Fitch: U.S. Media Ratings Stable in 2008 Amid Secular Challenges and Weakening Economy.

CHICAGO -- Against the backdrop of Fitch's expectations for modestly decelerating nominal and real GDP growth (3.7% and 1.7% growth, respectively), Fitch believes that on a debt weighted basis, Media & Entertainment ratings will remain stable on average in 2008. Two key considerations underlie Fitch's Stable Outlook.

First, some deterioration is expected in the broader economy. Slowing job growth, lower consumer confidence, high energy prices and issues in the housing sector could 1) weigh negatively on discretionary consumer spending and 2) cause some marketers to curtail advertising spending. However, consumer spending weakness is not expected to be significant enough to materially negatively affect the credit profiles of non-advertising related sub-sectors (Music, Theme Parks, Commercial Printing, and Movie Studios and Exhibitors). In terms of advertising-supported media, we expect some bi-furcation as sub-segments more exposed to local advertising (Newspapers, Radio, Yellowpages, Outdoor, TV Broadcasting Affiliates) are expected to feel more pressure than sub-segments that derive a higher proportion of ad revenue from national advertising (TV Networks, Cable Networks, Magazines). Fitch expects healthy political and Olympic spending to overcome pressure in the Auto and Financial Services categories to drive overall U.S. ad spending for the year around 4%.

Secondly, the ratings on the media conglomerates that issue a significant proportion of Media & Entertainment industry debt are expected to remain broadly unchanged as key operating fundamentals and financial policies should remain stable. Fitch believes geographic and product diversification (coupled with strong liquidity) moderate the volatility of consolidated cash flow and afford the conglomerates the flexibility to adapt as end-markets evolve. Because of the favorable cash flow dynamics of their businesses, these companies have the flexibility to address the secular challenges facing their businesses, return capital to shareholders, make prudent acquisitions and endure a cyclical downturn in several units concurrently while keeping their credit profiles intact. Fitch is cognizant that event risk for the conglomerates can increase with stock price pressure and that stock prices have not sustained the same trajectory in 2007 that they did in 2006. A more dramatic slowdown in the economy could drag down consumer spending, advertising and media stock prices which could potentially pressure credit profiles.

SECULAR CHALLENGES:

Traditional media is expected to continue to cede share of overall spending as advertisers continue to experiment with and become more comfortable with emerging and alternative mediums (online banner/search, social networking, mobile, cinema, video game, etc.). The momentum of this shift should be maintained over the next several years.

However, Fitch is cognizant that advertisers appear willing to pay even higher premiums than we previously expected for audiences that are either 1) aggregated or 2) highly engaged. The upfront markets of the past few years were supposed to reflect the shift of power from broadcasters to advertisers. However, scatter pricing has been solid even in the face of weaker ratings, which appears to indicate that advertisers and their media buyers still value the efficiency associated with broadcasting's aggregation capabilities.

In terms of audience engagement, Cost Per Thousand (CPM) rates for select online video pre-roll ads on certain web sites have reportedly been even higher than premium rates charged for prime time broadcasting. Fitch does not put too much weight in these figures as they are certainly affected by near-term availability of inventory which should increase. However, these figures emphasize our belief that although advertisers are likely to be more discerning given the wider selection of ad mediums, they are also likely to pay a premium for professional, targeted high-engagement inventory. We believe that some traditional media companies are in a solid position to produce the type of content that should allow them to capture some of these premium ad dollars.

While marketers have enhanced their focus on targeting, measurability and return on investment, Fitch believes changes to audience measurement metrics have made it difficult thus far for advertisers and media buyers to justify more dramatic changes to their media mix. Measurement continues to evolve within key mediums: Nielsen's People Meter introduction followed by commercial (C+3) ratings for TV and cable broadcasting; Arbitron's delayed Portable People Meter (PPM) for radio; total audience vs. circulation for newspapers; syndicated usage data for Yellowpages; page views vs. total sessions and total time spent for online; and vehicles passed vs. specific traffic counts and patterns for outdoor. 2008 will likely be another transition year, but as the data from these initiatives becomes more widely available and trusted over the next several years, the information could support more share shifts among ad mediums, potentially to the detriment of traditional media.

HIGH FIXED COSTS/UNIONS:

With the changing dynamics in TV network, network affiliate, newspaper and radio broadcasting businesses, cost controls and realignments have been a significant focus for management teams. Media companies do not have much discretion over significant portions of their cost structures (programming, newsprint, etc.) meaning that much of the cost cutting is focused on the labor component. While there are opportunities in this area, Fitch remains cautious that labor costs for many of these companies could be difficult to reduce going forward as union affiliations could obstruct the timeliness and magnitude of cost actions. The Writers Guild of America (WGA) strike and actions/statements by unions at several newspaper companies are evidence that media unions could play a role in credit profiles of certain companies going forward. Contracts for the Screen Actors Guild (SAG) and Directors Guild of America (DGA) expire in mid-2008. Fitch believes a protracted strike of all three unions could materially impact revenue streams of many of the companies within the media & entertainment sector.

