Credit Suisse: The Future of TV Advertising is Below-the-Line!

TV is Poised for Greater Growth

Embarking on a full analysis of the future TV media market, Sheikh started with the question -- What is the basis of competition between the advertising product offered by all of the media and technology platforms out there? "In the early 20^th Century it was reach," he noted. "Then with the advent of TV it was engagement. And since the advent of internet advertising in 1995 it has become relevance," as media becomes more able to target specific audiences.

With the advancement of technology like machine learning, the ability to target audiences becomes even more precise. Because digital can make full use of this technology, the general consensus is that the growth of digital advertising is projected to be robust by taking share from other budgets. Does this come at the expense of linear TV? According to Sheikh, no, and this is where Credit Suisse deviates from the general financial wisdom. "Investors think that digital growth will inevitably come at the expense of the growth of TV," he remarked, "We disagree with this view."

While he projects that digital growth will continue to be strong with projections of +60% in the US by 2030, TV will also grow even if digital share doubles. "In fact, we think that TV ad growth can accelerate from a 2% per annum we have seen over the last three years to 5-7% between now and 2030," he shared. MyersBizNet's forecasts agree, projecting growth in total digital advertising/marketing from $128.6 billion in 2016 to $244.9 billion in 2020. MyersBizNet forecasts broadcast network TV ad spending will increase from $20.1 billion in 2016 to $22.5 billion in 2020; cable network ad investments will increase from $28.4 billion in 2016 to $31.1 billion in 2020.

Where will this growth come from? Since early in this decade, when Myers began forecasting media and marketing budgets, he has been tracking a shift from below-the-line promotional budgets to above-the-line advertising budgets, driven by digital media and performance-based metrics. MyersBizNet's most recent forecast projected a shift of $63 billion annually from promotional (shopper) budgets to advertising budgets comparing 2010 to 2020. He has reported that 100% of advertising growth in this decade results from this shift, as total marketing budgets are flat, and down nearly 15% when factoring inflation.

MyersBizNet data, which incorporates 52 media and marketing categories, reports that 35% of total marketing communications spend in 2016 was invested in advertising -- $200.3 billion of a total $586.7 billion. Credit Suisse data, which is less comprehensive than Myers', argues that spending on all media is about 45% of overall marketing spend. The other 55% is spent on below-the-line marketing like price promotion and sponsorship.  Sheikh believes that advertisers can shift their investment from below-the-line to fund growth in digital and other media. And with continued innovation in the TV market, it will become easier and more precise to target the relevant consumer via dynamic ad insertion and linear TV. "Both are moving TV into the sweet spot of ad target positioning," he noted. And by combining reach with relevance, "the ability of the TV product to recapture market share is structurally improving," he concluded, with targeted linear in particular fueling this growth.

OpenAP Will Help Facilitate TV Growth

Targeted linear TV advancements like the recently announced OpenAP will help pave the way towards the projected TV growth spurt. OpenAP, according to Sheikh, "gives advertisers a gateway to advertising on linear television" by enabling advertisers and networks to use data to more narrowly target subsets of relevant consumers in individual shows beyond the Nielsen data. "This will deliver a much more efficient linear ad feed, which reduces the waste in reaching people when the ad is not relevant," he added.

Sheikh explained the process by an example of reaching truck buyers. Whereas previously the advertiser would purchase on age and demo across a selection of shows on a network, the ultimate conversion would be relatively low. "The same sales goal could be achieved by targeting a much smaller subset of potential truck buyers like current truck owners whose lease is about to expire," he posited. The smaller subset of a highly targeted relevant group of consumers can lead to the same (or better) sales outcome.

Traditionally it was impossible to target such a small group, but now with the advancements of technology and the ability to combine first party (such as customer lists) and third party (such as lease expirations) combined with syndicated data (such as set top box or Nielsen), advertisers can buy more efficiently with less waste and networks can maximize the value of their inventory with higher CPMs and fewer makegoods.

"OpenAP enables an advertiser to standardize the definition of their audience across all of the networks of Fox, Turner and Viacom so they don't have to go through the same process three times, enabling them to buy a guaranteed narrow target audience rather than a broad gender / age Nielsen guarantee," he concluded. While, at this time, nothing approaches the highly focused narrow targeting of audiences of digital, this does enable advertisers to dramatically reduce waste.

Conclusion

For those investors who may be concerned with the future strength of media stocks, the advice from Credit Suisse is don't be. Looking ahead to 2030, inventions like IoT, wearables and smart cars will make it increasingly easy to reach and target consumers. While this may hurt old time marketing like direct mail and telephone marketing, those ad dollars will flow to digital and … yes … TV. In fact, Sheikh believes that "TV advertising growth will accelerate." So, as for me, I am sticking with my media stocks and envisioning a cushy retirement.

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