Ad Market Strong but Slowing -- Pivotal Research

First Quarter 2016 was another strong quarter for advertising in the United States with industrywide growth among media owners of around 6 much as we saw during 4Q15 However underlying economic growth suggests an annual pace of growth that should be closer to 1 during the current year suggesting an eventual slowdown and the possibility that recent quarters will represent difficult comparables in future periodsWith Disney reporting their earnings results yesterday virtually all major media owners have now reported On our preliminary analysis we think the US media owners collectively grew their ad revenues by around 6 during 1Q16 on a normalized basis Our normalized definition excludes the impact of political and Olympic advertising to better correlate the state of the advertising market to the economy Historically we have found that personal consumption expenditures PCE and industrial production IP are the two variables that in combination have the highest correlation to the advertising marketThe first quarteramp8217s pace of growth was similar to what we estimate occurred during the fourth quarter of 2015 Combined we note that the growth observed over the past half year substantially higher than what we would expect to see given the growth of PCE and IP at the present time In fact our model suggests that advertising should be growing at a pace much closer to 1 given current economic conditions Nonetheless it seems unlikely that we will see a deceleration of this nature until much further into the second half of the year if at all during 2016By medium we estimate that national television grew by 5 to 6 during 1Q16 slower than the 7 growth rate we think occurred during 4Q15 but still quite rapid amp8211 especially considering the permanent secular decline that many observers believed the medium was experiencing around this time last year Local cable likely performed similarly while local broadcast was up by low single digits both excluding political Internet advertising was by far the fastest growing major medium seemingly slowing by a couple of percentage points during 1Q16 vs 4Q15amp8217s faster pace but still rising by around 20 yearoveryear At the other extreme newspapersamp8217 print advertising revenues appeared to fall by low double digits once again both at national and local levels while national magazines likely declined by mid to high single digit rates Outdoor advertising and radio both likely came in flattish for the quarter One notable amp8220traditionalamp8221 print medium was direct mail as the USPSamp8217 standard mail revenues rose by 32 during the quarterWe have also looked at spending trends from individual advertisers for additional color Specifically we have focused on the 200 largest marketers in the United States which consistently publish marketingrelated expenditures in their quarterly filings yielding 43 total companies From this group we can see that while revenues generally increased in the first quarter advertisingrelated line items including sales and marketing expenditures when advertisingspecific line items are unavailable increased as a percentage of revenue likely producing much of the spending increases that media owners benefitted from During 1Q16 the median advertiser allocated 90 of revenues to a marketingrelated line item vs 84 during 1Q15 83 during 1Q14 and 81 during 1Q13 In addition we have previously noted the presence of new marketers outside of this group including app developers and pharmaceutical advertisers as well Newer advertisers such as Google Amazon and Apple are also large marketers to note as each promotes new products and drive a significant share of the industryamp8217s growthWhile marketers may continue to increase the share of revenues they allocate to marketing going forward and new categories may continuously emerge we do not consider the rates of growth observed during 1Q16 or 4Q15 to represent anything like a amp8220new normalamp8221 for advertising We continue to expect low single digit growth rates to remain as a longterm rate of growth for paid media advertising on an ongoing basis While growth during any given period may randomly be above or below such levels our overall assessment is that recent rates will likely produced difficult comparables for the industry during future points in timeFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE Ad Update 51116pdfThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers amp160amp160

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Ad Market Strong but Slowing -- Pivotal Research

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Brian Wieser

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