Investors in broadcasting stocks, be forewarned:
"The network business is a very perilous, terribly difficult business."
That succinct quote from Capital Cities/ABC Chief Executive Daniel Burke, related in the book "The House That Roone Built" (Little, Brown & Co.: 1994) by Marc Gunther, sums up the industry outlook nicely.
Gunther's book chronicles the dramatic rise of ABC News under the leadership of Roone Arledge and the subsequent painful cost-cutting in the face of harsh economic realities of the late 1980s and early 1990s.
Stunning recent events seem to indicate even greater perils.
The latest surprise was the $500 million investment of News Corp., the Rupert Murdoch-run company that owns Fox Network, in New World Communications Group Inc., which will switch the affiliation of most of its television stations from CBS, NBC and ABC. CBS is hardest-hit, with eight stations moving to Fox. The scramble is on to line up new affiliates. CBS says it may buy more TV stations or take a minority stake in a separate station group.
Coming on the heels of the Fox capture of CBS's National Football League coverage and David Letterman's jump from NBC to CBS, there seems no end to the shock waves.
Perhaps the biggest surprise is that all the competitors and their shareholders will likely prosper.
That's because broadcasting may be entering its best cyclical recovery in a decade, due to revival of the U.S. economy and advertising tied to it. Another boost is the loosening of syndication rules that allow networks to create and distribute their own programming.
"The beginning of 1994 has produced spectacular revenue growth for networks and it looks as though the price per minute this fall could be up about 5 percent," said John Reidy, analyst with Smith Barney Shearson. "The big gest issue is whether there will be a solid economic follow-through."
Once criticized as old-fashioned, networks have come back into favor on Wall Street.
"It was an exaggeration to call broadcast companies 'dinosaurs' in the first place, for the network audience was actually up last year and past declines are slowing," noted Barry Kaplan, analyst with Goldman Sachs. "The networks provide the mass audience that advertisers want."
Negative on the group for several years, Jessica Reif, analyst with Oppenheimer, has now changed her tune.
"There's a healthy market for the networks," Reif said. "Recent affiliation changes hold more upside potential for Fox than downside problems for CBS, so they're an overall positive."
Some broadcasting companies, such as CBS, may become takeover targets and this would be a boon for shareholders, added Stephen DuFour, portfolio manager of the $50 million Fidelity Select Multimedia Fund, down 3 percent in total return this year after a 34 percent gain last year.
Networks will be necessary for the foreseeable future. "They still deliver, for not many companies can bid for something the scale of an Olympics," DuFour said.
Some recommendations in this brave new broadcast world:
* Capital Cities/ABC is favored by Kaplan, Reidy and Reif, and held in DuFour's portfolio. Ratings are on the rise, its stations continue to be leaders and ESPN is a strong franchise. A 10-for-1 stock split in June makes shares available to more people and a huge cash flow lets it invest in other businesses and buy back stock.
* CBS Inc., reasonably priced, is a Reidy and Reif pick. DuFour holds about half as much CBS in his port folio as Cap Cities. CBS isn't as diversified, but its fall programming schedule is strong and the Letterman gain exceeds the NFL loss. Kaplan doesn't recommend the stock because recent moves by Fox cut the CBS audience, at least temporarily.
* News Corp. Ltd., though its stock is pricey, is an aggressive, innovative worldwide company recommended by Kaplan and Reif. It constitutes a small portion of DuFour's portfolio, while Reidy rates it a "hold."
* A. H. Belo Corp. the Dallas newspaper company which derives two-thirds of revenues from broadcast stations, is a Kaplan and Reidy favorite and owned by DuFour.
* Tribune Co. (syndicator of this column), the Chicago-based media company that owns well-placed TV and radio stations around the country in addition to profitable newspaper holdings, is recommended by Reidy and owned by DuFour.