EVENT RISK:

Event risk has not necessarily diminished; it just may take different forms in 2008. Stock price performance has generally been lackluster, but with the more turbulent credit markets, Fitch believes that companies that did not already pursue highly leveraged buyouts are less likely to pursue those types of transactions in this funding environment. However, shareholders will likely continue to place pressures on companies and at current interest rate levels, leveraged buy-backs and leveraged acquisitions will still pose some risk to media company ratings in 2008. Also, leveraging and non-leveraging de-consolidations like Belo and E.W. Scripps announced in 2007 (neither of which are expected to add incremental debt) are possible.

Evaluating event risk continues to be complicated by corporate governance issues related to controlling shareholders and influential external owners. Fitch recognizes that in the recent past, certain owners have abruptly changed their publicly stated positions on corporate structure topics to the detriment of bondholders. This emphasizes the need to look beyond public statements and focus on managements' incentive to maintain a particular leverage target or rating commitment given other pressures they may face.

Fitch does not expect regulatory issues to pose any material event risk in 2008. Issues continue to be under review due to the 2004 remanding of previous Federal Communications Commission (FCC) media ownership rules. Media ownership rules currently being reviewed by the FCC and other distribution and content issues could receive greater clarity from the commission in 2008. While the outcome of the reviews remains unclear Fitch believes any potential revisions will have minimal risk of credit quality deterioration for the companies in the portfolio.

SUB-SECTOR OUTLOOKS (listed by level of concern)

Advertising Supported:

Newspapers and Terrestrial Radio (Negative Outlooks)

Much of the risk for the media sector is likely to continue to be concentrated within the newspaper and radio sub-sectors. Fitch expects newspaper industry revenues to be negative in 2008 as both price and volume will be under pressure within each of the four components of newspaper companies' main revenue streams: circulation and local, classified, and national advertising. There may not be as much relief from newsprint costs in 2008 as there was in 2007 and it could be difficult to offset revenue declines with labor-related cost cuts.

We expect radio industry revenues to be flat to down slightly in 2008 as pricing pressures could be partially offset by a larger piece of political advertising than what the industry has experienced in the past due to tightened inventory on the TV side. Fitch believes any real traction from HD Radio will occur post 2008 and even then, inventory over-supply issues could arise. There are less variable costs at radio stations compared to newspapers, but radio operators have margins as much as 2 times (x) higher, no unionized workforces, and convert a higher percentage of EBITDA to free cashflow giving them more cushion to endure the secular challenges.

Stock prices have been down significantly for the past several years in both sub-segments and there does not appear to be a catalyst for the pressured revenue picture to reverse itself, meaning that management teams could be under more acute pressure in 2008 to attempt to boost their stock prices through financial policy revisions.

Broadcasting Affiliates (Stable Outlook)

Ad inventory levels will be relatively stable, but political spending should increase demand and drive up pricing for affiliates, however weakness in the auto and financial advertising categories have tempered our revenue growth expectations down somewhat to the mid-to-high single digit range. Retransmission fees and continued efforts by affiliates to steal share from newspapers and radio in their local markets should provide some revenue upside in 2008. Fitch expects the networks to continue to embrace video-on-demand (VOD) opportunities on their own in 2008. While we do not expect any material impact in 2008 from increased usage of time-shifting technologies we will continue to monitor its impact (if any) on promotions and lead-ins to the late night news. Companies will likely continue to focus on expenses by attempting to eliminate redundant costs from station portfolios. Margins should expand but Fitch reminds investors that 2008 headline operating metrics may mask longer-term industry challenges. 2009 could be a very weak year for companies that do not remain sharply focused on these secular issues in 2008. A prolonged WGA strike into the back half of 2008 would weigh negatively on credit profiles as broadcast affiliates do sell ad time on national network shows and rely on primetime network viewers as lead-ins to late night news.

Magazines (Stable Outlook)

Given their exposure to digital substitution, as an industry, magazines have held up better than Fitch has expected. This performance appears to indicate the value advertisers place in the medium's targeting capabilities and reach. According to Publishers Information Bureau, industry volume (ad pages) were down slightly through first nine months of 2007 (pressured by technology, home furnishings, financial, automotive and apparel categories), while rate-card reported revenue was up mid-single digits. These results reflect the pressures in news and business titles while the publishers continue to introduce new niche titles. Companies have been aggressive at cutting costs and shuttering poorly performing titles. The proliferation of ad inventory in the broader print and online space will continue to pressure revenue. Magazines have generally lagged other mediums in development and execution of online strategies and while our 2008 outlook is stable, Fitch is cautious regarding the long term prospects for the magazine industry.

