10 Questions for James Marsh

by Terry L. Heaton
The rubber meets the road for TV broadcast groups on Wall Street, where nobody has a better record of tracking broadcast industry stocks than SG Cowen's James Marsh. In November, Mr. Marsh downgraded four broadcast-related companies and lowered financial performance estimates for the seven media concerns he tracks. The bold move also came with a warning through TV Week's Diane Mermigas that broadcasters have only a few years to salvage or leverage their franchises. Mr. Marsh's biggest concern is the spread of DVRs, and it's important to note that he made his predictions before cable and satellite companies decided to get into the DVR business. The projected spread of the technology has doubled since November. It's now estimated that DVRs will be in 30 percent of U.S. households by 2007.

His feelings haven't changed.

1. You've prophesied that 2005 will be a difficult year for broadcasters -- perhaps the first of many. Do you still hold to that belief and why?

We see difficulties ahead for broadcasters. The first will be operational, as tough YOY comparisons (Olympics/political ad spending) will slow revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) growth in 2005. Secondly, I think the TV stocks could suffer in 2005 as investors deal with lower growth (point 1) and due to the higher risk related to DVRs. We believe LT growth rates for TV Broadcasters could be cut in half over the next five years as DVR penetration increases.

2. A lot of people at the working level in the industry feel that an emphasis on short-term profits is to blame for the fragile position that the industry is in. What's your take on that belief? Is there any validity to it?

Short term thinking is a problem in many industries, and the TV broadcasting business is no different. Remember that many managers are incentivized by hitting/exceeding EBITDA targets so are loath to make investments if they believe it could result in lower EBITDA. Additionally, slower EBITDA growth results in slower stock market multiples in most cases so investors tend to focus on short term EBITDA performance. Managers are therefore inclined to overstate their growth rates in hope of getting rewarded with a higher multiple, only to cut costs to the bone or add new spots to hit the numbers. SO it is important for managers to be realistic about their long term growth and accept the multiple the market awards.

3. What role do you believe the Internet will play in the broadcast television business of the future?

The Internet will likely impact broadcasters a numbers of ways:
1) it will siphon ad dollars away
2) likely steal audience from both news and entertainment shows
3) could provide pirated content

Broadcasters have the opportunity to become the local news leader on the web and might be able to enter into other businesses (think classified advertising), but I would view the new medium as a net negative for broadcasters.

4. There's a lot of energy in the advertising community for the idea of more accountability in measuring the performance of ads on both network and station-by-station levels. Since Nielsen is primarily paid by the broadcasting industry, how can they respond and keep everybody happy?

Nielsen will never keep everyone happy. Hating Nielsen has never been more popular, even Hillary Clinton is complaining about Nielsen these days.

5. You've been studying the broadcasting industry closely for many years and have a stellar track record as a stock analyst. Was there any particular event that led you to the conclusion that there's trouble ahead for broadcasters?

The emergence of DVRs remains the biggest threat to broadcasters. Technology is allowing viewers to skip commercials, the lifeblood of the TV business.

6. If you were running a broadcast group today, what strategies would you implement to boost the future viability of the company?

Running any media company today is a difficult endeavor, and I don't pretend to be an operator. Competition is tough, the worst ad market in 50 years, a shifting regulatory framework, all making for difficult decisions. My advice would be stay very local, keep commercial loads light, have a workable Internet strategy and manage the business for long term growth, rather than quarterly results.

7. Do you watch television? What are your thoughts as a viewer? How has television usage changed in your own household, if at all?

I watch a bit of television but am disappointed with my choices. The bar really seems to have been lowered over the years. Virtually all the television consumed in our house comes off of our DVR hard drive, so I watch what I want, when I want. Generally, I like to watch Seinfeld and Simpson's re-runs, 60 Minutes, Meet the Press, and have been chuckling a bit at Reno911 lately. I think it is worth noting that none of this programming is watched live, and I skip through virtually every commercial. Only at hotels am I reminded how annoying and frustrating TV used to be as I get bombarded by commercials and surf endlessly trying to find something of interest.

8. Automotive is one of the top ad categories moving dollars from traditional advertising to the Internet. Since 20% of a station's revenue comes from automotive, this is obviously a concern. What are stations doing about this potential loss?

Automotive continues to be solid category for broadcasters. Dollars will move to the Internet as consumers continue to use that medium as a resource when researching car purchases. I think increased competition and the high level of new models being launched will keep auto ad budgets moving higher for the foreseeable future.

9. Who has the best job in television and why?

Best job in TV? I think it used to be the head of the NAB but not any longer. Being a sportscaster always looked pretty fun to me.

10. The contraction of the industry is being felt at the employee level, many of whom will be reading this. Station employees, especially those in news, are frightened about their futures and frustrated by shrinking salaries and demands for more output. As a stock analyst, you deal at the upper levels of the industry, but is there anything you can offer in the way of advice for the worker bees?

My advice would be to identify the long term secular trends in your industry. Determine whether they are positive or negative (I think for most of the industry they are negative). Next evaluate where the growth will be in adjacent businesses and put together a plan to migrate into that industry. It is much easier to find a new job while you still have one, so stay alert as to changes at your company. Make sure you have the proper training to make the jump. A quick review of "Who Moved My Cheese" might sound silly, but would probably be helpful. Be very wary of falling into the trap of complaining about the industry and how good it used to before _________(fill in the blank) screwed it up. DVRs will undoubtedly slow revenue growth for TV broadcasters and managers will look very hard at cutting costs to maintain what they believe to be their true long term growth rate. Eventually, managers will learn that they cannot "cost-cut" their way to prosperity, but by then it could be too late for the business.