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Morgan Stanley Explains Media Upgrades

Morgan Stanley media analyst Ben Swinburne thinks the future of television is bright. Speaking on a conference call Tuesday Swinburne explained the company’s decision to upgrade a handful of media stocks based on a more positive outlook: “We believe that TV can grow in the mid-single digits when you take affiliate revenue and ad revenue together, despite the emergence of alternative delivery platforms.”

Swinburne argues that investors should see things more positively in the sector given a few factors: TV usage is up (2.7% in the first quarter of 2009) and TV represents 99% of all video viewing. Meanwhile pay-TV channels are benefiting from increased competition among a growing group of distributors which now includes telecos. Another factor: 88% of all primetime ratings in the 18-49 year old demographic are divided up between seven companies giving them a lot of negotiating leverage.

Morgan Stanley believes there will be a 2% increase in advertising spend to $167 billion in 2010, with local and national seeing an improved picture, based on the company’s historical tracking of GDP. He said two other indicators; personal consumption and consumer confidence are also seeing improvements over the last few months. Local advertising is pegged at $71 billion for next year.

Yesterday Morgan Stanley raised estimates for Disney and CBS viewing a more positive future for both companies as the economy improves. “We are making bets that local comes back and a rising tide lifts all ships,” said Swinburne who made the point that TV is unlikely to follow more secular businesses such as newspapers.  The company is less positive about Viacom where it believes MTV Networks may be affected by lower spending in the movie category and by its historically higher CPMs.

While the Morgan Stanley analysis is good news for TV on the whole, it is slightly less positive for the broadcast networks. “The broadcast networks continue to underperform. Until they address their business models they are competing with cable companies with very fat margins.” Swinburne sees a future where broadcast networks will no longer be able to invest in programming without some major improvement in retransmission fees or converting themselves into pay-TV networks.

Swinburne has penciled political dollars for next year at between $1.5 billion and $2 billion.  He also thinks auto money will come back as the car companies realize there is nothing left to cut. The government’s own “cash for clunkers” program aimed at getting more gas efficient vehicles on the road will also be a positive for auto advertising. “The next debate is where that money will go. You’ll see money shift to digital but that will happen gradually.”

On the upfront, Swinburne said the initial news on a tie-up between NBC Universal and Group M was a positive. “We are cautiously optimistic about what we have heard,” he said.

CBS ended the day lower losing 2.7% at $7.23 while Disney was down 0.6% at $25.20. Viacom finished slightly up gaining 1.3% at $24.37.