The Media and Entertainment Outlook Brightens, But Regulatory Clouds Gather

Industry Economic And Ratings Outlook:
The Media And Entertainment Outlook Brightens, But Regulatory Clouds Gather
Primary Credit Analyst: Heather M Goodchild, New York (1) 212-438-7835; heather.goodchild@standardandpoors.com Secondary Contacts: Peter J Bourdon, New York (212) 438-0276; peter.bourdon@standardandpoors.com Elton Cerda, New York (1) 212-438-9540; elton.cerda@standardandpoors.com Hal F Diamond, New York (1) 212-438-7829; harold.diamond@standardandpoors.com Jawad Hussain, Chicago (312)233-7045; jawad.hussain@standardandpoors.com Andy Liu, CFA, New York (1) 312-233-7052; andy.liu@standardandpoors.com Minesh Patel, New York (1) 212-438-6410; minesh.patel@standardandpoors.com Naveen Sarma, New York (1) 212-438-7833; naveen.sarma@standardandpoors.com Jeanne L Shoesmith, CFA, Chicago (1) 312-233-7026; jeanne.shoesmith@standardandpoors.com Christopher D Thompson, New York (1) 212-438-8847; christopher.thompson@standardandpoors.com Chris E Valentine, New York (1) 212-438-1434; chris.valentine@standardandpoors.com
Table Of Contents
Economic Outlook Rating And Outlook Distributions Industry Ratings Outlook Recent Rating Activity Contact Information Related Criteria
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
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Industry Economic And Ratings Outlook:
The Media And Entertainment Outlook Brightens, But Regulatory Clouds Gather
Standard & Poor's Ratings Services' credit outlook for the U.S. media and entertainment industry continues to look up, with increasing rating stability, based on economic and industry data, and despite a modest drag from protracted severe winter weather. Although downgrades outpaced upgrades in 2011-2013, the downward rating trend reversed for the first quarter of 2014. For many U.S. issuers in this industry, we now expect the rating trend will be neutral-to-positive in 2014. Key inputs to this outlook are GDP growth modestly above the economy's long-term trend, a pick-up in consumer spending, and a decrease in unemployment to less than 7%. We also expect U.S. investor demand for speculative-grade debt to remain strong, providing liquidity to low-rated companies pursuing refinancing, and to investment-grade companies pursuing consolidating acquisitions. We currently don't expect meaningful repercussions of the Federal Reserve tapering its bond purchases slightly faster than previously indicated. In contrast to an improving economy, we see potential risks from increased regulatory and legislative activity. We expect that the FCC will pursue a number of initiatives in 2014 that could have longer-term ratings implications for the media and entertainment sector. This includes clarification of TV ownership rules, revised retransmission consent and joint services rules, rules for the broadcast incentive spectrum auction that we expect to occur in 2015, and a new network neutrality rule. In addition, on April 22, the Supreme Court will hear oral arguments in the case of Aereo Inc. versus the TV broadcasters and networks, which, if the court rules in Aereo's favor, could fundamentally alter the U.S. TV broadcast business. Finally, the U.S. Congress has expressed a desire to modernize the nation's communications and copyright laws. This would likely be a multiyear process involving both houses of Congress, multiple congressional committees, and federal regulatory bodies. We still expect some areas of rating weakness will persist, including subsectors in structural decline, primarily in traditional print-based media. Additional downgrades could occur among overleveraged issuers that underestimated risks in their original business plans, relating to acquisitions, dividend recapitalizations, or leveraged buyouts. As of March 31, 2014, stable rating outlooks represented 76% of all U.S. rated issuers, negative outlooks 18%, positive outlooks 5%, and developing outlooks (indicating the possibility of an upgrade or downgrade) 1%.
Economic Outlook
Key economic drivers of the media and entertainment business--and of ad spending in particular--include GDP and consumer spending. Consumer confidence is critical to consumer spending, and relies heavily on job growth trends. Wealth factors including home prices, stock prices, and gas prices also play a role in consumer confidence. Our base-case economic forecast (as of March 24, 2014) indicates 2.8% growth in 2014, followed by 3.2% in 2015--exceeding the roughly 2.5% figure that we regard as a very long-term trend of GDP. This forecast assumes the Fed starts tapering off its purchasing of Treasury securities in 2014. We expect consumer spending growth to pick up modestly, to 2.9% in 2014 and 3.1% in 2015. We base this expectation on gradual job gains, continued strong auto
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Industry Economic And Ratings Outlook: The Media And Entertainment Outlook Brightens, But Regulatory Clouds Gather
sales, and steady improvement in the housing market. Consistent with this more positive forecast, Standard & Poor's maintained its estimate of the likelihood of a recession at 10%-15%.
Table 1
Standard & Poor's Economic Scenarios

