Fox Becomes Latest TV Network to Be Hit by Weaker Ad Sales

NEW YORK ( TheStreet) -- Advertisers continued to move from television to digital media as 21st Century Fox (FOXA) , owner of the Fox network and the FX channel, became the latest media company to report weaker ad sales at its U.S. TV networks.

Rupert Murdoch's Fox on Tuesday joined Discovery Communications (DISCA)  in signaling that U.S. advertisers are spending less on TV, though the reason for the lowered spending remains a source of much contention within the media and advertising industries. Fox reported a 5% decline in ad revenue at its TV broadcast networks for the three-month period ended Sept. 30, due to lower broadcast ratings, which Discovery, owner of outdoor and science-focused channels, recorded a 1% increase in U.S. domestic TV advertising, its lowest ever quarterly increase, according to Bloomberg Intelligence.

Fox Chief Operating Officer Chase Carey, speaking in a conference call with investors, disputed the notion that the decline in TV adverting was due largely to the popularity of streaming services, led by Netflix (NFLX) , or user-generated digital platforms such as Google's (GOOG) YouTube and IAC Interactive's (IACI) Vimeo. He called such observations "overblown."

Carey countered that the decline is due mostly to the sluggish economy as advertisers choose to retain more of their advertising dollars rather than make purchases months in advance. "Pricing has held up well but volume is lower," he said, adding that another problem is measurement. "The issue is not ratings, its that measurement isn't accounting for viewing in non-traditional ways," Carey said.

To be sure, Fox generates revenue in many ways apart from U.S. advertising. For the quarter, the New York-based media conglomerate, with television, cable and film holdings around the world, posted a 12% increase in sales to $7.89 billion. Profit for the quarter was 39 cents a share compared to the 36-cent average of 19 analyst estimates surveyed by Bloomberg as the company posted strong box office sales from films such as Dawn of the Planet of the Apes, and increased revenue from fees it charges cable-TV providers to carry its channels. 

Whether the sluggish nature of U.S. television advertising is cyclical, a short-term event, or secular, as in a long-term trend comparable to the massive shift in ad-spending that forever changed the country's newspaper industry, is certain to remain a hot topic. One trend, though, is clear: television ratings are down as exemplified by Fox's ongoing struggles, and advertisers are buying less "up-front" advertising that television networks have historically sold as package deals months before airing.

For Discovery, the "scatter market," the industry term to describe advertising inventory sold piecemeal, "held up okay in the third quarter" but over the past six weeks has "gotten a little bit softer," Discovery CEO David Zaslav said in a conference call with Wall Street analysts. For media executives who strive to appear upbeat and positive at all costs, Zaslav's comments may indicate understatement and reflect profound changes taking place in the television business. For Discovery, slowing U.S. advertising growth is a big deal for a company that gets half its revenue from advertising; it also gets about half of its revenue from its U.S. operations.

"Pricing is still, I would say, pretty steady, maybe even good," Zaslav told investors. "But there's a lot more scatter out there, not just from us but from everyone, and people are booking closer to time. We have some good premieres coming up. We have some strength. I think we'll do fine. The question is, will the scatter volume be there? And we just don't have that much visibility right now."

Discovery did have sufficient visibility to realize it had to lower its full-year revenue forecast or risk getting slammed when the Silver Spring, Md.-based media company makes its fourth-quarter earnings public in February. Discovery now expects revenue of as much as $6.35 billion, a drop from the $6.53 billion the company anticipated in August, before the slowdown in scatter market sales became more apparent. As it was, Discovery tumbled 6.6% to fall to $33.31, extending its 2014 decline to a whopping 63%.

Fox, meanwhile, was gaining 1.3% in after-market trading. Shares ended regular trading on Tuesday at $33.33, a 5.2% decline on the year.

Written by Leon Lazaroff in New York

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Leon Lazaroff is TheStreet's deputy managing editor.

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