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December 13, 2007

The Writer's Strike Is About To Bite

I am surprised that the talks broke off between writers and producers. When the strike was launched there was a lot of discussion on both sides about how close they were to a deal. I figured that when they decided to start up negotiations again under a strict blackout a deal was at hand. My view was reinforced by two factors. First, the writers union is led by a folks who were willing to wage a strike so they had already proven to the producers that they were serious. Second, the fact that the writers seemed be winning the public relations war in a landslide. It seemed like a perfect setup for a deal.

Now things are looking ugly and the strike is dragging on long enough that it could impact media stocks. As a reminder, it is TV that could get hurt. That means that network owners and TV producers have the most to lose. Disney (ABC), NBC Universal (GE), News Corp (Fox), and CBS are the network owners. NBCU, Fox, Viacom, and Time Warner are the big TV producers.

The problem is most acute at the networks. Network TV is in a long-term state of decline as viewers diversify their media consumption. Cable networks have steadily gained share and now new digital distribution is starting to build viewership. With most popular original series about to run out of episodes, ratings will take a nosedive starting in January and February. The timing couldn't be worse as this is the first year advertisers are using the new currency of live commercial ratings plus three days of DVR playback. Ratings were unusually poor last TV season and although there is no an apples to apples comparison, they appear to be down sharply. Finally, the lousy ratings have actually tightened the ad market because the networks have had to offer "make goods" of ad time to compensate for low audience delivery. That means that if ratings nose dive under a prolonged strike scenario there is no obvious way for the networks to make good other than cut prices dramatically.

The financial impact of a prolonged strike on the networks is unlikely to hurt earnings at the networks owners because the cost of the replacement programming is going to be very cheap. However, the big picture risks of an accelerated decline in audience ratings and the shifting ad currency have serious long-term implications that could impact valuation of network assets. That said, CNBC is way overdoing the coverage of the strike relative to the stock price risks for the companies.

CBS is by far most exposed as the network is the primary driver of its profits. Disney and News Corporation have less to worry about given their broad base of entertainment assets. I remain bearish on CBS which also has serious ratings issues that put hundreds of million of operating income at stake. I still like News Corp and Disney which have plenty of growth levers away from network TV to drive operating income.

Posted by Steve Birenberg at December 13, 2007 10:53 AM in Media