--Baseline forecast*---Upside forecast**---Downside forecast**-Actual Baseline impact on 2013 sector
2014 Macroeconomic indicators Real GDP (% change) 2.8
2015
2014
2015
2014
2015
Comment
3.2
4.1
4.0
0.6
1.8
1.9 Somewhat favorable
We expect growth to pick up this year, which should help drive moderate ad demand and consumer spending on media and entertainment. Low inflation will help preserve consumer purchasing power and support spending, but also limit ad rate increases. Continued recovery in the housing market should lead to higher ad spending in segments tied to the housing sector, such as furniture and household goods. Further improvement in consumer sentiment bodes well for future consumer spending and ad spending in segments tied to the consumer. We expect flat home prices, after a sharp rise last year, pointing to less of a wealth effect that could drive consumer spending higher. Little change in oil prices should translate to stable gasoline prices, helping maintain consumer discretionary spending power. Further declines in unemployment should benefit overall consumer spending.
CPI (% change)
1.6
1.6
2.1
1.6
0.8
2.0
1.5 Neutral
Housing starts (% change)
20.3
32.3
48.2
20.4
(8.4)
30.8
18.9 Favorable
Consumer sentiment
85.3
92.5
88.8
99.0
70.3
74.0
Median single-family existing-home price (% change) West Texas Intermediate crude price (% change) Unemployment rate (%)
0.9
0.5
3.3
(0.7)
(0.1)
(2.3)
11.5 Neutral
0.2
(8.7)
8.2
(12.4)
(5.0)
4.8
4.0 Neutral
6.4
5.8
6.0
5.0
7.6
7.7
Industry drivers Real consumer spending (% change) 2.7 3.0 3.3 4.0 1.3 1.3 2.0 A return to moderate growth in consumer spending should benefit ad demand in consumer-driven segments. Rising interest rates would raise borrowing costs and dampen investment. Healthy corporate profit growth could be expected to support businesses' confidence and their ad budgets. Strong car sales suggest healthy advertising spending in the automotive sector.
10-yr. Treasury note yield (%) S&P 500 earnings (% change)
3.0
3.3
4.2
4.8
2.0
2.4
2.4
13.8
4.8
21.0
5.7
(2.2)
4.4
19.1
Sales, light vehicles (mil. units)
16.1
16.4
16.9
17.6
14.6
14.4
15.5
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Table 1
Standard & Poor's Economic Scenarios (cont.)

*Based on Beth Ann Bovino's U.S. Economic Forecast "Springing Into A Warmer Economy" (3-24-14). **Based on Beth Ann Bovino's U.S. Economic Forecast "Two Economies Diverged In A Wood" (12-5-13). Favorable: We believe that a key driver is materially positive for the industry. For example, it could support or point to healthy revenue and/or profitability growth in the year ahead. Somewhat favorable: We are of the opinion that a key driver is moderately positive for the industry. For example, it could support or point to modest falls in input costs, leading to moderate profitability growth in the next year. Neutral: Indicates that the key driver is not expected to have a material impact on the industry or its participants in the next 12 months. Somewhat unfavorable: We are of the opinion that a key driver is moderately negative for the industry. For example, it could support or point to increased input cost volatility, which could translate into lower or more volatile profit margins. Unfavorable: We are of the opinion that a key driver is materially negative for the industry. For example, it could suggest or lead to a material decline in revenue and/or profitability growth in the year ahead.
In this economic context, we expect total ad spending to grow 3.4% in 2014, while core ad spending should grow 2.1%. Within the forecast, online will grow the fastest, cable and broadcast TV broadly in line with GDP, and print will decline. Core ad spending should lag GDP, in part because of the displacement of some spending by election-related spending in 2014. Additional factors include the steady contraction of print-based advertising while online ad revenue continues to grow at a pace well ahead of GDP. We think that in 2019, total online spending, including search, will surpass national TV (including broadcast networks, national spot, syndication, and cable networks). Proliferation of online ad inventory--in particular discount "remnant" inventory sold on ad networks--hampers pricing across all online advertising--even prime online inventory. It constrains pricing in TV, and it has a deflationary effect on print. We think that the larger online gets, the greater the pricing drag may be on total ad spending growth. Achieving the overall ad spending forecast requires avoiding flashpoints that could lead to sudden and widespread ad cancellations. The most glaring risks include the frail economies of Southern Europe and the political instability in Eastern Europe. Serious flare-ups on either front could spill over into the U.S. economy and could deter ad spending. Because much of ad spending is booked very close to air time or online publication, the sensitivity to such flashpoints is high.
Table 2
Media Sector Ad Spending Expectations

Sector Internet Local television Network television Cable television Total television, excluding political and Olympics Political advertising Radio Outdoor Magazines Newspapers Directories Direct mail Core advertising Total advertising 2014 ad spending expectations Low-teens percentage growth 2.75% Low-single-digit percentage growth 3.5% 3.5% $2.5 billion Down slightly Low- to mid-single-digit percentage growth Mid- to high-single-digit percentage decline High-single/low-double-digit percentage decline -20% Mid-single-digit percentage decline 2.1% 3.4%
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Table 2
Media Sector Ad Spending Expectations (cont.)

