You've got profits!

Time Warner turned a profit of over $1 billion last quarter, which was in line with expectations. I see their well-traded 2012 issue 1bp wider at +113, supposedly because their debt load keeps growing. The company prefers to buy back stock rather than reduce debt and/or keep cash on balance sheet. They have bought back more than $9 billion in stock in 2006 while their net debt has increased from $18 billion to $22 billion. Clearly a weakening credit.

Media bonds have been clear underperformers. The graph below shows the change in spreads on 10-year bonds for four big median companies -- CBS, News Corp, Time Warner and Viacom (blue lines) versus the Merrill Lynch Corporate Master. Higher spread = badness.

So besides News Corp, everything is 8-18bp wider than corporates in general. On a 10-year bond, 10bp of widening is equivalent to a 0.75% price loss.

Probably more so than any other broad industry category, media companies face a direct challenge from changing technology. Big media needs mass audiences. But people are increasingly splintered on the type of entertainment they seek. Whereas once you could assume all of America was watching the same TV show or had seen the same movie, we now have more entertainment options. Not just more cable channels, but also video games and internet portals. Also, whether the much ballyhooed "long-tail" theory turns out to be right or not, its clear that the decreased cost of both production and distribution is and will result in even more entertainment options in the future.

Media is now scrambling to provide more diverse content, but it is questionable whether big media can make a format like YouTube provide enough profit to impact their gigantic infrastructure. Big media needs big ad dollars to survive. But big advertisers have been hesitant to advertise on individual YouTube or MySpace sites because of concerns about the content. So Pepsi won't buy blanket advertising space on YouTube for fear that their ad would show next to some racy video, or even a sketch lampooning Pepsi products. With no control over the content, there is nothing to prevent that from happening. If big media puts too much control over the content, it will kill what makes YouTube and MySpace so popular.

For the curious, Disney bonds have held in during this period, but Disney is traditionally a VERY VERY VERY VERY tight bond versus the media universe. As one trader once said to me, "Who wants to be short Mickey Mouse?"