It’s the economy, stupid!

Michael Hedges September 2, 2008 Follow on Twitter

A certain coolness is flowing across the Northern Hemisphere, even as summer keeps its tentative grip. The tough vice of economic chill and advertiser wariness (or weariness) is clamping hard on media companies big and small.

First half 2008 financial results for media companies are filled with Bill Clinton moments, starting typically with “I feel your pain.”  RTL CEO Gerhard Zeiler, on release last week (August 26), figuratively if not literally said, “It’s the economy, stupid.” And, it is so.

RTL reported first half 2008 revenue flat at €2.9 billion. Zeiler said the generally negative ad revenue trend for all broadcasters across Europe has more to do with economics and less to do with “structural changes.” That would be the internet.

“Online is growing, but it is growing at the cost of other media, not at the expense of television,” he explained.

Other broad market forces kept revenues from rising. A nasty exchange rate with the strong euro kept earnings gain at RTL’s UK TV channel Five at zero. And, too, share prices – and their trajectories – have nothing to do with anything but the betting house.

RTL continues to perform well in Germany and France, where its television channels dominate. But another slice of reality is the strong performance of the FreeMantle production unit. Producing television content for yourself is good; producing it for others is even better.

Diverse portfolios fare better in tough economic times, so goes the theory. Bertelsmann, majority owner of RTL, and News Corporation are highly diversified, investing in every platform and wide geographies. Both media giants, though, have made recent rumblings about a little less diversity.

Bertelsmann CEO Hartmut Ostrowski excited one and all last week with broad hints at floating another small piece of RTL for cash. Presumably (hint, hint, wink, wink) that cash would go for a television acquisition. Bertelsmann is shedding its half of the Sony BMG music business, good to get the cash now.

But Bertelsmann also bid on Reed Elsevier’s B2B publishing business. Ostrowski said he’d be investing in adult education services and, like News Corporation, in Asia. It’s safety and security that media biggies look for in tough economic times. And safety and security means traditional media; television, production and B2B businesses.

Many media wags – mostly in the UK – are delirious about the possibility of Bertelsmann/RTL buying ITV. That scenario might look like this: ITV hands back its public service license for the less encumbered digital platform, RTL buys it selling Channel 5 to News Corporation, merging ITV production into FreMantle. The cash flow would come from the production business. Even better – and bigger – would be RTL partnering with Endemol for ITV.

Chris Forrester of RadioTVNews (and others) suggests something quite different for the Bertelsmann/RTL billions. Buy CME. He’s right. Central European Media Enterprises (CME) is a free-to-air TV operator that has expanded about as far as it can expand before jumping the shark. It is an investment vehicle that happens to be in the television business, and very successfully. A big piece of CME is owned by private equity group Apax Partners. On top of that CEO Mike Garin is set to retire next year. 

CME’s Garin has fairly consistently kept to televison only, free-to-air TV at that, only recently venturing into Web platforms. Media companies – outside of the behemoths, of course – are more likely to “stick to the knitting.”

Shedding Virgin Radio helped Scottish Media Group (SMG) retire debt. In its latest financial report (August 28) profits were up year on year 300%. Said Chairman, “…despite challenging market conditions we remain confident of our ability to achieve the goals we set out and that our core television business will continue to move forward in line with our growth strategy.” And with that SMG becomes STV Group.

UTV Media’s CEO John McCann acknowledged a certain “softness” in Ireland’s economy “but it’s performing well for us.” UTV has the ITV franchise in Ireland and well as strongly performing radio stations in Ireland and the UK.  Revenues at UTV’s Irish radio stations grew 24%, year on year, and UK national channel TalkSport grew 18%, reported last week (August 26).

Falling housing prices and inflation worries kept UK consumer confidence near the 30 year low-point. The GfK NOP Index of Confidence, released, Friday (August 29) painted a grim picture. The August survey was slightly above July, which was the lowest monthly rating of consumer confidence since 1974 when the Index was first released. Separately, the UK Confederation of British Industry (CBI) released August retail sales data; the lowest since 1983.

The German consumer confidence continues its race to the bottom, declining for the fourth straight month and a five year low, according to the GfK survey released last week (August 26).

"Real disposable income for consumption will therefore hardly see an increase this year," said the report.

The European Commissions index of executive and consumer confidence, released August 29, showed yet another decline, lower than economists expected, for July in the euro-zone. 

The economies of Central and Eastern Europe - the new EU Member States, Russia and every country in between – have seen double digit GDP growth evaporate in the din of inflation. Estonia is officially in recession and Latvia may follow. Heavily dependent on exports to Western Europe, these economies are starting to feel the pinch of lower GDP, which begets lower consumer spending on top of no wage growth.

All of this has crashed in the US, where consumers can no longer augment shrinking wages by house trading and refinancing. No US media company is projecting ad revenue growth returning to ‘normal’ before 2009, at least, and 2011 most likely. Cable and satellite TV and, eventually, IPTV will benefit, somewhat, as consumers cut back on holidays, restaurants and anything else deemed non-essential.

Analyst iSuppli reckons tough economic times for consumers will boost game console and digital TV sales. Consumer electronics firms are “eyeing a goldmine of opportunity” as higher energy costs and tighter budgets force people to stay at home, said their report (August 29).

All of these sour economic notes seem to resolve – gracefully or not - around a simple little ditty. The giant orchestras of Bertelsmann and News Corporation can play the complex symphonies of global media markets but they are picking their tunes more carefully. Lesser mortals can hold their own even on a crowded stage but they’ll buy from the big guys and play mostly cover versions…and hope the video shows up on YouTube.