The message from a flurry of media earnings reports this week: If things are turning around, it’s only because there was practically nowhere to go but up.
Earnings from Comcast and News Corp brought some of the first good news for media companies, with the companies reporting 22 percent and 11 percent profit increases, respectively.
But that’s mainly because 2008 was so dire.
It looked so bad for media companies last year that even Rupert Murdoch, whose empire on Wednesday reported an 11 percent increase in profits over the third quarter last year, told analysts that internally, he prefers comparing the new numbers to what News Corp. reported two years ago.
By that logic – 2008 was so woeful that it didn’t even happen – the “green shoots” sprouting up in media don’t look quite so perky. Fox and friends may be up off the mat, but 2007 numbers are a more accurate benchmark of corporate health.
What’s universal among the post-earnings corporate chatter (even at Time Inc., which saw profits plunge another 38 percent, according to Tuesday’s numbers) is that the worst is over (though the pain is not), and all the cutting and bleeding has put the media giants in position to be profitable.
“One theme that’s emerging is that the depth and intensity of cost-cutting in this downturn is like nothing I’ve ever seen, and was more than most people expected," said one analyst, who follows media companies and requested anonymity to protect relationships with them.
That means that if a rebound is coming, big profits will be a cinch.
"Then the question becomes, how much of the cost-cutting was permanent, and how much is temporary?" the analyst said. "If enough of it is permanent, then when we start to see revenue increase again, you’re going to see some incredible profits — from not just media, but every sector."
But until advertising revenues come back – still a mighty big “if” – it would be a mistake to celebrate moderate profit increases for Comcast and News Corp (and a slight revenue uptick at Discovery Communications, for good measure).
And not all of the profits being reaped right now are robust, or all that likely to continue under the current circumstances: By its own admission, Comcast was able to grow revenue largely through promotions that enticed existing users to purchase add-ons. According to the analyst, because those subscribers are paying less for more, the value of the reported revenue growth is inflated.
"The subscriber growth was better than expected," the analyst said, "but the revenue per user wasn’t as good. That’s because of too much promotion."
He also said that the impending deal with NBC Universal casts a pall over Comcast for some: It sends a signal that Comcast no longer feels selling cable TV subscriptions — its core business — is sustainable.
All of this depends on the economy at large, said the analyst, who attributed much of the turnaround to federal stimulus spending that won’t last forever.
“You can’t look at the recent results and get excited until you start to take some of the stimulus out of the system … and we’re not going to know that until the Federal Reserve starts to shrink the balance sheet. That’s when we’ll see what happens with consumption trends.”
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