U.S. GDP growth Source: Standard & Poor's estimates. 2.8%
Rating And Outlook Distributions

As of March 31, 2014, we rate about two-thirds of U.S. media and entertainment debt at 'B+' or lower, a slight decline from the 70% figure we showed a year ago, partly because of defaults that rolled off the rating list. But it's also significantly higher than the roughly 50% at 'B+' and lower, for all corporate ratings. We attribute this difference to the sector's good cash flow characteristics, which attract private equity investors seeking opportunities for debt-leveraged returns. Declining structural trends in the publishing and print sectors are another factor. Issuers with 'B' and lower ratings, to varying degrees, show vulnerability to near-term or intermediate-term business or financial pressures. This high percentage of lower-rated companies makes the media and entertainment sector more vulnerable to downside economic shocks than other corporate sectors.
Chart 1
Stable outlooks dominate the sector (76%), but negative rating outlooks (13%) exceed the positives (4%) by 3 to 1. This
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is in part because almost all ratings in the 'CCC' category have negative outlooks, and some of the 'B' category issuers have thin covenant headroom and a lot of refinancing risk. CreditWatch negative, CreditWatch positive, and developing outlooks represented the remaining 4%, 2%, and 1%, respectively.
Chart 2
Rating actions offer useful perspective. Downgrades outnumbered upgrades by about 1.6 to 1 in 2013, a decelerating pace of decline compared with 2.1 to 1 in 2012. Early 2014 data, although limited, indicate a reversal of the decline, with upgrades outpacing downgrades 1.5 to 1. We attribute this to our healthier outlook on the economy and to the extended period of good market liquidity for speculative-grade issuance.
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Chart 3
Recovery
We expect the distribution of recovery ratings to be broadly unchanged from 2013 throughout 2014, in a divergence from the more positive trend we foresee in media and entertainment default-risk ratings. Recovery ratings convey our forward-looking view of recovery prospects for speculative-grade investors on specific classes of debt, in the event of a cash default. Recovery ratings are particularly sensitive to capital structure changes and rely more on the seniority and collateral support than default-risk ratings. Market conditions over the past couple of years have been very attractive for borrowers as demand for speculative-grade loans has been strong from both CLOs and other institutional investors chasing yield. As a result, structures have been aggressive and senior secured leverage has been edging up near 2007 levels. We expect this to continue in 2014. More specifically, companies doing recapitalizations (both dividend and non-dividend related) have shifted a significant portion of debt from junior debt to first-lien debt, with a negative effect on recovery ratings for first-lien debt. These types of transactions accounted for about one-third of rating volume in the sector in 2013. Last year, lenders also became increasingly comfortable providing first-lien loans with leverage-thru-first-lien in the mid-4x to low-5x range (potentially 1x-1.5x higher factoring undrawn revolving credit facility commitments and unconditional incremental borrowing baskets) to media and entertainment companies.
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From our perspective, absent a meaningful change in the general lending environment or economic activity, we expect current market trends to continue. In our view, 2014 and 2015 refinancing risk in the media and entertainment sector has been virtually eliminated, except for a few issuers with onerous structures or that have unsustainably high leverage, given the significant level of refinancing over the last two years. However, we continue to believe that today's borrower-friendly lending environment has introduced increased observed and hidden risks and complexity in transactions, and could pose a clear threat to lender recoveries when the credit cycle eventually turns.
Industry Ratings Outlook

