Content Players Contemplating iPad Effect

Ad spend analysts labeled 2009 as one of the worst years in terms of ad numbers. Ad spending in 2009 fell 10.2% over the year, according to ZenithOptimedia. Numbers are expected to improve in 2010, which should see 0.9% growth over the year to $448 billion. Overall ad spend is expected to continue to grow at 3.9% in 2011 and 4.8% in 2012 with recovery driven by emerging markets.

Internet advertising is the only medium which saw growth in 2009, and it should remain the only media to grow in the coming year. It grew 9% over the year even in the depressed market and is expected to generate more than $60 billion in 2010. It is expected to grow to $99 billion by 2015. Television, cinema, and outdoor advertising will regain growth in 2010, with radio advertising following the growth in 2011. However, newspaper and magazine ad spend will continue to decline and by 2011, spending there will be 25%-28% below its 2007 peak.

These numbers spell relief for players such as Disney, Warner, and Comcast, whose recently reported quarterly results reflected similar cheer. Disney’s Q1 revenues rose 1% to $9.74 billion and exceeded the market’s expectations of $9.62 billion. EPS of $0.47 was also higher than the Street’s expected EPS of $0.39.

The greatest growth came from the media segment, which saw revenues grow 7% to $4.2 billion driven by the increase in ad sales. Despite hotel bookings having fallen 10% over the year, theme park revenues remained flat at $2.7 billion. Studio revenues dropped a percentage to $1.9 billion but are expected to pick up soon on account of scheduled new releases. The segment will also benefit from the earlier acquisition of the Marvel group.

Disney is also exploring the options available for its Miramax unit, which many believe is already seeing an interested buyer in Lions Gate Entertainment Corp and Weinstein Co. and has been valued at nearly $700 million. Disney had acquired Miramax in 1993 from the Weinstein brothers, but now, with Disney focusing on its own movie brand, Miramax’s smaller independent and art films are no longer in synergy with Disney’s own mega family entertainers. Pixar fits better.

CEO Bob Iger has been quick to accept the impact that Apple’s recently announced iPad will have on their business and expects iPad’s portability and interactivity to radically change the way a viewer watches TV. No wonder Disney is gearing up its content to address this market and is looking at tying up with Apple to develop iPad products for ABC, Disney, ESPN’s ScoreCenter, and Marvel. The presence of Steve Jobs on the Disney board makes this inherently more productive.

Despite the economic recovery, Disney remained cautious about their coming quarters as the consumer discretionary spending in their theme park division is still rather difficult to predict. While cost control measures and a forward- looking strategy to keep improving content remain their focus areas, I would have preferred if they also looked at investing in acquisition of players such as Zynga, which has games that are available on Facebook, iPhone, and the iPod.  The upsurge in Facebook and iPhone apps is a trend that the company should not ignore.

The stock is trading at year high levels of $31.38 with a market capitalization of $60.6 billion. Earlier last month, it  touched a new 52-week high of $32.75.

Time Warner (NASDAQ: TWX) also reported a better Q4 beating the market’s expectations and finally managing a quarter without the severe loss making AOL under its umbrella.  Q4 revenues of $7.32 billion grew 2% over the year, despite recording 8% fall in ad sales and yet managed to beat the Street’s expected revenue target of $7.14 billion. EPS of $0.55 was also higher than the expected $0.52.

Networks’ division saw revenues grow 4% to $3.1 billion despite a 4% fall in ad revenues the growth was driven by the strong addition to their HBO subscriber base. Warner recently launched HBO Go, which is similar to TV Everywhere in that it will allow viewers to watch HBO programs online at any device without any extra charge.

Revenue from the studio division grew 7% to $3.3 billion driven by good performance of releases at both studios and the home entertainment segment. The ad slump during the year has hit the newspaper and magazine industry the most, as was evident in the declining revenues of the company’s publishing division, which saw revenues fall from $1.27 billion to $1.1 billion over the year. Advertising revenues fell 12% over the year and subscription revenues were down 6% over the year.

For the year, the company had revenues of $25.8 billion, representing a 3% fall over the year. EPS of $1.83 grew 29% over the previous year driven by the strong cost control measures.

In the current year, Time Warner is looking to reap the benefits of its restructuring, which resulted in the spin-off of the cable and AOL division, making them a pure content player, the company also plans to enter into relationships to enhance its content. It views India as one of the high-growth areas and recently tied up with NDTV Imagine to improve its reach and content in the region.

Unlike Disney, Warner does not seem to make too much of the iPad launch. It is, however, focusing on working towards development of a common technology standard for reading print content on tablets and on other e-reader devices to help flagging publishing sales.

For the current year, the company forecasts earnings to grow in the mid-teens, in line with analysts’ expectations of $2.12 per share.

The stock is trading at $29.44 with a market capitalization of $34 billion. In November last year, it reached a 52-week high of $32.85.

Comcast’s (CMCSA), Q4 results were also impressive. Q4 revenues grew 2.9% to $9.1 billion with cable registering a growth of 2.6% to $8.6 billion. Programming revenues grew 5% to $0.37 billion. The street was expecting revenues of $8.96 billion. EPS for the quarter of $0.29 also exceeded the market’s expected EPS of $0.27.

For the year, revenues grew 2.9% to $35.8 billion with cable revenues growing 3.8% to $33.9 billion and programming revenues growing 4.9% to $1.5 billion. During the year, they added 1.5 million customers to their video, high-speed Internet and voice services, taking their net user base to 47.1 million.

During the quarter they repurchased 18.1 million shares for $300 million adding up to 49.8 million shares repurchased for $765 million during the year.

Comcast is benefiting from the growth in the Internet business which is offsetting the decline in the cable and phone customer base. Consumers are switching to watching video content over the Internet and are attracted to cable players owing to the available faster speeds. In the recently ended quarter, Comcast added 247,000 customers to their Internet services while telecom providers, AT&T and Verizon, together added less than 200,000. Surely, Comcast’s wideband and digital platform solutions are already reaping benefits.

Comcast is also rebranding their video, high-speed Internet and digital phone services and will start selling these services under the brand “xfinity”. They are expanding their offerings and recently launched a secure backup and online storage solution for their Internet customers. Additional initiatives to help enhance their digital and wideband services are also being rolled out in the coming year.

Meanwhile, they are addressing antitrust hearings regarding the pending acquisition of a 51% stake from GE in NBC Universal. The deal has been in the air since early last year, and with GE buying Vivendi’s 20% stake for $5.8 billion, the way is clear for the Comcast acquisition. Comcast is eyeing the $30 billion deal to gain operational control over NBC’s content.

Comcast’s stock is currently trading at $16.00 after having reached a year high of $17.88 late last year. Their market capitalization stood at $45.8 billion.

The iPad launch is causing content players to rethink their strategies both on the video and print side. iPad will also potentially cause serious increase in bandwidth demand as consumers consume more content over the internet on an on-demand basis. This impacts players like Comcast, as well as AT&T which provides the wireless access. iPad’s impact on the future of online content is an important trend to watch.