TV’s ad revenue stream faces crosscurrents
A year that began with a bang was interrupted by a quake, and now is ending with a whimper. Next year is projected to be better — but not for everybody.
The March earthquake and tsunami in Japan, which put a months-long halt to automobile production, combined with a moribund job market and a steady drumbeat of bad economic news to slam the brakes on television advertising sales.
Early in 2011, economists predicted that TV advertising revenue in the U.S. would increase 6% this year to an all-time high. But during the summer the TV ad market cooled considerably, with the pace of growth slowing to less than 2% for the year. TV ad revenue is expected to end the year at nearly $68 billion — still a record, but the slowdown is a reminder of TV advertising’s vulnerability.
“The ad market has been slowly drifting downward over the course of the year,” said Jon Swallen, senior vice president of research at Kantar Media, which monitors advertising spending. “Traditional media sectors are lagging, experiencing softness, which suggests broad-based caution on the part of advertisers.”
Seismic shifts in spending continue to roil the media industry. Those changes come on top of the recession, which prompted advertisers to reduce spending. Some of the biggest ad buyers — retailers, automakers, car dealerships and home sellers — have been particularly hard hit, and few are predicting a speedy economic recovery.
Overall ad spending in the U.S. is expected to grow a meager 1.8% this year to $144 billion, Swallen said. MagnaGlobal recently cut its 2012 forecast to 2.9% growth in total ad spending, down from the nearly 5% that the agency was predicting just a few months ago.
During the first quarter of 2011, media companies that owned TV networks and prominent cable channels were riding high and assuming the recession was in the rearview mirror. Advertisers were paying 25% premiums over last year’s rates to buy commercial spots that were still available. TV network chiefs figured they would reap double-digit rate increases for their commercial time when the annual television ad sales season revved up in June. The networks sell nearly 80% of their commercial time for the coming season during the “upfront” TV advertising market.
But those heady days came to an end in March when a magnitude 9 earthquake and devastating tsunami hit Japan. The quake damaged car factories, slowing production of major models from Honda Motor Co. and Toyota Motor Corp. Supply lines also were interrupted, leading to a shortage of parts. With fewer cars to ship to the lots, Japanese companies slashed their ad purchases.
“There was a slowdown in car sales and so other automakers did not advertise as aggressively,” Kantar’s Swallen said. “They figured they didn’t need to advertise as much to meet their sales quotas.”
By late summer, the Japanese car inventory had returned, and auto companies were kicking into gear their big-budget marketing plans. Then came devastating floods in Thailand.
“Now, those floods are threatening to severely curtail production from Japanese automakers because they source a lot of their parts from Thailand,” Swallen said.
The sluggish economy also continues to take its toll. Spooked by the weak job market, stagnant wages and falling home values, consumers have not been spending as freely. Retailers, in particular, have been feeling the pinch.
Hollywood movie studios, traditionally heavy spenders, have been cutting back too — but for a different reason. Major studios have been releasing fewer big-budget films in recent years, so they haven’t needed to spend as much on marketing. Walt Disney Co.’s studio, for example, is releasing 14 films this year, down from 19 released in 2000 and 32 released in 1995, according to box-office tracker Hollywood.com.
“It’s a very complex market,” said Lisa Herdman, director of national programming at RPA, a Santa Monica ad agency. “There is not one thing that is driving it, but it seems that the root of all of this can be tied back to the consumer confidence level.”
Wall Street analysts have been monitoring the performance of Disney, CBS Corp., Viacom Inc. and other large media companies, searching for worrisome trends.
Lower ratings for TV programs have become a concern, said Doug Creutz, media analyst at Cowen & Co. Although networks are commanding higher rates for their commercial time compared with last year, ad revenue is shaping up to be flat or down because programs are drawing smaller audiences.
For the first seven weeks of the TV season, Comcast Corp.-controlled NBC is averaging 7.3 million viewers a night — down 9% compared with a year earlier. Several new NBC shows have bombed, and once-trusty veterans, including “Law & Order: SVU” and “The Biggest Loser,” have bled more than 1 million viewers.
“Without football, NBC’s ratings would be approaching basic cable channel levels,” Creutz said.
David Campanelli, senior vice president of national broadcast for ad-buyer Horizon Media Inc., said, “CBS is in the strongest position of the broadcast networks based on their current prime-time ratings performance. And sports programming has been strong and reliable. Sports have become a safe haven for advertisers.”
CBS is averaging 13 million viewers a night, up 2% compared with the first seven weeks of last season. Disney’s ABC is fetching 9.66 million viewers in prime time, down 1%.
News Corp.’s Fox Broadcasting, helped by a World Series that stretched seven games, boasts an average of 10 million viewers a night, a 22% increase over the same period last year. However, the network over-estimated the size of the audience for two of its big bets, the “X-Factor” singing competition and the sci-fi family drama “Terra Nova.” Because those shows have delivered lower ratings than promised, Fox now must compensate advertisers by giving them additional commercial time — spots the network could otherwise have sold.
For some media companies, hope is on the horizon. Next year will bring a bounty of political advertising dollars as candidates and interest groups spend as much as $2.4 billion to promote themselves and their causes.
“We think 2012 will be the biggest year ever for political advertising,” said Vincent Letang, director of global forecasting for MagnaGlobal, an arm of advertising behemoth Interpublic Group.
Coverage of the Summer Olympics in London should also generate at least $600 million in ad spending, Letang said. The concurrence of the Olympics and political contests — including a presidential election that could generate as much as $1 billion in spending — combine to create the “quadrennial effect,” which occurs every four years.
Still, that $3-billion bonanza will not be spread evenly over all media sectors, nor will it help those suffering the most. NBCUniversal, which has the TV rights to the Olympic Games, will rake in the Olympics money. The bulk of the political campaign cash will flow to media companies that own TV stations — especially those in battleground states such as Nevada, Colorado, Ohio and Florida. Newspapers, magazines and other print media, which have been under assault as advertising dollars migrate to the Internet, will be relegated to the sidelines.
A key question heading into 2012 is whether political candidates will follow the broader advertising trend by scaling back local TV commercial purchases to put a larger chunk of their money on the Internet.
Overall, Creutz said, the U.S. advertising market for 2011 is still below 2007 levels, when spending hit $149 billion. Since that time, he said, Internet advertising has soared, but the amount spent on local media — including TV stations, radio, newspaper and direct mail — has decreased by a much greater margin.
“Local media has been crushed,” Creutz said. “The Internet is replacing local media, but it is not replacing it dollar-for-dollar.”