Online Advertising
For 2014, we expect overall Internet advertising (including mobile) growth in the low-teens percentage range, while growth in mobile ad spending will exceed 50% as advertiser adoption becomes more widespread. Mobile advertising is the fastest-growing segment within online advertising. eMarketer estimated that U.S. mobile advertising reached $9.6 billion in 2013, a growth rate in excess of 100%, from 2012. Part of mobile's growth story is its relatively small revenue base. But the bigger part of the story is how widely adopted mobile advertising is now versus just a few years ago, and the potential that the format still holds for the future. By December 2013, mobile accounted for 14% of U.S. consumers' time spent on media (TV, Internet, and mobile combined), according to Nielsen, but only 5% of media spending, based on our estimates. This gap represents a tremendous revenue opportunity, and we fully expect the gap to close over time. A similar yawning gap once existed for Internet advertising, but now the spread between time spent on the Internet versus advertising dollars spent is only 4% (based on Nielsen data). Separately, from a demographic standpoint, advertisers consider Millennials (ages 18-34) the most desirable demographic. This group spends more time on mobile than other age groups. According to ComScore, Millennials spent close to 66 hours per month on mobile platforms, compared with 57.2 hours for people in the 35-54 age group. Another big component of the mobile story is social media, which underlies Facebook's tremendous growth over the past two years. Despite recent reports suggesting that Facebook may be losing its "cool factor" among teens, it is still the dominant social networking site, accounting for 76% of Millennials' time spent on social media. People age 35 and above spend nearly nine out of 10 minutes of their social activity on Facebook, according to ComScore. We believe high penetration of mobile devices, as well as Facebook's rollout of News Feeds (personalized lists of news items based on a consumer's list of active contacts and frequently accessed pages) and News Feed's ad rate increases are behind the company's growing mobile revenues. Facebook's fourth-quarter mobile advertising revenues increased by more than 270% year over year. Rapid growth of consumer use of mobile, and business advertising on mobile, remain key business opportunities in the Internet media subsector. At the same time, we view mobile media as subject to rapidly changing product features, and we carefully weigh the staying power and diversification of any company making sizable investments in the sector.
TV Broadcast Networks
Standard & Poor's outlook for TV broadcast networks for the remainder of the 2013/2014 television season is for lowto mid-single-digit percent growth in advertising revenues. Based on public comments from diversified media companies, we believe that current scatter pricing for first-quarter 2014 is trending up by a mid- to high-single-digit percent over the 2013/2014 upfront and up double-digit percent versus first-quarter 2013 scatter pricing. Upfront
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refers to annual ad commitments placed before the fall season begins, which benefit from audience guarantees. Scatter refers to quarter-by-quarter ad sales during the TV season that do not offer audience guarantees. Surprisingly, first-quarter prices, according to the same companies, represent acceleration from fourth-quarter 2013 scatter prices, despite the first quarter including the Winter Olympics. We believe this trend suggests national advertisers are becoming more confident in the strength of the U.S. economy. Still, this trend will only modestly improve broadcast network earnings as continued audience declines will partially offset improving scatter pricing. We expect overall audience ratings for the four major English-language broadcast networks to continue to decline at a mid-single-digit percentage pace, roughly the same as historical declines, but an improvement over last year's decline. Season-to-date (through mid-March), the four English-language broadcast network ratings in the key 18 to 49 demographic were down about 4%. Ratings for ABC dropped 9% while CBS' ratings fell 20%, in a difficult comparison without the Super Bowl compared with 2013. While ratings for Fox were up 4% from last season, this improvement was driven by Fox's sports programming, and masks the declines in "American Idol." Excluding the 2013 World Series and 2014 Super Bowl, Fox's ratings were down at a double-digit percent rate. Only NBC's ratings were up strongly--about 20%. This dramatic improvement in ratings has propelled NBC to No. 2, just barely behind perennial No. 1 CBS. CBS has built its premium ad pricing model on being the clear No. 1 broadcast network. Losing this position could have a significant effect on CBS' ability to pursue industry leading price increases in the upcoming 2014/2015 upfront. Longer term, acceleration in ratings declines could outpace the likely rate of ad rate increases, which could lead us to reevaluate the business profiles and our leverage thresholds for broadcast networks. This could ultimately have negative ratings implications for broadcast network companies, unless they develop new revenue streams, beyond the growth of retransmission fees from their affiliate stations, to compensate.
Local TV Broadcasters
We expect local TV core advertising could grow at a slightly slower pace than GDP in 2014, partially as a result of displacement by Winter Olympics advertising in the first quarter and election advertising this summer and fall, and the effects of severe weather in the first quarter. Our 2014 expectations reflect continued strength in auto advertising, which is still growing at a mid-single-digit percentage rate, based on public comments by TV broadcasters. Core local and national advertising continue to track closely with the health of the economy. For the fourth quarter of 2013, broadcasters reported year-over-year core advertising growth. Most companies, such as Gray Television Inc. (B+/Stable/--), LIN Media LLC (BB-/Watch Neg/--), Nexstar Broadcasting Group Inc. (B+/Stable/--), and Sinclair Broadcast Group Inc. (BB-/Stable/--) experienced low- to mid-single-digit percentage growth. While we believe that individual differences are the result of specific geographic or market conditions, the overall trend remains in line with GDP growth. We expect U.S. GDP growth of 2.8% in 2014 and 3.2% in 2015. As 2014 unfolds, we believe the key risk for the local TV broadcasting sector will be regulation. Since last year, with the installation of Tom Wheeler as the new FCC chairman, the FCC has announced a number of actions that could have a significant longer-term impact on local TV station operators. The FCC made two significant announcements related to TV station broadcasters at its recent March 31 open meeting, which affect retransmission consent negotiations and shared services rules. The FCC adopted for TV stations the joint services agreement (JSA) attribution rules that it has had in place for radio stations, putting constraints on TV stations' future use of JSAs, in our opinion.
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The Commission also gave TV station operators two years to comply with these new rules. In addition, the FCC voted to ban owners of big-four-affiliated TV stations in the same market from jointly negotiating retransmission deals together with the local cable operator. A number of TV broadcasters have built their business plans around the negotiating leverage and operating efficiencies offered by the previous FCC shared services rules and practices. We believe these revised rules could potentially lower revenues and increase costs for TV station operators. Separately, last September, the FCC announced the potential elimination of the ultra-high-frequency (UHF) station discount. This discount was in recognition of the historically weaker signals of UHF stations, but this has become less important with the conversion to digital signals and widespread carriage by cable systems. If the discount were eliminated, and the national TV household coverage cap remained at 39%, a number of broadcasters, including Sinclair Broadcast Group Inc., Tribune Co. (BB-/Stable/--), and Univision Communications Co. (B/Stable/--), would come close to, or exceed the 39% cap. Thus, the FCC's proposed rule that would end the UHF discount could hinder the flow of large merger transactions, though single station transaction activity likely would continue.
Cable Networks
