percent), MTVN is believed to have taken a bigger hit on volume, as sources estimate the group closed its upfront business down 15 percent in total dollars versus last year’s bazaar. Viacom execs declined to comment on the report.

Speaking to analysts during Viacom’s July 28 Q2 earnings call, president and CEO Philippe Dauman declined to provide any detail on the amount of inventory MTVN sold in the 2009-10 upfront, saying only that he was “very pleased with the results from both a volume and pricing standpoint.” Dauman later said that early fears of a washout had been dispelled as the stock market began to rebound.

“I think the feeling on the part of advertisers that perhaps they could extract dramatic reductions in prices because the economy was going to hell in a hand basket, that feeling has dissipated as we see signs of recovery in the general economy,” Dauman said. “So it’s no longer perceived to be a safe bet to assume that they will be able to get favorable pricing in the scatter market in the next broadcast year.”

That said, given the amount of inventory the broadcast and cable nets held back for scatter, even a slight downtick in demand in the fall could result in a glut of unsold inventory. Sellers are betting the other way, predicting that July’s stock market rally will lead upfront holdouts back into the fold.

“We just came through the worst economic disruption since the Great Depression, and it looks like the worst of it is behind us,” said one ad sales boss. “You have to believe that demand will be up 3 to 5 percent in 2010.”

In the near term, MTVN needs to see a marked improvement in viewership trends. In the second quarter, flagship net MTV fell 14 percent in prime time, averaging 778,000 total viewers, while its share of viewers 18-34 fell 13 percent to 406,000. In July, MTV appeared to have stopped the bleeding a bit, as its nightly audience fell 7 percent versus the year-ago period.

Comedy Central declined 9 percent to 973,000 viewers, of which 355,000 were members of the 18-34 demo, representing a year-over-year decline of 16 percent, while Spike TV dropped precipitously, averaging 1.01 million viewers, down 27 percent from Q2 ‘08. While Comedy Central was down 6 percent in July, Spike continued to struggle, with nightly deliveries off by 23 percent.

On the plus side, VH1 showed further signs of growth, gaining 11 percent in prime with an average delivery of 774,000 viewers. The network boosted its standing among the 18-34 crowd by 10 percent during the quarter, drawing 326,000 members of the demo in the period. As was the case in the previous quarter, BET continued to skyrocket, averaging 859,000 viewers in prime, an increase of 44 percent, per Nielsen ratings data. Significantly, the quarter marked the first time that BET out-delivered its sibling music nets in prime.

“If Viacom is able to turn its ratings positive over the next couple of quarters and the economic rebound begins to meaningfully impact cable network industry ad spending, Viacom could conceivably grow ad revs in calendar 2010 (as we had been forecasting),” Greenfield noted. “However, that feels aggressive.”

Final summer numbers aren’t due for another week, but many cable networks are preparing their ratings packages for release later today.