Seven flags media misery

The profit downgrade Seven West Media slipped out after east coast markets had closed on the eve of ANZAC Day clearly blind-sided the sharemarket, which has reacted savagely. The implosion in the Seven West share price, however, says that despite plenty of evidence, the market hadn't understood the extent of the downturn in advertising markets.

On Tuesday night Seven West disclosed that it expected earnings before interest and tax this financial year to be in the range of $460 million to $470 million. The market consensus was for EBIT of around $500 million. When the market opened today Seven West's share price imploded and was tracking towards a close down something in the high teens.

While it wouldn't have helped that the timing of the disclosure meant the market had more than 24 hours to digest the news, the more significant issue is that no one appears to have seen it coming. The top of Seven West's new range was above the lowest of the broker estimates ($476 million) identified by Bloomberg.

That's not surprising. When Seven West reported its half-year results in February the 6 per cent decline in EBIT was seen as very creditable in the context of the results of other media companies.

Seven West had experienced only modest revenue falls in its core businesses and had managed its costs tightly. Despite the lower profit, there was a sense that Seven West was managing the difficult environment well and exploiting the quality and dominance of its television, newspaper and magazine franchises and no hint of any likely dramatic change to that picture in the near term.

Now, it turns out, Seven West had expected conditions to improve in the June quarter. Instead, it says – based on conditions in all three segments – the previous expectation of the market strengthening are unlikely to be met.

It is unclear whether the unexpected ratings rebound by Nine in recent weeks – which has undermined Seven's ratings for some of its key television programs and which could lead to it having to compensate advertisers for under-delivering on audiences – are a factor in the downgrade. Nine has a monster hit in ‘'The Voice".

Even without the ratings upheaval in the past few weeks, however, if Seven West were expecting an improved advertising environment towards the end of the financial year it was being very optimistic.

There is a nasty advertising recession occurring and, as Ten's James Warburton said earlier this month, limited visibility within the advertising revenue pipeline – advertisers are behaving very defensively and are unwilling to commit money in anything but the short term. Not even Seven Network would or could be immune from that.

Given that the advertisers are responding to the wariness of consumers and the weakness of the economy generally that is a situation unlikely to improve in the short term, even if the Reserve Bank does cut official rates next month.

An imminent ‘'horror budget,'' the looming carbon tax and the instability in Canberra will probably cast something of a pall over consumer and business confidence, potentially until after the next election. This is not going to be an easy period, particularly for traditional media.

Until this week it appeared Seven West could use its dominance of TV and the strength of the West Australian's newspaper franchise to, if not defy gravity, then at least minimise the impact of the advertising recession. It is now evident that it couldn't, which – unless it turns out there is something specific to Seven West behind the downgrade (like advertiser compensation or a blow-out in its AFL programming costs) – doesn't auger well for the other major media companies.