We anticipate mid- to high-single-digit percentage domestic revenue growth at rated cable network companies in 2014. This is based on our expectation for ad revenue to grow at a low- to mid-single-digit percentage rate and affiliate fees to grow at a mid- to high-single-digit percentage rate. Audience rating softness is a continuing issue at the top 40 cable networks, and we expect this trend to continue through the start of 2014, reflecting the secular trends affecting both the cable network and broadcast sectors. We expect that audience ratings of cable networks, in aggregate, will decline, though individual networks' ratings will continue to vary widely. We estimate audience ratings for the cable networks broadly were down low single digits, season to date through March. Those with growing audience ratings could generate ad growth at a mid- to high-single-digit percentage rate, while those with declining audience ratings could experience ad revenue declines. While cable networks historically gained audience ratings and market share from broadcast networks, they are now facing the same secular audience fragmentation issues that the broadcast networks have been confronting for a number of years, largely because of over-the-top (OTT) content distribution that circumvents cable and satellite video services. Although this trend is broad-based, performance among various operators continues to diverge based on the rating success of their programming investments.
Radio
We expect the terrestrial radio industry will continue to have strong EBITDA and cash flow generation potential for years to come, but that the competitive landscape for radio will probably look much different a decade from now. We expect that terrestrial radio revenue will be roughly flat this year, but that digital radio will continue to gain share, leading to a slow and steady decline in terrestrial radio advertising over the long term. Internet radio has reached an 8% share of radio listening and continues to grow. Some of this share is taken directly from terrestrial radio, and some is incremental listening. Digital radio broadcasters are continually making advancements in technology and sales efforts. Over the long term, we expect industry margins to decline as a result of growth in digital radio, which is modestly profitable at best, and our expectation that royalty costs will increase. Currently, conventional radio operators are only required to pay a minimal performance royalty set by the U.S. Copyright Royalty Board, while digital radio operators pay higher rates.
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The biggest development in Internet radio over the past year was the long-awaited launch of Apple Inc.'s iTunes Radio app in September 2013. With the growth rates that Pandora has demonstrated over the last year (13% growth in active listeners in 2013), we expect eager new entrants will continue to emerge. We expect 2014 will bring more options for consumers and more competition for terrestrial broadcasters' listeners. Over the next two to three years, we view the radio industry as relatively stable, but we expect competition will cause slow secular and rating declines over the long term.
Recorded Music
We believe that sales declines will persist for the rest of the year, given the continued shift in consumption away from physical CDs and weakness in digital downloads. Year-to-date through March 16, 2014, total album sales, including digital track-equivalent albums, fell 14%, led by a 19% decline in CD sales and a 13% decrease in digital album sales, according to Nielsen Soundscan. Over the same period, a revival of vinyl spurred a 35% increase in the format, albeit from a very small base. While the industry contraction is still milder than the steep 18% to 20% declines between 2006 and 2010, it underscores the uncertainty of industry trends, the likelihood of continued CD declines absent blockbuster album releases, and the risks we see around music company sales and cash flow prospects. With digital releases now contributing over 40% of all album sales and streaming volume up over 30% in 2013, these delivery channels are key to the industry, especially as CD sales continue to decline at a double-digit percent rate. Although digital music sales declined for the first time in 2013 and have not shown signs of reversal so far in 2014, overall music consumption and popularity are gaining support from strong growth in streaming volumes. Streaming continues to demonstrate increased significance in the industry and competition is gradually heating up in this segment--a bright spot for music labels and publishers. In January, popular headphone maker, Beats Electronics LLC (B+/Positive/--) launched its own streaming music service called Beats Music. This follows streaming music launches last year by both Apple Inc. (AA+/Stable/--) and Google Inc. (AA/Stable/A-1+), all of which compete directly with established streaming services like Pandora Media Inc. and Spotify Limited. For its fourth quarter ended Dec. 31, 2013, Pandora reported a 13% increase in both its active users and listening hours. Additionally, Pandora's recent rate court victory against ASCAP bodes well for the Internet radio company because it ensures that Pandora's royalty expense rate will remain the same for now. While Internet and streaming services are growing, it is unclear to what extent these services will cannibalize digital download revenue. There is no concrete evidence of this happening, but recent trends in digital downloads are uninspiring. In other industry news, market share among the big three music labels remained relatively unchanged following a recent string of consolidation and M&A activity. The dominance of the major labels translates into increased risk for smaller competitors as the top three players in the industry--UMG (39% market share), Sony (29%), and WMG (19%)--control roughly 87% of the market, according to Billboard Magazine.
Newspapers
We believe that operating performance of newspaper publishers will continue to decline. We expect print advertising revenues, which we estimate account for roughly 70% of the total newspaper ad revenues, to lead the descent, with news consumption and advertising shifting to digital media. We expect total newspaper ad revenues will continue to fall at a mid- to high-single-digit percentage rate for 2014, similar to the rate of decline in 2013, despite the gradually
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improving economy. In 2014, we expect print newspaper ad revenues to decline at a high-single-digit percentage rate, minimally offset by low-single-digit percentage online revenue growth. The proliferation of online ad inventory is leading to slowing online revenue growth and weak online pricing, which is already a fraction of print ad rates. Most newspaper publishers are seeking ways to generate more revenue from their online content. Newspaper companies are enhancing video content on their Web sites, realizing higher-CPM ad revenue, while providing increasing value to readers beyond what is available on the printed page. Many newspapers have put pay walls in place, and are charging for digital-only subscriptions. Digital-only subscribers have helped to increase circulation revenue slightly, while unit circulation declines have slowed as print subscribers are often provided with free digital access. Still, there remains a significant revenue shortfall between lost print advertising revenues and the contribution from online advertising. It is unlikely that newspaper publishers will ever be able to close that gap. As a result, several diversified media companies have sold or spun off underperforming newspaper operations. In addition, many publishers have reduced or eliminated unprofitable circulation, cutting editorial staff and relying more on commodity news from wire services. For example, nearly all newspapers have eliminated stand-alone book review sections and reduced reviewer staff, while the related content has been integrated in the paper. We believe it will be increasingly difficult to realize cost savings, given that the cost of editorial, production, and marketing functions are fairly lean from prior restructuring efforts. In our view, this is likely to translate into most newspaper publishers' EBITDA declining at a low-teens percentage rate in 2014.
Magazines
