In 2003, expect Canadian media and broadcasting companies to reap benefits from the restructuring initiatives and cost-cutting efforts undertaken in 2002. I believe media and broadcasting companies are poised for solid organic growth in 2003 and that there are attractive investment opportunities in the sector. Look ahead to improved operating margins and growth in earnings for 2003. Three key expectations for the media and broadcasting industry in Canada are:

1. Moderate advertising growth

2. Pickup in industry consolidation

3. Above-average growth for specialty channels

Moderate ad growth expected

Advertising growth in Canada should be in the range of 3% to 4% in 2003. Historically, advertising growth has moved in tandem with GDP growth. However, advertising growth tends to be more sensitive to the cyclical nature of the economy. Our advertising outlook assumes relatively moderate economic conditions, i.e. GDP growth of 2% to 3%.

Anticipate more robust growth in 2004 as the biannual stimuli of the Olympics and the U.S. governmental elections drive advertising growth. Returning to 2003, we do acknowledge the current overhang on the advertising market, which includes the economic uncertainty, shaky consumer confidence and current geo-political conditions. The deterioration of any, or all, of these elements would have seriously negative consequences on the health of the advertising market. Nonetheless, we believe our advertising outlook reflects moderate and pragmatic assumptions regarding these external factors.

Total television advertising growth is expected to outpace that of the general advertising market and to increase its share of total advertising spending, at the expense of other non-broadcast mediums. This above-average growth will be driven by the continued development and penetration of the specialty television market.

Industry consolidation returns

Following almost two years of relative inactivity on the merger and acquisition front, expect industry consolidation to reappear in 2003. Stronger financial positions, relative low valuations and the desire to augment existing asset portfolios will provide the catalyst for increased industry consolidation. Companies will look to build on their core asset genres and increase the geographical scope.

I believe companies will concentrate on developing horizontal integration, as opposed to vertical integration (i.e. companies will tend to avoid building their content production capabilities).

Expect the most active market to be specialty channels, both analogue and digital.

In the U.S., the imminent sale of DirecTV will pioneer the consolidation trend. Following the collapse of its US$18-billion merger with EchoStar in 2002 (due to the failure to acquire regulatory approval), DirecTV remains one of the hottest assets on the media market today. Similar to the Canadian market, specialty channels (i.e. cable channels) are among the much-sought-after assets in the media market. In fact, AOL Time Warner is expected to spin off its cable assets in an effort to extract more value from its cable assets.

Another catalyst providing further stimulus to the consolidation market is the possible loosening of ownership restrictions following the Federal Communications Commission’s review of its current media ownership rules. Enabling cross-ownership of media assets and eliminating the duopoly rule are examples of the regulations under review and which, if repealed, would promote industry consolidation.

Above-average growth in specialty revenue

Expect specialty television to continue to increase its share of total television advertising spending. We are anticipating specialty channel advertising growth in the range of 6% to 8% in 2003. While specialty television in Canada has managed to increase its share of the total advertising market from 9% in 1997 to 17% in 2001, this pales in comparison to its 48% share of total Canadian viewership. There continues to be significant ground to make up, in terms of specialty channels closing the gap between viewership and advertising share.

As a result of the success of specialty television, advertising rates are moving closer in-line with conventional television. Expect these higher rates, combined with the continued advertising shift from conventional television to specialty television, to drive above-average growth in 2003.

An attractive advertising profile, steady subscriber revenue and strong operating margins are key attributes of specialty channels, which make them one of the most-sought-after assets in the Canadian broadcasting and media marketplace. In 2001, specialty channels generated roughly 64% of their revenue from subscription fees, making the channels less vulnerable to the cyclicality of the advertising market. Specialty channels (excluding the new digital start-ups) generate an average operating margin of 19%, compared with 16% for their conventional counterparts. The major players in the specialty channel market are AAC, Astral Media, Bell Globemedia, CHUM and Corus. *

(All expressions of opinion in this column reflect the judgment of the research department of Raymond James Ltd. or its affiliates at this date and are subject to change. Rhonda Dyce is a professional analyst and opinions expressed here do not necessarily reflect those of Playback.)