Clear Channel Outdoor Holdings (NYSE: CCO) is the world's largest outdoor advertising company, providing advertisers with space on billboards, street furniture displays, and transit displays in 50 countries across six continents. Roughly half of its revenues are from its operations abroad, while the other half are the U.S., where a consolidated market and favorable regulations keep operating margins high. The outdoor advertising industry is poised to become significantly more efficient and competitive more directly with other advertising channels--including Internet advertising--as outdoor companies convert their traditional displays into digital displays. The promise of this technology will allow higher quality, faster time to market, and better customer targeting along with much lower operating costs. The company earned $2.7 billion in revenue but incurred a net loss of $868 million in net income in 2009.
Clear Channel Outdoor split from parent company Clear Channel Communications on November 11, 2005, but Clear Channel Communications continues to maintain a 90% controlling share of CCO (and 99% of voting power). The company is highly sensitive to fluctuations in the U.S. economy, as small downturns in the economy lead to large overall declines in ad spending and vice versa. In addition, downturns and upswings in the domestic economy will have dramatic effects for the company's bottom line.
Clear Channel Outdoor was formed when parent company Clear Channel Communications began acquiring smaller outdoor advertising companies, beginning in 1997 through 2002. On November 11, 2005, Clear Channel Communications spun off its outdoor advertising division in an initial public offering, through which 10% of CCO common stock was sold.
CCO derives revenues from selling advertising space on the over 910,000 advertising displays which it owned or operated worldwide as of December 31, 2006. These displays consist mainly of billboards, street furniture displays, and transit displays. In addition, CCO has equity investments in various international out-of-home advertising companies.
CCO owns and operates about 870,000 displays in 50 countries across six continents; while only about 195,000 of these are in the United States, revenues from domestic displays continue to generate the lion's share of CCO profits.
The Americas segment consists primarily of operations in the United States, Canada and Latin America. Approximately 94% of revenues in this segment are derived from operations in the U.S. Favorable regulations and market concentration allows for substantially higher profit margins in outdoor advertising in the U.S. than in the much more competitive European markets.
The top five client categories in the Americas segment by source of revenues were retail, business services, automotive, banking and financial services, and media.
CCO's International segment consists of the company's operations in Europe, Asia, Africa and Australia. Approximately half of revenues in this segment are derived from operations in France and the United Kingdom.
Part of the reason for the discrepancy between the performance of the International and Americas segment is that outside the U.S. outdoor advertisers are often not allowed to own lease permits. As a result, permit owners take a large share of profits through revenue-sharing and minimum guaranteed payment arrangements.
In the U.K., on the other hand, billboard contracts last only a few weeks (versus 6 to 12 months in the U.S.), increasing costs associated with changing content. The English market has also become an oligopoly, with only four major players buying the bulk of ads.
The French operation has undergone restructuring over the past two years due to overcapacity and a flagging economy. In addition, in a lifting of one of the most restrictive marketing regulations in Europe, a new law in France allows retailers to advertise on television for the first time. A ban was originally put in place to protect the revenues of local newspapers and to protect small retailers afraid of the effects of nationwide ad campaigns that big retailers could afford. This development is likely to cause advertising dollars to shift from outdoor advertising to television in France.
The majority of CCO's revenues come from the sale of advertising space on billboards, street furniture displays, and transit displays.
Billboards are highly visible, large displays located along heavily-trafficked major highways (bulletins) or in commercial areas near point-of-purchase locations (posters). Bulletin advertising rates as well as margins are higher than poster rates, and bulletin contract terms are typically longer. Bulletin customers may contract for individual bulletins or rotate among a network of bulletins, increasing their market reach over the length of the contract.
Street furniture displays are ad displays on bus shelters, information kiosks, public toilets, freestanding units and other public structures. They are primarily located in major metropolitan cities and along major commuting routes. CCO generally owns its street furniture structures and is responsible for their construction and maintenance. Contracts for the right to place street furniture displays in public areas and sell advertising space on them are awarded by municipal and transit authorities in competitive bidding processes and these contracts typically last 10 to 20 years. In exchange, CCO pays the municipality or transit authority a fee or revenue share that is either a fixed amount or a percentage of revenues. Street furniture display customers also have the option to rotate displays among a network.
Transit displays are ad displays on various types of vehicles or within transit systems, including the interior and exterior sides of buses, trains, trams and taxis and within railroad stations and airports. As with street furniture, contracts for the right to place transit displays are typically negotiated with public transit authorities or private transit operators in competitive bidding processes which may result in revenue-sharing and guaranteed minimum payments agreements.
Clear Channel Outdoor incurs three kinds of operating expenses:
With a majority of the company's costs fixed, increased revenues to lead to substantially higher operating margins. Decreased revenues, on the other hand, cause margins to dip.
Favorable regulations and market concentration allows for substantially higher profit margins in outdoor advertising in the U.S. than in the much more competitive European markets. Part of the reason for this discrepancy is that outside the U.S. outdoor advertisers are often not allowed to own lease permits. This leaves permit owner taking a large share of profits through revenue-sharing and minimum guaranteed payment arrangements.
In addition, U.K. billboard contracts typically last only a few weeks (versus 6 to 12 months in the U.S.), increasing costs associated with changing content. The English market has also become an oligopoly, with only four major players buying the bulk of ads.
The innovation of digital signage is poised to dramatically increase operational efficiencies in the outdoor advertising industry by decreasing the cost of changing content.
While CCO is a public company, Clear Channel Communications continues to hold 90% of CCO shares and holds 99% of the total voting power of CCO stock. Three Clear Channel Outdoor directors continue to serve as directors of Clear Channel Communications, and four CCO executive officers continue to serve as executive officers of Clear Channel Communications. Clear Channel Communications elects all of the members of CCO's board of director and reports CCO revenues as its own. Future sales of CCO stock by Clear Channel Communications could have a significant negative impact on share prices.