We believe that consumer magazine advertising pages will continue to decline at a steady mid-single-digit percentage rate in 2014 as advertisers shift spending to the Internet. According to the Publishers Information Bureau, ad pages fell 4.9% in the quarter ended Dec. 31, 2013, and 4% for all of 2013, despite the improving economy. Magazine newsstand sales, which tend to be an impulse purchase, remain in a long-term secular decline, reflecting increasing availability of free content on the Web and relatively high print cover prices. Newsstand sales of consumer magazines dropped 10% in 2013, according to the Alliance for Audited Media, after falling at a similar rate in 2012, as many retail outlets have closed or deemphasized magazines in their merchandising. Subscription revenues were roughly flat in 2013, as a result of sharp discounting to shore up rate bases (the total annual circulation on which advertisers negotiate ad rates). Subscription revenues of the largest U.S. magazine publisher, Time Inc., declined 4% in 2013 and 1% in 2012. Time's newsstand sales, which account for one-third of the company's total circulation revenues, declined 13% in 2013, after declining 10% in 2012. Digital revenues are increasing briskly from a small base, partly as a result of the bundling of digital and print subscriptions and the inclusion of video content. Still, digital subscriptions only represented 3.5% of the total unit circulation, have a lower retail price, and are subject to revenue-sharing arrangements with tablet makers. We expect operating performance to remain under pressure as growth of digital subscriptions, and the benefits of reduced raw material, printing, and shipping costs, will still not compensate for the decline in print revenue.
Printing
We continue to view the printing industry as being in a secular decline, with printing volumes decreasing 1% to 2% and pricing falling annually at about 2% to 3% in 2014. Digital consumer alternatives such as e-readers, and broadening channels for advertising outside of printed materials, will continue to erode print volumes in end-markets
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such as magazines, books, and retail inserts. Volume declines have left significant excess capacity in the market, which has resulted in intense pricing competition among printers. With about 47,000 printing companies in the U.S. attempting to manage the excess capacity, we expect printers will continue to aggressively compete on price, which will continue to result in lower profitability for the industry. R.R. Donnelley & Sons Co. (BB-/Stable/--) and Quad/Graphics Inc.'s (BB/Negative/--) lease-adjusted EBITDA margins will likely dip below 10% over the next one to two years, compared with more than 15% in 2008. The decline represents an important reason for downgrades of both companies over the past several years. The industry has been consolidating to remove excess capacity, but we expect it will remain an ongoing problem in the short to intermediate term. In response to the revenue and profit pressure on printing businesses, these companies have cut costs and diversified into complementary services that support printing, such as logistics and marketing services. These services, at this point, are only a small portion of total revenue, which we do not expect to change in the short term, and they are subject to their own competitive pressures. Printers' ability to maintain ratings amid business model transitions, in our view, will be subject to their discipline in managing leverage lower while diversifying in new businesses.
Ad Agencies
In 2014, the tone is optimistic for all the major players, which have set organic growth expectations of 4% for 2014 (outpacing our U.S. GDP forecast of 2.8% in 2014). We expect most of agencies' revenue growth will come from the U.S., emerging markets, digital, accounts won from competitors, and acquisitions, while Europe continues a sluggish recovery from its recession. Margin gains are likely to be hard won through cost cuts, given a possible shortage of digital talent, and the high cost of and competition for senior executives. Fourth-quarter 2013 results at the major advertising holding companies were largely in line with our expectations as organic revenue growth averaged about 3%. In the second quarter of 2013, Omnicom Group Inc. (BBB+/Stable/A-2) and Publicis Groupe (BBB+/Stable/A-2) announced a merger. The combination received regulatory approval from the EU in January and awaits the approval of Chinese authorities--the last major hurdle for the deal's expected close in the second quarter of this year. The merger will create by far the largest advertising agency holding company, further increasing its scale, scope, and diversity, and offering significant back-office cost consolidation opportunities. Key risks of the merger are perceived client conflicts that could result in client losses, potential obstacles to merging two massive companies with diverse cultures, and possible losses of talent within the agencies. Since the initial announcement, we have not seen any major client losses from Publicis or Omnicom as a result of the merger. Any intermediate-term rating upside for the merged entity would likely involve greater clarity on financial policy and evidence that integration risks between the two large companies have been mitigated.
Film Studios
We see the possibility of slightly lower 2014 domestic box revenues, a solidly higher international box office, a continued increase in home entertainment (including all digital revenue), and slightly lower pay and other TV revenue. The main catalyst for earnings upside, in our view, is the gradually shifting mix in home entertainment, in favor of higher-margin digital distribution, and away from DVDs. The domestic box office was up 0.8% in 2013, according to boxofficemojo.com, though 0.4% fewer tickets were sold.
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Performance was largely in line with expectations as there were a number of sequels that helped 2013 performance. Studios continue to face prospects of long-term declines in domestic theatrical attendance, and in our opinion, will need to boost creative and marketing efforts to reach the Millennial (currently in their 20s and 30s) generation. Additional uncertainties surround growth in home entertainment sales, and continually escalating marketing and talent costs. International box office revenue growth remains a bright spot for the industry and should continue to be a source of growth at least over the near term. Total international box office sales represent a majority of the total box office. Home entertainment revenues increased 1% in 2013, according to the Digital Electronics Group. For consumers, the ability to view content whenever they want is very appealing. As a result, standard DVD sales continue to experience steady decline, while Blu ray increased 5%, electronic sell through increased 50%, and total spending on digital content grew 17%. Another potential area of growth for the industry is Ultraviolet, which has about 15 million registered users, doubling since June 2012. If the trend of increasing streaming and video-on-demand (VOD) revenue continues, we would expect the studios to report modestly improving margins, as the manufacturing, packaging, distribution, and product return costs of DVDs decline.
Exhibitors
Despite a strong start to the year, we expect the box office will be down in 2014 from record-breaking 2013 levels. Although attendance was down slightly in 2013, the box office was up because of an increase in premium ticket sales to levels that we believe are unsustainable. Longer term, we believe that exhibitors will find it difficult to offset attendance declines with ticket price hikes. We expect exhibitors to face continued pressure from proliferating entertainment alternatives, including better home theater systems, faster downloads via Internet-enabled TV, and cheap or free online content. Another source of pressure is the narrowing of release windows, reducing the span of time when exhibitors can exclusively monetize a movie before it is released on DVD and VOD. Many small independent studios have had success in releasing lower budget movies to VOD at the same time or shortly after the films theatrical release. In a first for a major movie studio, Warner Bros. released "Veronica Mars" simultaneously in theaters and on VOD on March 18. Warner Bros. is circumventing the normal distribution window policies by renting the screens where it will be showing the film. The majority of efforts by studios to significantly shorten the exclusive theatrical release window have failed in the past, either because premium VOD prices were too high or because top theater chains balked. In addition, major studios are developing an exclusive digital release window, in which films are released to digital platforms two to four weeks before being available on DVD or VOD. For example, "Iron Man 3" (releases by Walt Disney) was available on digital platforms three weeks before its scheduled DVD and VOD release in October 2013. While "Veronica Mars" was an off-season release and not a major summer "event" film, we expect experimentation and the shortening of the exclusive release window to continue, leading to declines in attendance and high-margin concession sales.
Recent Rating Activity
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Table 3
Recent Rating/Outlook/CreditWatch Actions

