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Katerina Semida

Over the past several years, growth in the $70 billion television advertising industry, a major source of revenue for firms ranging from cable companies to TV stations, has been declining.^[1]On one level, the trend is part of a more general advertising slowdown that has also affected industries such as print media and outdoor advertising. With many major advertisers, particularly in the automotive industry and financial services, falling on hard times, advertising spending is rising slowly, if at all. Factors specific to the television industry, however, have also contributed to this weakness - audience fragmentation decreases the value of each TV spot. At the same time, the rise of digital advertising media (the Internet, cell phones, mp3 players, etc) gives companies cheaper, more convenient alternatives. While cable and broadcast advertising remains a large part of total ad spend - about 25% - 2007 growth rates in all types of television advertising remained at 1% or less, often entering negative territory (see chart below). Internet companies and those television industry firms that have embraced the opportunities offered by the internet benefit from this trend; however, traditional television companies that depend on advertising revenues will see profits suffer if these trends continue.

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Business Drivers

Audience Fragmentation

With the proliferation of cable, broadcast, and satellite channels, video-on-demand, and various digital video recording devices such as TiVo (TIVO), television audiences are becoming increasingly fragmented, with fewer viewers watching each program. For instance, satellite television services provided by companies such as The DirecTV Group (DTV) and EchoStar Communications (DISH) have gained market share rapidly over the past few years and are now used by 27.6% of US households, compared to 24% last year. Cable television, despite enjoying much higher penetration rates, has been losing popularity; it currently reaches 61.3% of households, the lowest percentage since 1990.^[3] Such fragmentation can decrease the value of each advertising spot sold by broadcast, cable and satellite companies. The increasingly frequent tendency of viewers to pre-record programs and then fast forward through advertisements further aggravates this decrease in value.^[4]

Weakness in Advertising Industry

Spending on advertising is highly correlated with general economic growth, which makes such macro factors as oil prices, the U.S. Housing Market, and U.S. Economic Cycles key influences on the advertising industry. Advertising spend in 2007 grew less than 1% over the previous year due to weakness in the housing market and growing fears of a recession. With the effects of the subprime crisis continuing to spread, 2008 may be another weak year. ^[5]

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• Financial services Advertising: Companies in the financial services industry spend more on advertising than those in any other industry, accounting for 12% of total advertising spending. Although advertising in the financial services industry grew faster than overall advertising in 2007 (5% in the first three quarters), the continuing fallout of the subprime crisis has the potential to strongly decrease total advertising spending going forward.^[7]
• Automotive Advertising: The US automotive industry has posted weak results throughout the past several years, a trend that is likely to continue. Rising costs, particularly wages and benefits for the companies' unionized workers, coupled with falling sales and the success of more efficient foreign competitors like Toyota Motor (TM) and Nissan Motor (NSANY), are all taking their toll on General Motors (GM), Ford Motor Company (F), and DAIMLERCHRYSLER AG (DAI). ^[8]Consequently, the big three automakers have decreased their spending on advertising. GM, for instance, spent 22% less on advertising in the first three quarters of 2007 than in the same period of 2006; total automotive industry advertising fell 13.5%. ^[9]
• Political/Issue Based Advertising: Political advertising has proved itself the one bright spot in the industry as the the 2008 presidential election approaches. With many states pushing up their primaries, the campaign ads hit the waves earlier this election season, raising political advertising in 2007 (traditionally, odd-numbered years are weak in the industry.) Additionally, a wide array of viable candidates is running, and, for the first time since 1952, it includes neither a sitting president nor a vice president. This makes competition more intense and makes it necessary for candidates to run more advertisements in order to make their names and policies known to voters. The resulting spike in political ads may soften the decline in television advertising in the short term, but its effect is unlikely to last beyond the election next year. ^[10]

Impact of Internet Advertising

U.S. advertising spending devoted to Internet advertising has increased rapidly over the past few years, growing over 21% in 2006 to reach 7% of total advertising spend. ^[11] In comparison, total advertising spend on broadcast television grew only 10% annually in 2006 and most other media saw only single digit growth. ^[12] The Internet offers advertisers a high level of flexibility in presenting their message to the consumer at a lower cost than traditional 30 second TV spots.^[13]

