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Taking Stock of the Year Ahead

Most media investors and executives are glad that 2005 is finally over.

There was little to smile about in '05. B&C's index of TV-station owners dropped 20%, even worse than the 17% slide during 2004. Cable operators slid 18% and radio stations dropped 9.1%. Out of the 69 media stocks we track, only 14 posted any gain at all.

It's hard to see what might trigger a stock turnaround. If media stocks were being dragged down by a recession, then executives and investors could just wait for the cycle to turn. But the broad economy was reasonably strong in 2005, and so was ad spending.

Universal McCann advertising forecaster Bob Coen believes spending on all media increased by a fairly healthy 4.6% last year. The good news is that overall spending should jump another 5.8% next year. But that may not help everyone in TV and radio. Except for politicians, Coen sees advertisers favoring national TV—cable and broadcast networks—more than local stations. And cable systems, networks and entertainment giants, which don't live on advertising alone, say they need a broad increase in consumer spending on subscriptions, DVDs and other entertainment to thrive.

Here are some lessons from the stock market to carry forward this year:

There may be only two ways to boost a cable stock: Slay the telcos, or go private

Investors are terrified by AT&T's (aka SBC Communications) and Verizon's threats to pound cable by pumping video signals over their own wires. The Baby Bells are desperate to offset the damage to their core business by cable's own push into voice.

That's a big opportunity for cable operators. Morgan Stanley media analyst Richard Bilotti sees them reaching 7.5 million phone subscribers by the end of 2006 and 20 million by 2010.

But investors are riveted by the threat rather than the opportunity. Every voice customer a cable operator gains generates $35 or so in new revenue monthly. Every video subscriber lost to a telco would cost the operator around $70 monthly.

Never mind that any severe damage is a long way off. Verizon has turned on one system in Keller, Texas, cleverly choosing a town where the incumbent cable operator is one of the weakest: Charter Communications. AT&T's launch has been delayed by problems with Microsoft's IPTV software.

Never mind that the telcos' legacy of false video promises stretches back a decade, from Verizon's Stargazer system to AT&T/SBC's fizzled partnership to resell DBS service. Despite their problems, the telcos are so financially powerful that investors fear they'll spend billions, even on a losing battle.

Strong performance is not a cure for Wall Street's cable anxiety. The largest operator, Comcast, had a great year, boosting revenues by a healthy 10% to $13 billion and operating cash flow by an enviable 14% to $9 billion. But that didn't stop investors from pounding Comcast's shares down 20% to $26.14 each.

Just one cable operator saw its stock rise this year: 1.3-million subscriber Insight Communications. That's because top execs Mike Willner and Sid Knafel teamed with private equity fund Carlyle Group to buy out public shareholders in a deal valuing $3.3 billion. Before that deal closed Dec. 16, Insight's stock had increased 23% for the year.

Investors aren't treating cable's competitors any more favorably. Verizon's stock dropped 19% last year; DBS service EchoStar fell 19% and DirecTV fell 15%.

Broadcasters face another hard year—maybe

Young Broadcasting, for example, was B&C's worst-performing stock of the year.

“The best thing about 2005 is that it's almost over,” says Vince Young, CEO of the 10-station company he and his father founded. Company shares plunged 76%, marking $10.53 per share at the year's opening trade, and then sliding all the way to $2.50 toward the close of the year. Revenues and operating income are down.

The good news, contends Young, is that investors won't see a repeat of the biggest problems in 2006.

What went wrong? It wasn't a major election year, so Young saw little political-ad spending. Also, KRON, the station accounting for a third of Young's revenues, was rocked when Nielsen launched its people meters. The new system shows a smaller audience for all stations in the markets, which spurs protests by advertisers who feel they were overpaying and panic by stations that cut prices. Finally, new affiliation deals with ABC, NBC and CBS on less favorable terms mean less compensation from the networks.

Young believes 2006 will be better. It's a mid-term election year, and the people-meter fallout should settle. The company is also finding success with a special program luring smaller businesses who have found broadcast-TV advertising too expensive. One option that investors would love: Sell KRON. Given the high valuation of stations sold recently in smaller markets, KRON could fetch a fat price.

Stock buybacks and financial gymnastics don't work very well

Media companies have spent billions of dollars buying back their own shares, bowing to investors' current buzz phrase: “Return capital to shareholders.”

The goal of using financial capacity to shrink the base of outstanding shares is boosting stock prices. Time Warner has set a $12 billion buyback; Comcast is spending $3 billion; Viacom spent $3.4 billion, decided to split into two, and then committed another $3 billion. The stocks of all of those companies dropped and didn't perform any better than Disney or News Corp., which haven't jumped on the buyback bandwagon.

Howard Stern alone cannot save satellite radio

The shock jock's jump to Sirius Satellite radio has sparked enormous hype about how a legion of Howard fans will sign up for the subscription service. Satellite radio shares should soar, right? Instead, Sirius' stock dropped 12% last year to $6.70. Fellow satellite-radio programmer XM saw its shares fall 23% to $29.02.

Why are investors skittish? Sirius is bleeding cash and expected to post more than $700 million in negative cash flow for 2005, boosting its total losses to $2.6 billion. Sirius' losses go up with Howard, according to Sanford Bernstein media analyst Craig Moffet, who sees Sirius losing another $752 million in 2006.

By 2009, however, the company could become a cash geyser, generating $562 million in positive cash flow. Rival XM Radio has more subscribers and better deals to get it installed in new cars, but it is also losing plenty.

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