Issuer Herff Jones Inc. Moody's Corp. The Sheridan Group Inc. Deluxe Corp. Netflix Inc. Miller Heiman Inc. R.R. Donnelley & Sons Co. LBI Media Holdings Inc. Quad/Graphics Inc. AMC Networks Inc. American Media Inc. American Achievement Corp. Visant Holding Corp. E.W. Scripps Co. (The) ION Media Networks Inc. Cumulus Media Inc. NexTag Inc. ProQuest LLC Igloo Holdings Corp. Yahoo! Inc. (Unsolicited Ratings) Getty Images Inc. Valassis Communications Inc. Affinion Group Holdings Inc. Belo Corp. Go Daddy Operating Co. LLC CBS Outdoor Americas Inc. FoxCo Acquisition LLC To B+/Stable/-BBB+/Stable/-NR/--/-BB/Stable/-BB-/Stable/-B/Stable/-BB-/Stable/-CCC-/Negative/-BB/Negative/-BB/Stable/-From NR/--/-BBB+/Stable/A-2 CCC+/Negative/-BB-/Positive/-BB-/Negative/-NR/--/-BB/Negative/-SD/NM/-BB/Stable/-BB-/WatchPos/-Date 10/2/2013 10/2/2013 10/16/2013 10/30/2013 11/1/2013 11/5/2013 11/6/2013 11/11/2013 11/13/2013 11/15/2013 11/18/2013 11/21/2013 11/21/2013 12/2/2013 12/3/2013 12/4/2013 12/6/2013 12/11/2013 12/16/2013 12/17/2013 12/20/2013 12/23/2013 12/26/2013 1/2/2014 1/3/2014 1/7/2014 1/9/2014 1/9/2014 1/10/2014 1/13/2014 1/23/2014 1/24/2014 1/31/2014 1/31/2014 2/4/2014 2/10/2014 2/11/2014 2/11/2014 2/19/2014 2/24/2014 2/27/2014
CCC+/Negative/-- SD/--/-B-/WatchPos/-B/WatchNeg/-BB-/Stable/-B+/Stable/-B/Positive/-CCC/Negative/-B/Stable/-B+/Stable/-BB+/Stable/-B/Negative/-BB-/WatchNeg/-B-/Stable/-B/Negative/-NR/--/-NR/--/-B/Stable/-B-/Stable/-B-/Positive/-B/WatchPos/-NR/--/-B/Stable/-BB-/Stable/--
CCC+/Negative/-- SD/--/-NR/--/-B/Positive/-BB-/Stable/-NR/--/-BB/Stable/-B/Stable/-NR/--/-B/Stable/-NR/--/-NR/--/-B+/WatchNeg/-B/Positive/-BB+/Stable/-B-/WatchPos/-B/Stable/-B/Stable/-CCC/Negative/-B+/Stable/-B+/Negative/-B-/WatchNeg/--
McGraw-Hill School Education Holdings LLC B+/Stable/-AVSC Holding Corp. Harland Clarke Holdings Corp. IG Investments Holdings LLC AutoTrader.com Inc. Ascend Learning LLC Local TV LLC Marquee Holdings Inc. Deluxe Entertainment Services Group Inc. Barrington Broadcasting LLC Digital Generation Inc. Cenveo Inc. Education Management LLC Knowledge Universe Education LLC B/Stable/-B+/Stable/-B/Stable/-BBB-/Stable/-B/Stable/-NR/--/-NR/--/-B/Stable/-NR/--/-NR/--/-B-/Stable/--
CCC+/Negative/-- B-/Negative/-CCC/WatchPos/-CCC/Negative/--
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Table 3
Recent Rating/Outlook/CreditWatch Actions (cont.)