The Writers' Strike

As the Writers Guild of America's strike drags on into its third month, it is beginning to negatively impact the television advertising industry, compounding its decline. With thousands of writers on strike, existing programs must be taken off the air and new shows in development must be pulled, further shrinking already decreasing audiences. As viewers leave television for new media (i.e. the Internet), advertisers follow. ^[14] And, after finding profitable advertising venues outside of traditional television spots, they may not return to television even when the strike ends.^[15]

Positive Exposure

• Internet Companies: Google (GOOG) and Yahoo! (YHOO) increased their internet advertising revenues by 107% and 95% respectively in 2006. These and other internet companies benefit from the decline in television advertising as companies look to their more innovative advertising options. ^[16]
• Media conglomerates developing internet businesses: Media giants that are tackling the threat of losing audiences and advertising dollars head on may actually benefit from the decline in television advertising as it takes its toll on their less innovative competitors. News Corporation (NWS), for instance, made a big move into internet advertising by acquiring #1 social networking site MySpace in 2005. ^[17] Time Warner (TWX) is another media conglomerate that has positioned itself to succeed despite the decline of television advertising; it was the #1 company in internet advertising in 2006, receiving $8.7 billion in internet advertising revenues.^[18]
• Hearst-Argyle Television (HTV) has developed websites for each of its 29 stations, where it replicates much of its television content. The company also partnered with YouTube to broadcast on 26 of the site's channels last year, the first such alliance in the industry. ^[19]

Negative Exposure

• Cable companies: Large cable companies, such as Comcast (CMCSA), Time Warner Cable (TWC), and Cablevision Systems (CVC), among others, derive significant revenue from cable television advertising. Although all are trying to expand other parts of their business, such as high speed internet and VoIP services, television remains their biggest segment.
• Media conglomerates depending on television advertising: CBS (RBV), which derives close to 70% of revenues from advertising, Viacom (VIA) , and the Walt Disney Company (DIS) all stand to lose from the decline.
• Advertising agencies, both large conglomerates like Omnicom Group (OMC) and Interpublic Group of Companies (IPG) and those that specialize in television advertisements, are seeing their business diminish as demand for TV ads slows.

Footnotes

1. ↑ Thomasch, Paul. "Writers strike could mean big changes in advertising." Reuters News November 11, 2007
2. ↑ Nielsen Media
3. ↑ Satellite Takes Market Share from Cable in U.S. Pay-TV Market
4. ↑ DISCA 2006 10-K Item 1 Business p.I-15
5. ↑ Chaffin, Joshua. "US advertising faces 'another poor year'." Financial Times (FT.Com) December 4, 2007.
6. ↑ Nielsen Media
7. ↑ TNSE Media Intelligence Reports http://www.tns-mi.com/news/12112007.htm
8. ↑ HTV 2006 10-K Item 1 Business p.12
9. ↑ Nielsen Media
10. ↑ Lowry, Tom. "TVs Boomlet from Election '07." Business Week, 3/5/2007
11. ↑ AdAge 2006 Factpack http://adage.com/images/random/FactPack06.pdf
12. ↑ Impact of Internet Advertising http://www.wikinvest.com/concept/Impact_of_Internet_Advertising
13. ↑ Bulkley, Kate. "The digital persuaders." The Guardian 24 September 2007
14. ↑ Thomasch, Paul. "Writers strike could mean big changes in advertising." Reuters News November 11, 2007
15. ↑ Neff, Jack. "Ads That Leave Scripted Shows Might Not Return." Television Week, 12/10/2007
16. ↑ AdAge 2006 Factpack http://adage.com/images/random/FactPack06.pdf
17. ↑ News Corp Wikinvest Article. http://www.wikinvest.com/stock/News_Corporation_(NWS)
18. ↑ AdAge 2006 Factpack http://adage.com/images/random/FactPack06.pdf
19. ↑ Hearst-Argyle Television Wikinvest Article http://www.wikinvest.com/stock/Hearst-Argyle_Television_(HTV)