Recently introduced to the outdoor advertising industry, LCD and LED digital displays allow for for higher quality, faster time to market, and better customer targeting. They also promise to significantly cut costs. For a higher initial investment in the displays, digital displays will cut industry operating expenses by allowing outdoor advertising companies to update displays at the click of a button rather than through regular and labor-intensive on-site visits. Messages can also be changed at different times of the day as well as instantaneously updated for price changes. CCO has already installed digital displays in the majority of its major markets.
The ability to update ad displays quickly and frequently will herald a transition from a business model based on selling display space to one based on selling time on multiple displays. It also has the potential attract more types of advertisers to outdoor advertising as well as to increase display utilization rates. In addition, with the new innovation outdoor advertisers are likely to begin following the lead of television advertisers in maximizing revenues by "day-parting" their advertising slots and rates for different times during the day.
The majority of Clear Channel Outdoor's revenues come from billboards placed along the highway, and ad rates for these billboards are determined by the amount of traffic that passes by them. Population growth and increasing drive times are CCO's key growth drivers. Thanks to urban sprawl, the search for cheaper housing outside of major metropolitan areas, and America's love of cars, commuters are spending more time in their cars than ever before.
Clear Channel's main source of revenue, advertising, is highly correlated with and sensitive to GDP growth. Small downturns in the economic performance lead to large overall declines in ad spending, while ad spending tends to increase sharply during boom times.
In addition, revenues in the outdoor advertising industry are highly seasonal, following consumer spending trends. Both the Americas and International segments have historically experienced their worst performance in the first quarter and the best performance in the second and fourth quarters.
Customers seeking to get the most bang out of each buck into advertising want measures of the relative "impact" of their ads and make decisions about where to place their money based on metrics that help determine the cost per thousand impressions (or CPMs). Currently, advertisers buy outdoor display space based on traffic counts provided by the Traffic Audit Bureau, which measure gross exposure to a particular display but do not measure active viewing; thus this metric serves as only a rough measure of actual outdoor displays' advertising impact on their audience. This kind of impact measurement is similar to newspapers and television stations, which counts gross circulation or viewer numbers. Internet advertising, on the other hand, has the ability to yield superior measurement detail provided by audience metrics such as click-through rates, impressions, conversions and other metrics.
A new system being rolled out that would provide advertisers with a more accurate measure of impact has the potential to attract more advertisers and more money from existing advertisers. The Traffic Audit Bureau, which measures traffic circulation, will begin providing not only demographic data but also "eyes-on" data that would allow advertisers to know who is actually viewing their ads. This greater amount of detail may make outdoor advertising more competitive vis-a-vis traditional media and bring it closer to the measurement provided by the Internet.
The outdoor advertising industry owes its profits in good measure to the 1965 Highway Beautification Act, which limited billboards to major U.S. highways and industrial areas regulates the locations of outdoor displays in the U.S. The limit on billboard placement has created large barriers for new entrants into the highly consolidated market, leading to high billboard profit margins that analysts and companies alike agree would not exist under more competitive conditions such as those seen in Europe. On the other hand, some states have banned billboards altogether.
U.S. federal, state and local regulations play an important role in shaping the outdoor advertising industry, and any changes could make a significant financial impact on CCO. In the future, digital billboards may be regulated because of their brightness or power to distract highway drivers. In addition, several jurisdictions in and outside of the U.S. have imposed taxes on gross receipts of outdoor advertising revenues, and new jurisdictions may also seek to do so.
International regulations similarly affect CCO's operations. The Law of December 29, 1979 in France, the Town and Country Planning (Control of Advertisements) Regulations 1992 in the United Kingdom, and Règlement Régional Urbain de l’agglomération Bruxelloise in Belgium regulate the extent to ad placement in rural areas, the hours during which illuminated signs may be lit, local authorities must consent to placing signs in certain communities. Regulations restricting outdoor advertiser's ownership of lease permits keep profit margins slim in the International segment.
According to the Outdoor Advertising Association of America (OAAA), there are over 565 companies in the outdoor advertising industry operating over 850,000 outdoor. Nevertheless, the domestic outdoor advertising industry is highly consolidated, with a few large companies operating in multiple markets and the rest operating a limited number of displays in a handful of markets.
The top three players--Clear Channel Outdoor , CBS (through its CBS Outdoor division), and Lamar--together take in over 85% of industry revenues. The Highway Beautification Act of 1965 limits the number of new billboards that can be built and makes market entry difficult, giving current market players pricing leverage.
From a global perspective, French company JC Decaux S.A. is the number one outdoor advertising company in Europe, and the number two player worldwide after CCO.
In addition to other outdoor companies, outdoor advertisers compete with other media such as television, radio, the Internet, and newspapers. According to the Outdoor Advertising Association of America, outdoor advertising revenues in the United States increased 7% per year over the past decade. While the domestic supply of billboards cannot increase significantly in the near future barring an unlikely easing of regulations, there is still much room for growth as outdoor grabs advertising expenditure market share from other forms of media.
Outdoor advertising has only about a 2% share of total domestic advertising revenues, significantly lower compared many other countries: outdoor comprises 12% of total advertising spending in France, 10% in the UK, and 8% in Spain. In the U.S., outdoor advertising boasts substantially lower costs per thousand impressions (CPMs) for its advertisers than competing media, with outdoor display CPMs ranging on average between $1.50-$5.00, while media like network TV have CPMs close to $25. With the addition of digital signs and more accurate measurements, outdoor advertising may become even more attractive.