Rollercoaster Drop Hits Entertainment Sector Investments

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Rollercoaster Drop Hits Entertainment Sector Investments

By KATE BERRY

Staff Reporter

When Wall Street sneezes, big media always seems to catch cold.

Year to date, the Bloomberg Media Index of 33 U.S. companies is down 9.7 percent, compared with the S & P; 500 being down 2.1 percent. Over the past 12 months, the index has struggled to keep up with a rising market, gaining 5.3 percent to the 18.2 percent gain of the S & P; 500.

Among individual issues, Viacom Inc. shares are down 8.2 percent from Feb. 11, the S & P; 500 peak this year. Time Warner Inc. shares are down 8.5 percent and Burbank-based Walt Disney Co. is down 16.7 percent.

Part of the problem is that the heavily concentrated media companies have not lived up to the lofty expectations set before the Internet bubble burst in 2000. Instead, high growth niches such as video games and Internet retailers have outperformed mainstream media, with the unlikely exception of large newspaper chains.

The recent concerns over media stocks range from succession planning to the ongoing volatility of movies, music and television.

“Wall Street is very cynical about the management of these companies because the era of the media mogul has passed,” said Porter Bibb, managing partner at Mediatech Capital Partners in New York, a small merchant bank that specializes in media and entertainment. “Many media companies have just taken on too much and cannot be managed by a normal human being they’re too big and diverse.”

Fragmented audiences

Stewart Kim, an investment banker at PGP Capital in Los Angeles, believes consumer audiences have become more fragmented, displacing traditional products of media conglomerates.

“The world is a different place from 1999-2000,” said Kim. “Media companies clearly haven’t grown in the 20 percent to 25 percent growth rate that was expected by analysts.”

Last week kicked off a lukewarm “upfront” advertising market, the annual period when television networks sell ad time. Top advertisers such as American Express Corp. have sharply curtailed network ad spending in the face a 3 percent drop in television audiences, a stinging defeat for the industry. Radio ad spending has seen declines as well.

“While everybody likes the fact that advertising is coming back in a strong way and the economy is picking up, internal and corporate finance problems are steering the smart money in another direction,” Bibb said.

Seth Geiger, co-founder of SmithGeiger LLC, a media research firm in Westlake Village, said television programming is being squeezed by its reliance on reality shows, which have been unable to fill the critical syndication pipeline. Syndication is an important revenue stream for networks, which are expected to run into trouble finding content to fill its non-prime time pipeline in the next few years.

“Reality programming is like crack,” he said. “You’re going to eventually pay the price because you don’t have the opportunity, and the business model in broadcasting is predicated on syndication.”

Disney is being watched on several levels, from its poor-performing ABC network operations to the future of Chief Executive Michael Eisner and who might emerge as his eventual successor. There’s also suspicion among some analysts that Comcast Corp. might return for an encore of its unsolicited $54 billion bid to take over Disney although others believe that the Philadelphia-based cable giant will more likely go after the assets of Adelphia Communications Corp., now in Chapter 11 bankruptcy protection.

Class A shares of Comcast have fallen 7.1 percent in the past year to 28.12 as of May 19. They have fallen by 26.8 percent since May 19, 1999, when they traded at 38.44.

Disney shares were up 29.1 percent in the past year to $23 on May 19, but have fallen 19.2 percent over five years.

Other succession issues are unfolding at Viacom and News Corp., where media moguls are attempting to anoint their children as successors.

Viacom’s controlling shareholder and chief executive, Sumner Redstone, has stated that he wants his daughter, Shari Redstone, to have a larger role in the company she will inherit. That has caused tensions with Mel Karmazin, Viacom’s president and chief operating officer. Class A shares of Viacom have fallen 14.3 percent in the past year to $37.88 a share, and are down 7.6 percent in the past five years.

Meanwhile, Rupert Murdoch apparently wants to keep control of News Corp. in the hands of his two sons, Lachlan and James. Analysts believe News Corp., which reported a 70 percent surge in third quarter profits, is likely to get a 10 percent to 15 percent lift to its stock this summer when it moves its listing to the New York Stock Exchange from the Australia exchange.

NBC gains

But News Corp, owner of Fox television network, DirecTV and 20th Century Fox studios, also must contend with John Malone, chairman of Liberty Media Corp. Malone has ramped up his ownership stake in News Corp. to above 20 percent.

Shares of Liberty Media, which owns home shopping network QVC, Discovery Channel and E! Entertainment, are virtually unchanged from a year ago at $10.49 on May 19, but have lost 70 percent of their value since 1999, when they traded at $35.31 a share, a sign of overall weakness in the industry.

One of the few stars in the lackluster media roster is NBC Universal, which some on Wall Street say might be spun off in an initial public offering in the next year by General Electric Co. The company, which includes the NBC television network, Universal studios and theme parks, and USA cable network, has stolen some managers from Disney and other studios as it gears up to compete against rivals Time Warner and Vivendi.

Though major newspapers chains were written off as the dinosaurs of the era, they have been among the best media performers of the past five years.

Gannett Co. Inc., of McLean, Va., the largest owner of newspapers in the U.S., has seen an 18.1 percent jump in its stock in the past year to $86.95 a share, and a 27.5 percent jump in the past five years. Knight-Ridder Inc. in San Jose, owner of 31 major newspapers, has seen its stock rise 15.5 percent this year to $74.99 a share on May 19. Shares have risen 53.4 percent in the past five years.

Though shares of Tribune Co. of Chicago, which owns the Los Angeles Times and Chicago Tribune, fell 2.4 percent to 46.91 on May 19 in the past year, they’re up 25.5 percent over five years.

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