Television is back (or not)!

happy days are here again!2010 was a great year for the television industry, so much so that the doom and gloom of recent years is being replaced by a cautious optimism. Media Post’s Wayne Friedman’s report last week on New York-based media investment/adviser M.C. Alcamo & Company’s clients actually shows profit margin increases of 10 points. TEN points!

These results near the 50% or greater gains that virtually all TV station groups had garnered decades ago. Some, like Sinclair Broadcast Group and Meredith Corp., got to this magical mark, posting the quarter’s highest profit margins of 51% for all TV companies.

For the 15 broadcasting companies it covers, M.C. Alcamo says revenues rose 27.1% to $371.8 million — in part helped by the turnaround from major ad categories such as automotive marketers, as well as a surging political ad market.

The best performers: Fisher Communications grew 49% in revenue to $18.9 million; Gray Television added on 47.8% to $37.1 million.

These companies have all gone through painful restructurings during the last few years, which contributed to the profit margin gains and begs the question “what will they do with all that extra cash?” It all depends on how you view the future. Remember, public companies exist to share profits with investors, but the question still applies. Michael Alcamo told Mediapost that there are three possibilities:

…many broadcasters will continue to pay down outstanding debt…many will set aside these big cash reserves for strategic investments. Third, stations will look to upgrade station infrastructure, such as HD technology.

While companies must do what companies must do, we strongly recommend strategy #2: set aside cash reserves for strategic investments, and let those investments be in people and technology for new media, especially in the area of sales.

These wonderful numbers may suggest to some that local television is back. Automotive is certainly going strong, and there’s going to be early political money for some, because 2012 will be so huge. But there are still tremendous weaknesses in the economy and despite glowing projections for this summer’s upfront marketplace, at some point advertisers are simply going to lose interest in higher CPMs to cover shrinking audiences.

On the economy, take a look at the below graph, for it points to a major concern. It comes from a Bloomberg article entitled, “U.S. Job Rebound Misses Those Looking Longest” and shows that the number of people out of work more than six months is going down much more slowly that those unemployed less than six months.

While the jobless rate dropped for the fourth consecutive month in March, the number of people going more than six months without work rose to 6.12 million. That’s more than four times the average since 1970, the period covered in the chart.

unemployed more than six months compared to those unemployed less

The continued weakness in the economy is another reason why broadcast companies shouldn’t spend those cash reserves as if television is back. The road ahead is both uncertain and rocky, so let’s proceed optimistically but cautiously.

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