BOSTON—The cable industry should be prepared to weather a recession that will last until 2010, Jessica Reif Cohen, Merrill Lynch first vice president and managing director, said on the closing panel session at the CTAM Summit ’08 here Tuesday.
“I know the perception is that cable is recession proof. Its business tends to hold up better…but it’s not recession proof,” Reif Cohen said.
While there’s a perception that most recessions last 10 to 11 months, Reif Cohen (pictured) said, a typical recession actually is 18 months. Merrill Lynch is forecasting negative economic growth for the first three quarters of 2009, flat growth in the fourth quarter, with the first positive quarter the first quarter of 2010. The current recession began in the second quarter of this year, she said.
Businesses better suited to withstand economic slowdowns have strong cash flow and are self-financing—and “cable fits that bill very well,” Reif Cohen said. Cable stocks historically recover more quickly than broader economy, too, two to three quarters after a recession has begun.
But the effect on cable in past recessions has been slowing net subscriber additions. In the early 1990s, for example, net adds slowed by 50%. “The net adds slowed down and it took two years to get back to trend line. That’s our expectation now,” she said.
The advertising sector will likely be hit harder, Reif Cohen said, and take longer to recover. Media stocks don’t recover until a quarter or two after the recession is over, she said.
Discovery Communications president and CEO David Zaslav said his company’s advertising business has slowed down some in the fourth quarter “but we’re holding our own.” The company generates about half its revenue from advertising.
“The value of cable has made us maybe the last man standing in the media business,” Zaslav said, but added that if the economy worsens Discovery will be affected as well. “We’re looking into next year and we’re pretty cautious.”
Canoe Ventures CEO David Verklin, who officially started with the advanced-advertising venture formed by the six biggest MSOs on Aug. 4, said an economic downturn could make cable more attractive by increasing the effectiveness of TV ads.
“In my three months on the job, we’ve gone from a high level of interest to a ridiculous level of interest in Canoe,” he said. “In my mind, we can use this very challenging economic time to bring change to linear television advertising.”
Verklin said the idea that Internet advertising is inherently more accountable and more targetable than TV is “a myth that needs to be busted,” alluding to the top Discovery Channel show MythBusters.
Canoe’s first products will be data, derived from cable set tops in 32 million households, he said. “One of the first things we must do is bring set-top data into the marketplace and make that the currency,” Verklin said.
Interactive products will be next, and Verklin said Canoe believes it can deliver a “large-scale deployment” of a service that allows viewers to request more information from a TV advertiser within 12 months.
Also on Canoe’s road map is “t-commerce,” or selling goods via a TV portal. “We’ve been approached by L.L. Bean and other direct marketers who can’t wait to see turn television into a transactional medium,” Verklin said.
Canoe has real potential to boost the value of cable advertising, Zaslav said. “Cable has the benefit of being in the sweet spot for advertising,” he said. “Well, we could be an even better value if we had interactive ads…If we can get another 10% that’s more money for all of us and we just have to figure out how to share that.”
Advertising on VOD is another category that holds promise, Zaslav said. “We’d be very happy to give all our content on VOD” if it could be monetized so both distributors and networks could benefit, he said.
In the absence of comprehensive VOD services, consumers turned to DVRs, Zaslav (right) continued. “The reason the DVR exists is because they don’t have to ask permission,” he said.
If cable operators and programmers had figured out the rights issues, Zaslav said, “we could have empowered a technology that would be much more beneficial to us” than DVRs.
He noted that Cablevision Systems is planning to move ahead on a network-based DVR service, which cable networks, broadcasters and movie studios have fought all the way to the U.S. Supreme Court.
Cablevision chief operating officer Tom Rutledge countered that—besides the “holes” in the rights that would allow operators to offer programmers’ linear content on-demand—cable has had to offer DVRs to remain competitive.
“If you’re going to allow DVRs, you can allow network DVRs,” Rutledge said. “That’s how we got to where we are.”
But the game isn’t over on DVRs, Rutledge added. “I think the DVR can still be defeated, not in a legal sense but in a practical sense,” if huge on-demand libraries of TV content were available to subscribers.
Zaslav replied, “The real takeaway is, when there’s an opportunity, we should work together. Otherwise someone is going to do it on a competing platform, or the technology is going to do it to us.”
The panel was moderated by Harvard Business School senior professor of retailing Rajiv Lal.
Before the panel, Rutledge accepted the Grand TAM award—CTAM’s highest award—by saying he was “happy to finally be recognized by marketers.”
Rutledge said Cablevision employees love to sell cable services—and pointed out that they’re intensely competitive.
“Everyone who works at Cablevision knows that the only satellite dish we want to see in our territory is on the side of the house that the neighborhood kids think is haunted,” Rutledge said.