Terrorist Attacks Hurt Media and Entertainment Revenue

In one strange way, the weakening economy might be helping consumers. Reluctant to deter the few people still spending money, media and entertainment companies are resisting passing along the costs of revenue lost due to last week's terrorist attacks by raising prices.

The toll of sales is indeed substantial. For example, media companies lost millions of dollars in their ad-free coverage. According to estimates from advertising agency Universal McCann, the television industry alone lost $100 million a day. This figure, of course, does not include the newspaper industry. Entertainment and leisure companies also lost money because a large number of consumers canceled vacation trips to amusement parks, vacation spots and movie theaters, feeling they might be safer staying at home.

But in today's grim economic climate, these companies don't dare ask consumers for more money, analysts say. The companies could raise subscription fees, ticket prices or advertising rates to offset revenue lost from decreases in ad revenues or attendance because of the tragedy. But, in a staggering economy with consumers already skittish with their pennies, these companies are struggling just to keep their current business. Put simply, they will have to absorb the losses.

"The advertising and entertainment markets have been weak to begin with, so with demand so low, you can't push through price increases," explains Katherine Styponais, a senior entertainment analyst at Prudential Securities who covers AOL Time Warner(AOL Quote), Walt Disney(DIS Quote) and Viacom(VIA Quote). AOL's CNN, Disney's ABC and Viacom's CBS covered the tragedy without commercials for six consecutive days. Affected additionally, Disney closed its theme parks the day after the attacks.

Steve Weinstein, an AOL analyst and vice president at Pacific Crest Securities, agrees that it isn't likely the Internet company will raise subscription fees or that CNN will hike advertising rates -- the latter of which could affect consumers through higher prices for consumer goods.

"It's going to be difficult for any media or entertainment company to raise prices when we are in a recession environment with people worried about their personal income," Weinstein says. "If you are a large consumer company like AOL, you want to maintain your relationship with customers. You have a long-term outlook."

The Bigger the Company, the Less of an Impact

But such losses might not significantly influence earnings results of larger media conglomerates that have multiple revenue streams. What they lose from television commercials, for instance, they can make up in film revenue. As a result, such companies might still hit their full-year profit targets.

For example, CBS lost a total of $200 million in advertising revenue, Styponais estimates. While sizable, such a loss would amount to only 4% of the $5 billion in cash flow that Viacom predicted it would generate this year, she says. "In the long run, this is not a situation like the airline industry. It is a tough year and has made visibility into next year nonexistent, but I don't think the secular trend in the entertainment industry has changed that much."

Likewise, Disney is not in a position to raise ticket prices, says Richard Jack, assistant vice president at the Pershing Division of Donaldson Lufkin & Jenrette. "Travel and tourism will suffer over the next six to eight months. If people already don't feel like going, you can't charge more."

But more critical for companies like Disney and Viacom than the short-term impact of the terrorist coverage is film inventory, Jack believes. Many movies -- some costing $100 million to produce -- will be shelved due to violent content, he says. "Disney's Big Trouble with Tim Allen, set to premiere Sept. 22, had the theme of a plane hijacking," Jack explains. "You can't run a movie about terrorism, even if it's goofy terrorism."

Many newspapers did have an advantage compared with other media. Papers began running advertisements as early as the day after the tragedy, while TV networks and local stations didn't start commercials again until Saturday or later. "Because of the static nature of print advertising, big, well-known national newspapers such as The New York Times and The Wall Street Journal were able to offset the tremendous loss of traditional advertising with full-page condolences," says Douglas Arthur, a publishing equity analyst with Morgan Stanley whose coverage includes Dow Jones(DJ Quote) and Tribune(TRB Quote).

But even print media won't pass along its relatively smaller losses to readers through higher newsstand or subscription rates, Arthur adds. "I don't think that in this weak economic environment that [raising rates] is going to be a smart marketing tactic," he says.

Even though the losses incurred to date might be manageable for most of these companies, more missed revenue is yet to come, analysts predict. Indeed, the nation faces the threat of war, and critical to the performance of media companies in the long term "are the events that unfold over the next several months: the U.S./Allied response, level of terrorist activity, and the psychological effects on the U.S. consumer," wrote Goldman Sachs analyst Anthony Noto in a report this week.