Broadcast Networks (Stable Outlook)

Fitch expects viewership to continue to slowly erode, but political and Olympic ad spending should tighten available inventory and help networks boost price. Given the healthy scatter market, networks could neutralize and possibly reverse the gradual shift in power toward advertisers in upfront negotiations. Fitch expects the Networks to continue to explore and experiment with digital opportunities and VOD. Negotiations with the WGA will likely get meaningful headlines and could have an impact on credit profiles if there were a prolonged strike into the second quarter of 2008.

Yellowpages (Stable Outlook)

Incumbent publishers will likely continue to see erosion in the advertiser base and may have difficulty offsetting volume declines with price increases, particularly in local markets that are experiencing significant housing weakness. The surge of independents appears to have moderated at least partially reflecting market saturation. Fitch believes print directory publishers can be complimentary to (rather than substituted by) online publishers and 2008 will be an important year in demonstrating the growth and economics of web-based initiatives. Costs will not likely be a focus, but with flat to slightly down revenue there could be continued pressure on stock prices and increased event risk in the form of potential changes in financial policies.

Cable Networks (Stable Outlook)

Cable industry ad inventory has grown significantly over the past several years, causing a deceleration of the decades-long increase in ad dollars. Also, the shift of ad dollars toward alternative mediums has negatively affected cable nets gains. Changes in measurement may have some affect on certain channels, but in general cable continues to be a targeted medium with significant reach and will continue to gain share. Fitch expects the cable networks to continue to embrace its VOD and digital strategies which should provide some modest upside to revenue growth. Fitch continues to believe that programming on the cable networks should be less of a priority for DVR usage as it includes live news (CNN, ESPN, CNBC, CourtTV, Fox News), sporting events (ESPN, TNT, Fox Sports Nets), off-network syndication (TBS, TNT), and shows that are repeated throughout the day and week (MTV, VH1, Comedy Central, Discovery, etc.). Costs, cap ex and financial policies should not be significant issues in 2008.

Outdoor (Stable Outlook)

Although Fitch expects some weakness in the local markets that Outdoor advertisers serve, audiences are growing slightly and prices remain relatively low. Regulation provides a meaningful barrier to the creation of new inventory and digital boards present opportunities to improve revenue growth and margins. Fitch expects outdoor advertising could continue to grow in the 4-8% range, outgrowing the economy and overall advertising spending over the next several years and stealing share from more secularly challenged traditional media. Outdoor advertising is a high EBITDA margin and high free cash flow conversion business positioning it well to endure an economic downturn.

Online (Stable Outlook)

Online advertising continues to grow rapidly but growth has decelerated somewhat as it has become a larger portion of the ad mix. The advent of ad networks and behavioral/contextual targeting technologies could boost pricing on remnant ad inventory that has proliferated over the past several years. Usage measurement, penetration of online video and social networking will be key themes in 2008.

Non-Advertising Supported:

Music (Stable Outlook)

Recognizing that the volatility of release schedules makes one-year outlooks less relevant, Fitch expects the music industry to continue to undergo significant structural changes in 2008 as they evolve their strategies and cost structures to adapt to rapidly evolving music consumption patterns and piracy. The stable outlook is more reflective of the dominant market share of industry participants and increasing acceptance of legitimate online music sites and the early successes within the digital music landscape. Fitch expects continued declines in shelf space and physical sales to be partially offset by increases in digital sales. Fitch will continue to monitor companies' execution of 360-deals and greater traction with mobile offerings and video monetization.

Theme Parks (Stable Outlook)

Fitch recognizes that disruption in the housing market and high energy costs could negatively affect discretionary consumer spending in 2008. Theme park performance is highly susceptible to cyclical factors, and if the economy slips into a recession, theme park attendance could be negatively affected. In a full-fledged downturn attendance could be down 10%-20%, pricing could slip slightly and EBITDA would likely be down more than 2x the percentage decline in revenue. Given the solid margins (mid-to-high 20% range) and maintenance capital expenditures (cap ex) at around 5% of revenue, Fitch would not expect theme parks to drop below EBITDA less maintenance cap ex-breakeven in a downturn, but highly leveraged companies (Six Flags) would not cover interest expense.

Movie Exhibitors (Stable Outlook)

While the outlook for the sector remains stable, Fitch believes that exhibitor industry fundamentals are not as healthy as 2007 box office headline numbers might imply. In addition to modest increases in attendance, exhibitors have driven their revenue by price hikes and increases in concession spending. Fitch does not believe that movie exhibitors can expect to maintain this pricing power in years when film product is less robust given already high prices, collapsing windows and competing alternatives for consumer's time and disposable income.

