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TV Ratings Are Bad. Have We Reached the Tipping Point?

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Have we finally reached the tipping point where new delivery systems undercut national TV's economic model? I'm not sure, but improved economic confidence might make us all worry less.

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Recently, I received several Wall Street research reports reviewing October TV ratings for the major broadcast and cable networks. In a word, the data is ugly. According to a note from Morgan Stanely's excellent analyst, Benjamin Swinburne, broadcast nets were down 9% in October on a channel sharing (or CS) basis in primetime and down 12% for live-only, all for Adults 18-49. Cable networks are gaining share, but they don't appear to be gaining viewers as the Top 40 nets saw C3 down 2% and live-only down 2%.

Some of the numbers at broadcast are astonishing. Fox (NASDAQ:NWSA) is down 33% on a C3 basis. C3 refers to the ratings for average commercial minutes in live programing plus three days of digital playback. CBS (NYSE:CBS) is down 20%. Granted, there are some comparability issues. Fox had three less World Series games. CBS had the mega audience a year ago for the Two and a Half Men premiere, which only dwindled off slowly. Everyone is suffering from higher news ratings due to the presidential election, loss of ad supported TV time during the presidential debates, and a full season of Thursday night NFL games on the NFL Network.

On recent conference calls, management teams gave some reassuring words, particularly Les Moonves of CBS. He is almost certainly correct that CBS will see steadily better ratings declines (but still declines) as the season progresses. I will also take Les and other managers at their word that advertising conditions are holding up. Higher upfront pricing and scatter at a high single digit to low double digit premium are indicative of a decent ad market, if true. The upcoming period where first quarter 2013 upfront commitments can be cancelled will be key to how the ad market develops and how investor sentiment toward TV network owners shifts.

Right now, it is a nervous time. Wall Street analysts are more bearish on the ad outlook than management teams. The street is nervous about the fiscal cliff, ratings, and what it already sees as mildly weak ad trends. More significantly, the unexpected sharp drop in ratings has reignited fears that a tipping point is being reached where national TV networks become less relevant to advertisers and viewers. In turn, the economic model (which is already under pressure from technology changes in the delivery system) is being questioned again.

My viewpoint for many years has consistently been that changes are happening in TV, but that they were happening much more slowly than industry observers and Wall Street believe. I call this my "couch potato" thesis. Viewers are used to their TV and like it simple. Advertisers know they can effectively reach consumers through TV as they always have.

I have to say, however, that this latest ratings shock is cause for concern. Any trend can hit a point where it shifts, in this case, the ratings loss that undercut the growth in national TV advertising. Maybe it is just the anxiousness around the election and the fiscal cliff, but it seems a little more serous this time.

It is hard to ignore how much more available TV programming is via on demand or subscription video on demand platforms. I suspect most subscribers, myself included, watch a lot more on demand or Netflix (NASDAQ:NFLX) than we used to. So far, the TV ad market has remained resilient as ratings have shifted among networks, but overall viewership has not fallen off sharply. Have we finally reached the tipping point?

For the next few months, this question will dominate the minds of media stock investors focused on the long-term. My firm will be keeping an eye on ratings, news from the scatter market, upfront cancellations, and the macroeconomic picture. One thing I know for sure is that that if the fiscal cliff is avoided and business confidence improves – matching already improved consumer confidence – lots of worries will subside.

I wish you all a very Happy Thanksgiving! Spend it well with family and friends and remember what the really important things are in life. Hint: They are not TV ratings trends!

CBS is widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. CBS is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, communications and related technologies. Steve Birenberg is portfolio manager of Entermedia, owns a controlling stake in the funds' investment management company and has personal monies invested in the funds.

This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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