Viacom Picture's Not Pretty


The national cable television ad market continued to show strength — with one exception — in the third quarter, with both Time Warner Inc. and News Corp. reporting revenue growth in the high single digits, reflecting what appears to be further evidence of pay TV's resilience during economic downturns.

But the one exception — Viacom — was glaring and perhaps shows that even well-established networks like MTV and VH1 are not immune to a fickle viewing public.

Viacom reported its second straight quarter of domestic ad revenue declines — a 3% dip in the third quarter, to go with the 2% drop in the second quarter — last week.

The decline had previously been telegraphed when Viacom revised year-end guidance downward. Still, it prompted management to promise to pump more money into new programming.

While Time Warner and News Corp. reveled in robust ratings for its news shows — bolstered by the recently completed presidential election — and entertainment shows like The Closer, Viacom hasn't had as much luck.

Miller Tabak analyst David Joyce said MTV's problems are twofold: too many repeats, which translates into lower ratings and ad revenue, and a shift in the audience for its networks TV Land and Nick at Nite.

“Now they are young parents, maybe aged 35-45, so the shows that had been on those networks were for an older generation, and therefore less relevant and therefore starting to hurt ratings and ad revenue,” Joyce said in an e-mail referring to TV Land and Nick at Nite. “So they are revamping the programming lineups there.”

On a conference call with analysts last week, Viacom CEO Philippe Dauman said MTV's ratings softness lies in repeat viewership, and that the network would increase original programming. A big part of that effort will be to entice viewers into watching shows a second and third time — he pointed to a new game called “backchannel,” a chat interface that runs live online during the airing of The Hills that will update during repeats.

MTV also is experimenting with new ways to serve its audience and advertisers, creating programming blocks that serve subsets of the core demo. “This will allow us to sell more strategically to a broader set of advertising partners,” Dauman said.

For the third quarter, Viacom's overall revenue was up 4% to $3.4 billion and operating income declined 15% to $689 million. At its Media Networks division, revenue rose 6% to $2.1 billion, aided by Rock Band video game sales, and operating income declined 4% to $761 million.

Worldwide advertising revenue at Viacom declined 2% to $1.2 billion and domestic ad sales, pressured over the past few quarters, were down 3% in the period.

Dauman said the domestic ad market is challenging, and the outlook for the fourth quarter is no better.

“Clearly we had our challenges in the third quarter,” Dauman said on the call. “The impact was compounded at a handful of networks where ratings were lower than expected, particularly at MTV, VH1 and BET. As we move toward the fourth quarter, the advertising picture hasn't changed much.”

Dauman said he was encouraged by Viacom's position in the upfront — revenue was consistent with past performance — and by the national ad market (in which Viacom participates) proving to be much stronger than the local advertising market.

Other programmers, unlike Viacom, are not anticipating more gloom in the fourth quarter.

Time Warner Inc. reported a strong third quarter, with domestic advertising revenue at its cable networks up 9% in the period. Overall, revenue was flat at $11.7 billion, but adjusted operating income before depreciation and amortization (AOIBDA) was up 9% to $3.5 billion, as growth at its cable networks and movie studios more than offset declines at its publishing and AOL units.

Time Warner also reported its best quarter ever in terms of free cash flow — $2.1 billion for the period.

At the cable networks — which includes Turner Broadcasting System and Home Box Office — revenue was up 7% to $2.7 billion and AOIBDA rose 21% (a new record) to $1 billion, fueled mainly by increased revenue and lower programming expenses.

Time Warner CEO Jeff Bewkes told analysts on a call that, despite the sluggish economy, the media giant has proven its resilience by having little or no exposure to the much maligned local advertising market and by continuing to make compelling content on a consistent basis.

That is reflected in the strong ad-revenue growth. On the same call, chief financial officer John Martin said that at the networks, “Essentially every dollar of revenue growth fell to the adjusted OIBDA line in the quarter.”

Martin said Time Warner cannot gauge how much the broader economy will be affected over the long term. Turner would not likely be immune to a protracted economic slump and certain segments — automotive and financial services — are expected to continue to be challenged. Martin, though, is cautiously optimistic the fourth-quarter advertising market should maintain strength.

“The benefits of this year's strong upfront are kicking in this quarter — cancellation rates are running at normal levels,” Martin said. “And while the current scatter market is moving cautiously, it is still is running modestly ahead of upfront pricing.”

At News Corp., revenue at the broadcast stations were down significantly, but cable networks were strong. At the cable networks, revenue rose 18% to $1.3 billion and operating income increased 31% to $379 million, reflecting strong advertising and affiliate fee increases.

News Corp. said its flagship Fox News Channel reported a 27% increase in operating income while the rest of its cable channels collectively reported a 31% gain in operating profit.