Commercial Printing (Stable Outlook)

Due to overcapacity, fragmentation, customer and supplier consolidation and technology advancements, Fitch expects pricing to remain pressured. Industry growth will be challenged to keep pace with nominal GDP growth, but larger better capitalized operators (the predominant issuers of debt) should be able to at least keep pace with nominal GDP growth organically by capturing share from smaller printers and also through acquisition of smaller and relatively inexpensive (after synergies) targets that could experience distress and come on the market in a downturn. Fitch also believes there are still some opportunities for printers that have made significant past acquisitions to streamline/realign their cost structures. We remain cognizant that event risk is heightened among the slowest growth media sub-sectors like commercial printing.

Movie Studios (Stable Outlook)

Fitch expects box office figures to be down from 2007 due to tough comps that include several high-profile trilogies. Nevertheless, Fitch expects 2008 to have its share of franchise releases that should keep volume and box office revenues fairly healthy: The Chronicles of Narnia (Disney), Star Trek (Viacom), Indiana Jones (Viacom), Batman (Time Warner), The Mummy (Universal), The Incredible Hulk (Universal), James Bond (MGM), and Madagascar (Dreamworks Animation). In addition, the studios are expected to release first time films of familiar Comic Book and TV hits (e.g., Sex and the City (Time Warner)), and also have a number of features with high profile talent (Brad Pitt (Viacom's Benjamin Button) and Angelina Jolie (Universal's Wanted)). Fitch does not expect the recent credit crunch to impact the slate of films released in 2008 as most co-financed deals for release this year are already beyond production. A prolonged WGA strike beyond the third quarter of 2008 would cause some concern however it is partially mitigated for the conglomerates as the movie studios typically account for less than 20% of overall company cash flows and costs are scaleable. Fitch will monitor the negotiations between the studios and the DGA and SAG as any strike by either of those entities would have a more immediate impact on film production.

Ad Agencies (Stable Outlook)

Organic growth should exceed nominal GDP growth for the agencies as advertising activity (and pricing to a lesser extent) should benefit from the healthy national and global advertising environment. Due to the scalability of their cost structures, agency margins have proven resilient through advertising downturns. Agencies will continue to focus on digital opportunities, expanding their footprint in emerging markets, and better coordinating the media buying/planning units with their creative divisions.

Educational Publishing (Stable Outlook)

Healthy growth in demand should come from a favorable adoption schedule, as well as other revenue streams (open states, testing and supplemental materials, College, etc.). Pricing is expected to remain stable as the industry is highly concentrated and there are meaningful barriers to entry. There could be some share shifts among the top three players as Education Media & Publishing Group (EMPG), formerly Houghton Mifflin Riverdeep Group, integrates its Harcourt acquisition. Costs will also likely be a focus for EMPG and less so for Pearson and McGraw Hill. Fitch expects some smaller acquisition activity could continue but does not expect major corporate actions in this space in 2008.

Diversified Media:

--CBS Corporation ('BBB' Outlook Stable);

--Cox Enterprises ('BBB-' Outlook Positive);

--Liberty Media ('BB' Outlook Negative);

--McGraw Hill Companies ('A+' Outlook Stable);

--News Corporation ('BBB' Outlook Stable);

--The Walt Disney Company ('A-' Outlook Stable);

--Time Warner Inc.('BBB' Outlook Stable);

--Viacom ('BBB' Outlook Stable).

Publishing, Printing, Radio, TV Broadcasting

--Belo ('BB+' Rating Watch Negative);

--Clear Channel ('BB-' Rating Watch Negative);

--Cox Radio ('BBB-' Positive Outlook);

--Dow Jones ('BBB+' Outlook Negative);

--Hearst Argyle Television ('BBB-' Rating Watch Evolving);

--McClatchy ('BB+' Outlook Stable);

--R.H. Donnelley Corp ('B+' Outlook Stable);

--R.R. Donnelley & Sons Co. ('BBB' Outlook Stable);

--Tribune ('B+' Rating Watch Negative);

--Univision Communications ('B' Outlook Stable).

Entertainment - Movie Exhibitors, Theme Parks, Music:

--AMC Entertainment ('B' Outlook Stable);

--Regal Entertainment ('B+' Outlook Stable);

--Six Flags ('B-' Outlook Negative);

--Warner Music Group ('BB-' Outlook Stable).

Business Products and Services, Ad Agencies:

--Dun and Bradstreet ('A-' Outlook Stable);

--Interpublic Group of Companies ('BB-' Outlook Stable);

--Omnicom ('A-' Outlook Stable).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.