Advertising Update: Strong Market Up By +5% -- Pivotal Research

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BOTTOM LINE: 2Q16 was another strong quarter for advertising in the United States, with industry-wide underlying (ex-political and Olympics) growth among media owners of around +5%, slower than the nearly +7% growth rates observed in both of 1Q16 and 4Q15, although well above the nearly +4% growth observed during all of 2016. However, we also note that on our estimates, absolute year-over-year gains equated to $2.5bn in the quarter. By contrast, Google and Facebook combined to generate somewhere between $2.5bn and $3.0bn in gross revenue gains – equal to more than the entire industry's growth by themselves. Of course, this masks gains in some places (as with national television, which grew by ~+3% year-over-year) and declines elsewhere (as with most kinds of print, which declined by more than double digit rates).

Media owners grew ad revenues by +5% in 2Q16.With Disney reporting their earnings results on Tuesday, 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 +5% during 2Q16 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.

National TV grew, but by less than the industry average; digital dominates again.By medium, we estimate that national television grew by ~+3% during 2Q16, slower than the nearly +6% growth rates we think occurred during 4Q15 and 1Q16, but not bad considering the permanent secular decline that many observers believed the medium was experiencing around this time last year. Local cable and broadcast were somewhat weaker, probably down slightly on an ex-political basis, although in total not up by as much as might have been expected with relatively soft political during the quarter. Internet advertising was by far the fastest growing major medium. We won't have firmer estimates until the IAB reports their estimates for the quarter in the fall, but we can point to around +56% growth for Facebook during 2Q16 vs. 58% in 1Q16 (note that both figures reflect ad revenues apportioned to advertisers based on figures provided in the company's 10-Qs rather than to users, which is the basis against which the company provides figures on their earnings press releases) and growth that likely accelerated for Google in the low 20 percent range year-over-year. These gains more than offset relatively significant deceleration for other sellers of digital advertising in the quarter. Our estimates for growth in domestic ad revenues generated by Facebook and Google – somewhere between $2.5 and $3.0 billion – equated to more than all advertising growth across the industry in the United States, illustrating the dominance of those two companies.

Print was weak again, but radio and outdoor may have grown modestly. At the other extreme, newspapers and magazine publishers' print advertising revenues appeared to fall by low double digits once again. Outdoor advertising and radio both appeared to accelerate slightly in the quarter, although both at low single digit levels. Direct mail decelerated in the quarter as the USPS' standard mail revenues fell by -2% during the quarter.

Long-term expectations for advertising growth should remain at low single digit rates.While 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 recent quarters to represent anything like a "new normal" for advertising. We continue to expect low single digit growth rates to remain as a long-term 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 produce difficult comparables for the industry during future points in time.


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