Viacom Inc.'s decision to scale back full-year revenue and earnings guidance last week could be another sign that cable operators are taking an increasing piece of the local advertising pie.
In a statement issued last Wednesday morning, Viacom said that while the economic recovery has resulted in a robust national advertising market, "the pace of recovery in local advertising markets going into the fourth quarter is not as rapid as had been anticipated."
Viacom's share price fell as low as $38.50 last Wednesday (down $1.82), before regaining ground to finish at $38.76 (down $1.56).
Viacom said it now expects mid- to high-single-digit growth in revenue and operating income for the full year, versus earlier guidance of high single-digit growth for revenue and double-digit growth for operating income.
Viacom also expects to deliver low- to mid-teen growth in net earnings and earnings per share for full-year 2003, versus earlier guidance of mid-teen growth.
Viacom president and chief operating officer Mel Karmazin has touted the strength of the advertising market for months, despite the economic downturn. While he's been proven right on the national front, local advertising, especially in broadcast television and radio, has been hit hard.
"They [Viacom] were overly optimistic coming off the strong political year in 2002," said Jack Myers Report
editor Jack Myers. "We've been pretty conservative on our forecasts for 2003, although I think while Viacom was smart to lower Wall Street's expectations, ultimately they will see a very strong fourth quarter and a resurgence in the local retail market."
Myers projected year-to-year local ad growth would be in the 3% to 5% range for local broadcasting, followed by robust growth from strong political advertising in 2004.
Said Myers, "2004 should be a resoundingly strong year for local broadcasting."
Viacom said it still expected to report record revenue, operating income, net earnings and earnings per share in 2003, as well as strong growth for 2004, aided by political advertising and CBS's airing of the Super Bowl.
Some analysts were crediting more aggressive moves by cable operators into local advertising as influencing Viacom's revisionist thinking.
"The cable guys are getting much, much smarter in selling advertising," said Fulcrum Global Partners media analyst Richard Greenfield. "I think the gains they make come right out of the [broadcast] station groups."
Howard Nass, founder of New York ad agency Nass-Hitzig, said that while each market varies, the amount of money flowing into local advertising has been strong.
"They [Viacom] never had the strongest stations," Nass said.
Second-quarter financial reports by top MSOs show a mixed local ad-sales picture.
Comcast Corp. showed the biggest increase in advertising sales among major MSOs in the second quarter — up 8%, rising to $285 million from $264 million a year ago. Comcast credited "the effects of growth in regional/national advertising as a result of the continuing success of our regional interconnects, and growth in a soft local advertising market."
Cox Communications Inc. saw just 0.2% annual growth in advertising sales in the second quarter, to $98.3 million.
AOL Time Warner Inc. and Charter Communications Inc. posted declines.
Charter — which has focused on reversing subscriber losses and selling new services — reported a 6.9% decline in ad sales in the quarter, to $67 million.
AOL Time Warner, preoccupied by troubles at its America Online Internet unit, said second-quarter ad sales at Time Warner Cable declined 31%, to $118 million.
Little guys rise
Smaller MSOs saw increases.
Mediacom Communications Corp., with 1.6 million subscribers in secondary markets, increased ad sales by 10% in the quarter, to $10.8 million.
Insight Communications Co., with 1.4 million customers, boosted ad sales by 6.6%, to $15.2 million.
Merrill Lynch & Co. analyst Jessica Reif Cohen recently reported cable advertising sales have been on the rise because of an increase in cable interconnects and the amount of "insertable" networks during the past three years.
She estimated that cable MSOs receive an average about $55 in annual revenue per subscriber from advertising, a figure that's on the rise.