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Tuesday, September 29, 2009

Will Media Billings Come Roaring Back in 2010?

I received an e-mail from a long time friend a few weeks ago. He and I discuss markets of all kinds regularly. Our topics range from stocks to broadcast inventory to commodities to emerging markets. His question was: Are you going to start nibbling at broadcast oriented stocks now and make a big killing when they come roaring back in 2010?

Fortunately, the old fellow was not talking with me. I sent back a measured response and then called two days later. We basically agreed to disagree. His take is that the local broadcast marketplace is like a coiled spring ready to come unleashed once the “long recession” is officially over. My take has a bit more nuance; hence this post.

All of us are hoping for a recovery in 2010. Some say that it has already begun. P&G and Toyota have both promised to hike ad spending next year which is really encouraging. And, Microsoft says that they will attempt to take on Google with their Bing search product by spending $100 million+ of ad dollars in some venues that need the funds badly.

But the coiled spring analogy won’t apply in my opinion next year. Each medium will carve out a different path over the next several years and some will not follow the past pattern of economic recovery.

Historically, TV, particularly Spot TV, always did lead the charge into recovery. During expansions they always out performed other media types. Even during the horrible inflation of the Carter years (1977-1981), Spot TV usually increased billing by 3% or more over the increase in the Consumer Price Index (CPI). So they grew in real terms even when all others only grew nominally; a neat trick for sure.

Here is how we see things shaping up by medium over the next few years:

Internet—no surprises here and over the next few years we see low double digit increases in billing in the 11-13% range compounded. By some measures, Internet advertising has just passed radio in total billing and next year it looks as if it will hurdle over magazines as well.

Mobile—this is easily the fastest growing medium with billing set to grow by 30% and double every 30 months or so. Remember, they are starting from a low base so billing can double and double again over the next five years and they still will not be a major player.

Cable—the growth will continue both nationally and locally. Good sales organizations at both levels have positioned them for good growth even if the recovery is muted. We would forecast high single digit percentage growth here which is great if consumer prices stay flat for a while longer. Some of the national players work very hard to customize efforts for you—they have finally arrived at true integrated marketing communications. Panel members give Discovery Networks high marks for imagination and multi-platform offerings even to modest advertisers.

Outdoor— more than one panel member says there are signs of comeback here in some markets. Increasingly, people are catching on to its unique position as the last mass medium. As I travel, I see lots of open boards so “Let’s Make a Deal” may prevail for a while longer. While growth will not be as dynamic as cable, 5% growth per annum could be achieved easily.

Newspaper—Times are tough and will get tougher. Publishers are just not getting religion and the tidal wave of Internet growth and demographics is against them. Don’t be surprised if papers continue to close as the economy improves. Ad revenue declines of close to 10% compounded will take down some big names in the years to come. A shame but it will take a mass movement to Kindle or similar products to save some historic newspapers.

Magazines—some specialty titles may do okay but billings will drift down in the 5% range year to year for a while.

Radio—with car dealers closing all over and retail shaky as consumers pay down debt, the picture here is grim in some markets. A return to local ownership may breathe life into some stations in selected markets where sales people hustle and long standing relationships continue to be nurtured. People from coast to coast tell me that this medium is on the ropes but has promise with the right management and realistic expectations. Long term, they are losing lots of young people who get their music elsewhere which is a big issue. Overall, look for sales decreases to continue in the 3-4% range nationally.

TV—This one is tough. Some people will come back to TV next year. There is no way there will not be a bounce up from the horrible first quarter of 2009. But, offsetting that, hundreds of local car dealers no longer exist. They were instrumental in the “coiled spring” recovery years of past business cycles. If you do a proper Discounted Cash Flow (DCF) analysis of broadcasters the picture does not look good. Some say billings will decline by a couple percent per year going forward and they will back to mid-1990’s revenues in several years. This is way too linear for me. It is not so simple and there may be a downward shock or two. My analysis does not take into account the sophisticated number crunching of a Warren Buffett or a David Dreman who labor long and hard over revenue growth rates, depreciation, interest payments, taxes, and changes in working capital. But what I do see are two things that can cause a big drop in a few years:

1) Time Shifting Devices (TiVo et al) are now at about 35% penetration nationally. When TiVo and other DVR’s cover 40% of the US TV household base, some advertisers will abandon the TV ship including national network broadcast.
2) As DVR penetration grows beyond the 40% mark in individual markets, TV will stop working or paying out for many people. Broadcasters will have to cut rates and reach potential will accelerate its downward spiral of recent years.

This will not happen everywhere. Some TV executives will run more DRTV (Direct Response TV), cut staff even more and bring new players into their medium. Others wedded to the old model will get clobbered. And, a few will benefit from network TV declines by being in a top 30 market and scooping up money that used to be spent in the network upfront marketplace.

Right now, network TV has not been hurt yet to a big degree as advertisers do not seem to know where to put their money. When a few big players cut back and have good years, the logjam will break and they will never be the same again.

How about ad agencies? Want to bet your kids tuition money on WPP or Interpublic? Larry Haverty, a mutual fund manager who follows media for the Gabelli Group put it well—“I would prefer to bet on companies selling stuff, rather than those specializing in the art of selling stuff.”

As always, there will be opportunities for the bold, the nimble, the tech savvy, and the lucky. Be prepared and realistic and you may come out of it just fine.

If you would like to contact Don Cole directly, you may e-mail him at doncolemedia@gmail.com

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