Big media to shrug off economic woes, for now

NEW YORK (Reuters) - U.S. media conglomerates are expected to shrug off the deteriorating economy in the first quarter thanks to strength in their cable networks, but real pain could hit as early as in the second quarter.

Cable TV affiliate fees and advertising have propped up media profits as viewers defected from network TV, analysts said, despite a procession of incrementally dour comments on the economy from top executives of News Corp, Walt Disney Co and Time Warner Inc.

"The large cap media companies will show growth in the first quarter," UBS media analyst Michael Morris said, adding the quarter's advertising was likely purchased on budgets from last year, before the onset of the credit crisis. "The expectation is that growth will slow as the year progresses."

Concerns about the economy aside, the first quarter results from the world's top two advertising agencies, Omnicom Group Inc and WPP Group Plc, suggest U.S. ad spending is holding up relatively well.

Omnicom said last week that U.S. revenue rose 7.6 percent. WPP, while reporting an overall weak quarter dragged by western Europe, also said its U.S. business had held up well.

"First-quarter growth reflected the continued steady overall economic environment, despite the continuing uncertainty stimulated by the credit and liquidity crisis and much heralded slowdown in the United States," WPP said in a statement on Friday.

That is expected to change over the next few months.

"We'll have a pretty big contraction in the second quarter," Standard & Poor's media analyst Tuna Amobi said of advertising spending on television.

He expects U.S. television networks on average to sell 1 to 2 percent less advertising for upcoming prime-time shows at this year's "upfronts" in May.

CABLE NETWORKS, A BRIGHT SPOT

Amid uncertainty over how fast Internet divisions can boost ad sales and a declining economy, cable networks are seen as a safe haven for big media companies this earnings period. Time Warner reports results on Wednesday, Viacom reports on Friday, while News Corp and Disney report later this month.

NBC Universal shocked media investors in early April when its first quarter results fell short of its own targets, but it remained one of the best performing divisions of General Electric Co thanks to the strength of the USA Network.

On that basis, GE was confident enough to tell investors NBCU's second quarter financials will likely rise faster than every other division except infrastructure. GE expects NBCU's second quarter revenue to rise 10 percent and profit to be up 5 percent.

Similar trends are expected to play out at Time Warner, News Corp and Viacom Inc, where cable networks have driven growth over the past few quarters.

Time Warner's CNN wrested the top spot in the coveted 25-to-54 year age group from News Corp's Fox News for the first time in seven years during the U.S. presidential primaries in February. Its TBS is also ranked first among U.S. cable networks in the quarter.

UBS expects Time Warner's cable networks revenue to rise 7 percent, the second-fastest growing unit behind cable services.

Aiming to take advantage of viewers flocking to cable networks, media companies are eager to snap up the handful of independent networks on the market.

Cablevision Systems Corp is pursuing the Sundance Channel, according to the New York Post. NBC Universal, Liberty Media, CBS Corp and Comcast Corp have expressed interest in snapping up Landmark Communications's Weather Channel cable network.

"There's been a sustained interest," said one media investment banker, who has worked on cable deals and sees valuations holding steady at 11 to 12 times earnings or rising into the mid-teens multiple by next year.

Viacom, which generates most of its business from MTV Networks Group, is building new channels. Its Paramount movie studio planned to launch a joint venture premium channel with Metro-Goldwyn-Mayer and Lionsgate slated for autumn 2009.

In a market that has punished traditional media companies, Viacom, whose shares have fallen about 10 percent in the past year, is among the better performing stocks.

But Morris cautioned that investment in cable networks might not have as big pay-offs as investing in faster-growing areas such as the Internet over the long run.

"Cable networks are not a mature business, but a maturing business," he said.

Wall Street expects Time Warner's March quarter net profit to fall 29 percent, Viacom's profit to rise 30 percent, News Corp's profit to rise 20 percent and Disney's profit to rise 7 percent.