News

Looking for Overseas Growth

10/10/2008 8:00 PM Eastern

Cable networks, faced with the uncertainty of the U.S. economy and the shrinking advertising market, are looking to expand their presence internationally to help offset some of the weakness in the domestic economy.

Last week, the U.S. economic malaise spread to other countries, but most analysts believe the international market still poses opportunities for networks.

As the U.S. stock market has been in free fall over the past couple of weeks — as of Oct. 7, the Dow Jones Industrial Average was down 27%, or 3,596.36 points, since the beginning of the year — international markets were relatively unscathed. But last week, the banking crisis that crippled the U.S. economy spread across the globe with banks in the United Kingdom, Germany and even Iceland teetering on the brink of collapse, only to be rescued by their respective governments.

Miller Tabak media analyst David Joyce said that while the domestic market malaise has apparently spread to other countries, it shouldn't have a huge impact on the international advertising market, at least for now. “There are still expansion possibilities,” Joyce said, adding that a strengthening dollar could make some of that growth appear smaller than it actually is as foreign currencies are converted into U.S. dollars.

Viacom, which is expected to kick off the third-quarter earnings season on Nov. 3 when it releases financial results, stressed the unlocked opportunity in its international markets during its second quarter conference call with analysts in August. While international advertising is still a tiny portion of overall ad sales — international revenue was $390 million in the second quarter, compared to $1.75 billion in domestic revenue — it is growing at a faster pace (31% in the quarter versus 8% for domestic revenue).

Second-quarter international advertising revenue grew 10% at Viacom, while domestic ad revenue grew a paltry 1% in the period. The international market also appears to be a strong and growing source of affiliate-fee revenue. Worldwide, affiliate revenue was up 12% in the second quarter, to $650 million. Domestic affiliate fees grew by 11% in the period, while international affiliate fees were up 13% in that time frame.

Despite the softness in the global economy, Joyce believes non-U.S. sales can be an increasingly lucrative business for Viacom and other programmers.

“There is still going to be growth for entering new markets, for applying their current brand and starting new brands in their current markets,” Joyce said. “They can grow affiliate and advertising fees just by expanding. It's a multifaceted coin — it's not just that international expansion is good or bad — there's a weakening economy, which means that advertising is slower, but at least there is growth from expanding.”

International is becoming a focus of programmers across the board, not just the ones that are struggling to replace lost domestic ad revenue. At Time Warner, which owns cable programming giants CNN, Home Box Office and Turner Entertainment, international is garnering more attention. Time Warner has some of the strongest second-quarter advertising growth in the industry, with domestic cable ad sales up 11% in the period.

In its 10-Q quarterly financial filing with the Securities and Exchange Commission, Time Warner said that network results benefited from its international expansion efforts in the first half of the year — including Turner's purchase of seven pay TV networks in Latin America and HBO's acquisitions of additional interests in HBO Asia and HBO South Asia in late 2007 and early 2008.

In the SEC filing, Time Warner said it “anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.”

Time Warner CEO Jeff Bewkes reiterated that stance at an appearance at Goldman Sachs' Communacopia conference in September, saying the media giant is carefully selecting the areas that it expands in, and it's not just the more traditional international markets like the United Kingdom and Germany. Time Warner is focusing on secular high-growth economies like India, Eastern Europe, Brazil and Mexico, Bewkes said.

News Corp. is another media giant with big international ambitions. Last year, Fox International, News Corp.'s stable of international cable channels, launched 40 new channels and reported total revenue of about $1 billion. On its fiscal fourth-quarter conference call with analysts in August, News Corp. chief operating officer Peter Chernin said that most of that growth was in emerging markets and mature markets with low but rising penetration of cable and satellite-TV service. In the fiscal 2008 fourth quarter, ad sales at Fox International were up 30% and pacings for the fiscal 2009 first quarter were strong.

At the Merrill Lynch Fall Media conference in September, Chernin continued to be optimistic about the international business, calling it one of the “really big, big growth drivers in our cable business, and if anything, I think probably the highest growth potential going forward over the next couple years.”

Joyce, however, doesn't believe that international sales will be enough to reverse Viacom's fortunes in the third quarter.

Viacom missed its own conservative ad-growth estimate in the second quarter — 3% to 4% — which weighed heavy on the stock and the market's perception of how it would weather a downturn. Joyce said Viacom's second-quarter problems stemmed from a shift in demographics in some of its networks that caught advertisers off guard. He added that networks like TV Land and Nick at Nite may have gained audience from broadcasters, but that those new viewers were likely older than advertisers expected.

While Viacom has identified the problem and is making moves to correct it, Joyce doesn't think that will translate into more robust third-quarter growth.

“They can't turn the ship around that quickly,” Joyce said, adding that Viacom should show improvement in the fourth quarter.

1Q08 2Q08 Change
Source: Company reports.
Viacom $390 million
$298 million 31%
India
Eastern Europe
Brazil
Mexico

March