Lagging Ad Sales Hit Disney, AOL in Purse

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Advertising-dependent media companies last week took a pounding as the recession continued, with AOL Time Warner Inc. and The Walt Disney Co. both reporting declines.

It was ABC that brought Disney's results down the most. The broadcast-TV network saw a precipitous drop in ratings, which had an equally bad effect on its results.

During its fiscal first quarter (which ended Dec. 31), Disney's broadcast division saw revenue drop 18 percent to $1.5 billion. The unit reported a $76 million operating loss for the period, compared with operating income of $287 million in first-quarter 2000.

Cable networks reported gains in both revenue and operating income — 18 percent and 6 percent, respectively. And president Bob Iger said the repurposing of ABC programming on Disney's cable networks is expected to yield even better results.

In a conference call with analysts, Iger said ratings for ABC Family — the former Fox Family Channel, which Disney purchased last year for $5 billion in cash and assumed debt — have been the highest in its history.

ABC Family's ratings among young adults were up 25 percent in December, and the network was able to maintain that growth rate in January, Iger said during the conference call. Repurposed fare — programming that originally aired on ABC and was repeated on cable networks like ABC Family and SoapNet — continued to show strength.

Disney chairman Michael Eisner referred to the U.S. Figure Skating Championships — which first aired on ABC Family and was later repeated on ABC — as an example.

"The combination rating of the two was higher than what we would have gotten if we had it just on [the] ABC network exclusively," Eisner said. "The ability, going down the road, of using these platforms and programming interspersed between them is going to be more and more effective."

Disney also plans to make some changes in how it sells advertising for its repurposed programming, Iger said.

"We're also going to attempt to package, from a sales standpoint, advertising basically throughout these windows," Iger said. "So there will be an attempt, as we did successfully with SoapNet, to sell units across networks — ABC network into ABC Family, for instance — to try to maintain, where possible, some advertiser consistency within the body of a given program."

MORE CROSS-PROMOS

While repurposing is the word of the day at Disney, AOL Time Warner has a different remedy for the ad slide: cross-promotion.

In a conference call with analysts, AOL Time Warner COO Bob Pittman said the company is not anticipating an ad-market recovery anytime soon, as advertising revenue was down 3 percent in the period. AOL is dealing with the situation by aggressively cross-promoting its products.

AOL tallied over $1 billion in global media sales, and also spent heavily to promote its own products over its online properties and cable networks, Pittman said. That trend, he said, will continue.

"As advertisers have pulled back, we have been more concerned with efficiency and effectiveness," Pittman said on the analyst call. "The goal in '02 is to continue that trend — to find ways to use our own media."

Overall, cash flow and revenue growth at AOL Time Warner — at 14 percent and 4 percent, respectively, in the fourth quarter — was in line with analysts' expectations. But at the cable networks — which include Cable News Network, Turner Network Television and TBS Superstation — revenue rose only 4 percent and cash flow was up just 2.5 percent.

And though the networks have not performed as well as they have in the past, AOL Time Warner's cable systems helped take up some of the slack.

Time Warner Cable was one of the company's bright spots, with revenue and cash flow up 18 percent and 13 percent, respectively.

AOL Time Warner CEO Gerald Levin — who will resign that post in May — stressed the company's leadership in the broadband arena. Time Warner Cable has 2 million cable broadband subscribers, more than any other MSO. Its America Online Internet service boasts 4 million subscribers using both cable modems and digital subscriber line service.

"We know broadband like no other company," Levin said. "There is no other company as well-positioned to drive and capitalize on this opportunity."

CEO-elect Richard Parsons hinted that AOL Time Warner is still in the hunt for cable systems after losing out on the bidding for AT&T Broadband.

"We don't believe consolidation stops with that transaction," Parsons said. "We continue to be involved and opportunistic on the cable side because we believe in cable.

"We are net, net, net an acquirer. How that will manifest itself in the real world, only time will tell. But we remain alert to opportunities on that side."

Consolidation is also a reality on the content side and AOL Time Warner will keep its eyes open for opportunities in that arena, he added.

"We believe there are two kinds of entities in the world — consolidators and consolidatees," Parsons said. "We are a consolidator."

AT&T MARGINS SLIDE

AOL may have breathed a sigh of relief that it didn't win out in the bidding for AT&T Broadband, which last week reported a drop in cash-flow margins.

While fourth-quarter cash flow rose 10 percent at AT&T Corp.'s cable unit, cash-flow margins were down 2.2 percentage points to 22.9 percent, compared with the 25.1 percent margin in the previous quarter.

Broadband attributed the decline to additional costs incurred with the December shift of 900,000 cable-modem customers from Excite@Home Corp.'s network to its own. Excite@Home, which filed for Chapter 11 bankruptcy in November, shut down its network a month later.

Broadband added 568,000 new revenue-generating units, and its data-subscriber ranks increased by 130,000, to 1.5 million. Digital-video customers rose by 335,000, to 3.5 million. The company also added 103,000 cable-telephony subscribers in the quarter, finishing the year with 1 million customers.

Basic-subscriber growth declined about 1 percent in the period, or by about 88,000 customers to 13.56 million.

"Basic performance did not come in at an acceptable level," said AT&T Corp. chairman C. Michael Armstrong in a conference call with analysts. Initiatives to upgrade the unit's systems and improve customer service should reverse that trend, he said.

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