Encouraged by the steady rollout of COVID-19 vaccinations and the prospect of herd immunity to the virus, Moody’s Investors Service predicted that total advertising revenue growth could top 6% this year.

In a note to clients Monday, Moody’s senior VP Neil Begley wrote that the quick pace of the vaccine rollout could provide “multiple paths to a recovery for the subsectors of the media and entertainment industry.”

Moody’s noted that ad revenue fell nearly 4% in 2020, dominated by the pandemic that forced most American to remain in their homes. As a result, GDP dipped almost 4% as well.  

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While Begley warned the recovery might be inconsistent across different areas of the country, he nevertheless expected a strong rebound.

“Where confidence, employment and economic activity grows more quickly because of mass vaccinations, we expect advertisers to spend heavily to attract pent-up demand for many products and services,” Begley wrote, adding that digital advertising platforms, broadcasters and networks should benefit the most. 

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The movie business was decimated by the pandemic -- Moody’s estimated that domestic box office in 2020 was about $2 billion, compared to $12 billion in 2019. But after a shutdown in production, Begley wrote that “studio pipelines are as full as they have ever been and ready to fill the void once theaters can reopen at reasonable levels. Broadcast networks and stations may have a harder go at it," he wrote, because of a longer production hiatus. 

“Production did resume in a limited fashion by the fourth quarter, but the content pipeline is not likely to be filled to normal capacity until production returns to a more normal level,” he wrote. “So the speed of vaccinations is imperative for the industry.”

As the battle for control of Viacom continues to be waged in the courts, Telsey Advisory Group media analyst Tom Eagan said he was “cautiously optimistic” about the overall pay TV ad climate, adding that replacing Viacom executive chairman and CEO Philippe Dauman with 21st Century Fox vice chairman Chase Carey or DreamWorks SKG chief Jeffrey Katzenberg could help boost the stock.

Viacom stock was down about 40% in the 12 months prior to moves by its controlling shareholder Sumner Redstone to remove Dauman from the trust that will manage his shares in the event of his death or incapacitation. That battle still rages in Massachusetts Probate Court and elsewhere and has cast a pall on the overall company, but has been understandably good for the stock. Viacom shares have climbed during the cat fight, up a total of 7.2% since May 20. And all of that growth can be attributed to the growing possibility that Dauman, who has been under fire for poor decision making over the years, will be ousted from the C-suite. Dauman joked at the Gabelli Movie & Entertainment conference last week that it was better to create content than become it, but his fate appears to be the only thing concerning investors at the moment.

Carey, who became Fox vice chairman in 2015 and is largely in that role to help founder Rupert Murdoch’s sons James and Lachlan transition into eventually running the whole shooting match, has a stellar track record with troubled companies. He basically resurrected DirecTV when he was CEO at that satellite TV service provider in 2003 and stayed about six years, returning what had been a struggling operation to robust subscriber growth, before returning to then-Fox parent News Corp. in 2009. Carey helped News Corp. through the split that created two separate companies – Fox, the programming arm and News Corp. the publishing arm – unlocking value for both. While there is little doubt he could help Viacom – he has been running content businesses for most of his career – the question is whether he would want to take on the challenge. Viacom, which has struggled with declining ratings and sluggish ad growth, may be too far gone for the seasoned executive to even bother.

Katzenberg, who helped create Disney’s modern animation business and has had some successes with DreamWorks – like the Madagascar and How to Train Your Dragon series of films and TV shows – will step into an advisory role after the sale of the content creator to Comcast’s NBC Universal is completed later this year. Katzenberg, 65,  has the content chops, particularly in the kids’ business, but again it could be a question of whether he wants to take on the challenge.

There are other experienced executives in the pool – Eagan said former Disney COO Tom Staggs also would be cheered by Wall Street – so there is no shortage of possible replacements.

And like other analysts who have pointed to the structure of the trust and the board make-up, it doesn’t really matter if Redstone is declared incompetent or not.

“The Redstones have already won,” Eagan wrote.    

In the meantime, the traditional pay TV networks business, thought to be on its way out as over-the-top services and skinny bundles transform the industry, is expected to be surprisingly strong.

Eagan expects the strong scatter market will continue into the Upfront negotiations and third quarter spending. He believes that the move toward cross platform measurement in the first half of next year will help comparables, but expects CBS, Time Warner Inc., and Fox to generate mid-to-high single-digit ad revenue gains in fiscal 2016.

At Viacom the outlook is less rosy. Eagan predicts Viacom will have “lackluster” fiscal x quarter results, but he believes that performance already is built into estimates.  For the full fiscal year, Eagan expects ad revenue at Viacom to decline about 2%, better than the 2.9% decline in fiscal 2014 but worse than fiscal 2015’s 0.7% deficit. Affiliate fee growth of 1.6% in fiscal 2016 is behind the 3.6% rise last year and the 11.3% increase in 2014.

In contrast, Eagan expects CBS to grow ad revenue by nearly 10% in 2016, up from a 3.3% decline in 2015, while affiliate fees increase 4.1%, compared to 0.5% growth in 2015.