Bankrate Inc. McGraw-Hill Global Education Holdings LLC Merrill Corp. Sorenson Communications Inc. SFX Entertainment Inc. FTI Consulting Inc. Extreme Reach, Inc. Cengage Learning Holdings II Inc. Lee Enterprises Inc. LIN Media LLC Media General Inc. Dun & Bradstreet Corp. (The) Web.com Group Inc. The McClatchy Co. CORE Entertainment Inc. NR--Not rated. BB-/Stable/-B+/Stable/-B/Stable/-D/--/-B-/Negative/-BB/Stable/-B/Stable/-Bprelim/Stable/-B-/Stable/-BB-/WatchNeg/-B+/WatchPos/-BBB-/Stable/A-3 B+/Stable/-B-/Stable/-B/WatchNeg/-BB-/Negative/-NR/--/-B-/Stable/-CCC/Negative/-NR/--/-BB+/Stable/-NR/--/-NR/--/-NR/--/-BB-/Stable/-B+/Stable/-3/3/2014 3/3/2014 3/4/2014 3/4/2014 3/5/2014 3/12/2014 3/13/2014 3/19/2014 3/21/2014 3/21/2014 3/21/2014
BBB/WatchNeg/A-3 3/24/2014 B/Positive/-B-/Positive/-B/Negative/-3/25/2014 3/27/2014 3/31/2014
Contact Information
Table 4
Contact Information
Credit analyst Peter Bourdon Elton Cerda Hal Diamond Heather Goodchild Jawad Hussain Andy Liu, CFA Minesh Patel Naveen Sarma Jeanne Shoesmith Location New York New York New York New York Chicago Chicago New York New York Chicago Phone E-Mail
(1) 212-438-0276 peter.bourdon@standardandpoors.com (1) 212-438-9540 elton.cerda@standardandpoors.com (1) 212-438-7829 harold.diamond@standardandpoors.com (1) 212-438-7835 heather.goodchild@standardandpoors.com (1) 312-233-7045 jawad.hussain@standardandpoors.com (1) 312-233-7052 andy.liu@standardandpoors.com (1) 212-438-6410 minesh.patel@standardandpoors.com (1) 212-438-7833 naveen.sarma@standardandpoors.com (1) 312-233-7026 jeanne.shoesmith@standardandpoors.com (1) 212-438-8847 christopher.thompson@standardandpoors.com (1) 212-438-1434 chris.valentine@standardandpoors.com
Christopher Thompson New York Chris Valentine New York
Related Criteria
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Key Credit Factors For The Media And Entertainment Industry, Dec. 24, 2013 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
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The Media and Entertainment Outlook Brightens, But Regulatory Clouds Gather

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The Media and Entertainment Outlook Brightens, But Regulatory Clouds Gather

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Industry Economic And Ratings Outlook:

Industry Economic And Ratings Outlook:

Standard & Poor's Economic Scenarios

2014 Macroeconomic indicators Real GDP (% change) 2.8

1.9 Somewhat favorable

Housing starts (% change)

79.2 Somewhat favorable

7.3 Somewhat favorable

10-yr. Treasury note yield (%) S&P 500 earnings (% change)

Sales, light vehicles (mil. units)

Standard & Poor's Economic Scenarios (cont.)

Media Sector Ad Spending Expectations

Media Sector Ad Spending Expectations (cont.)

Rating And Outlook Distributions

Industry Ratings Outlook

Recent Rating Activity

Recent Rating/Outlook/CreditWatch Actions

Recent Rating/Outlook/CreditWatch Actions (cont.)

BBB/WatchNeg/A-3 3/24/2014 B/Positive/-B-/Positive/-B/Negative/-3/25/2014 3/27/2014 3/31/2014

Christopher Thompson New York Chris Valentine New York

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