The advertising market is expected to continue to be lukewarm at best in the second quarter, as declining ratings are expected to continue to drive down overall ad revenue.

Most of the top content companies are expected to release calendar second-quarter results in the next few weeks. In two separate reports, MoffettNathanson senior research analyst Michael Nathanson and Evercore ISI Group media analysts Vijay Jayant and David Joyce agreed that the ad market would continue to be tepid for broadcasters and cable networks alike. In the past, cable networks were able to offset ad-sales declines with strong affiliate-fee increases, but that gap is narrowing, the analysts said.

Overall, Nathanson predicted that national ad spend will be down between 2% and 3% in the second quarter, what he called the weakest growth in a non-recessionary quarter for the sector.

DOWN 8% IN KEY DEMO

Last year’s lower upfront base and tepid scatter markets are contributing factors, Nathanson said in a research note, but the steep decline in TV ratings is the main culprits. Aggregate C3 primetime ratings in the coveted 18-49 year-old demographic were down 8% in the second quarter, according to Nathanson, with broadcasters dipping 4% and cable networks declining 9%.

While the analysts may differ slightly on their predictions — Joyce and Jayant estimated that Viacom’s domestic revenue would fall 7.2%, while Nathanson foresaw an 8% decline — they agreed that compelling content is what is separating the winners from the losers. And for both broadcasters and cable channels, that means event programming and sports.

For some networks, tough comparisons to the prior year will hurt growth — for example, NBC had the Winter Olympics in second-quarter 2014, and ESPN had the FIFA men’s World Cup at the same time last year.

Others will benefit from event sports and entertainment programming to differing degrees. Joyce and Jayant predicted that Fox would get a boost from some FIFA Women’s World Cup matches in the second quarter, but not enough to offset greater overall ratings declines. AMC, which aired the much-awaited finale of Mad Men during the calendar second quarter, should see a 17.9% increase in ad sales, the two analysts believe.

Viacom, which has been plagued by ratings declines across the board, should expect domestic ad revenue to dip 7.2%.

While in the past, networks were able to fall back on rising affiliate fees and retransmission-consent revenue to offset ad-sales declines — 2014, when affiliate-fee revenue surpassed ad revenue in overall dollars for the first time, was a watershed year for the sector — that growth is beginning to level off.

Affiliate-fee growth is expected to continue, Nathanson added, but overall revenue from affiliate fees will decline as pay TV subscribers fall.

“We believe that the next wave of negative revisions for the sector could manifest itself in a slowdown in affiliate fees,” Nathanson said.

In a June note to clients, Nathanson said affiliate-fee revenue, which has risen at a double-digit clip for the past five years, will climb 9% in 2015 and by 2018 will increase an average of 7%.

Retransmission-consent fees, he wrote, which have grown an average of 67% between 2010 and 2015, will rise just 16% between 2015 and 2020.

Nathanson didn’t factor in the impact of over-the-top services on affiliate-fee revenue, but OTT is also expected to have a small impact on ratings declines.

Jayant and Joyce think Dish Network’s Sling TV OTT service could have as many as 250,000 customers, while CBS All Access (the broadcast network’s OTT offering) could have as many as 300,000 subscribers. Standalone online offering HBO Now could have about 400,000 customers, according to Joyce and Jayant, but again isn’t expected to make much of an impact on ratings.

The analysts said OTT offerings over the past two years have allowed cord-cutters and cord-shavers to be partly responsible for fully-distributed cable networks in losing between 3% and 5% of their distribution.

Traditional viewing has declined: the top 25 cable networks saw viewership dip about 10% season to date, on par with the 7% decline in 2014).

But there’s evidence that people aren’t watching less — they are watching more, at different times.

“Perhaps stabilization is the new up, until, of course, better measurement on multiple screens is available and accepted,” the analysts wrote.

And it’s not just different screens. More and more viewers are watching programming when it is most convenient for them and when longer viewing windows are considered ratings rise dramatically.

RISE IN C7 SALES METRIC

Broadcaster CBS has been a big proponent of moving to a live-plus-seven-day (C7) measurement window, counting viewership up to seven days after a show originally airs. Joyce and Jayant predicted that CBS, which already sells about 30% of its ad inventory in C7, will increase that to more than 50% of its inventory this year.

The numbers appear to back up the practice. According to the analysts, ratings can in some cases more than double in C7 compared to live plus same day ratings in the coveted Adult 18-49 year-old age demographic. For example, TNT’s Rizzoli & Isles drama series normally gets a 0.6 live-plus-same-day rating, but its C7 rating is 1.3 — a 117% increase.

Other shows, such as A&E’s Duck Dynasty (0.9, 1.7 for an 89% increase) and Discovery Channel’s Deadliest Catch (1, 1.6, 60%), see healthy increases as well.

This is not just a cable phenomenon: according to Jayant and Joyce, a June 25 episode of Fox’s Wayward Pines saw ratings in the 18-49 demo double to 2.4 in C7, compared to 1.2 for live plus same day. CBS’s Under the Dome saw a 69% increase between C7 (2.2) and live plus same day (1.3) on June 25.