For decades, advertising and media companies could reliably depend on ad spending to track consistently with gross domestic product. During recessionary periods, advertising has been a lagging indicator. Marketers maintained their ad spending until sales declined for two quarters and then held back on spending increases until six months after the recovery began.
It's clear today that investors have little appetite for media stocks. Even investors who are willing to make long-term plays have no impetus to focus on media until the general economy is in a clear recovery mode. Based on historic patterns, they will then have six months to focus their attention on media-dependent companies before these companies experience steady revenue gains. The pattern, based on precedent, should be:
1. General economy begins to recover;
2. Investors refocus on media stocks that are best positioned to benefit from an ad spending uptick;
3. Selected media and agency holding company stocks experience small gains;
4. Ad economy recovery begins;
5. Media stocks begin steady growth phase and increases track along with GDP gains.
This is good news for the ad industry and is the foundation of assumptions upon which most media companies and investors are relying. There is a huge "but…" in this scenario, which I outline in this report, along with an important opportunity.
As a senior financial industry analyst who follows media stocks closely advised me recently, the nation's economy will inevitably experience significant (8% to 14%) inflation beginning in 2010 or, at the latest, 2011. Advertising spending, therefore, should increase at least half of that amount – projecting 4% to 10% growth annually in 2011 and beyond before the economy stabilizes. Into the foreseeable future, this analyst believes, ad spending will track with gross domestic product and – therefore – will grow at an average annual rate of two to three percent adjusted for inflation. On a real dollars basis, therefore, growth in 2011 and 2012, adding in inflation, could potentially be in the double digits.
The danger, of course, is that traditional patterns have been broken in this great recession of 2009 and the recovery assumptions no longer hold true. For the past sixty years at least, except during short recessionary periods, advertiser demand has exceeded media inventory supply. Even as the amount of advertising inventory has grown exponentially, demand has outpaced it. For the next sixty years, however, it's apparent that advertising supply will exceed demand.
Media continue to splinter into smaller and smaller pieces, and even a successful broadcast network TV series typically reaches less than 3% of the 18 to 49 audiences advertisers crave. While those media that are able to maintain reasonably large audiences with quality content will achieve market growth as the economy turns, the vast majority of media companies will be confronted with the Sophie's Choice of whether they hold the line on pricing and sell less inventory, or give in to market pressure and drop rates to gain market share. The reality for most is that they will be unable to increase prices and will sell less.
Investors, however, are unlikely to fear the grim reaper that many media companies will be forced to confront in the next decade. Investors will follow the patterns and, as the economy begins to improve, they will turn their eyes toward the media stocks they are ignoring today. The most attractive media companies, those with well-branded content, loyal audiences, stable assets and minimal debt load will be appealing as investors anticipate an ad spending rebound. The stocks of Disney, Viacom, Gannett Yahoo, Time Warner among others will suddenly rebound.
The challenge for the management of these companies is to prepare today for this rebound, which will last for 12 to 36 months before the bloom will be off the rose for media once again. During this short-lived recovery period, media companies must be prepared to invest in business models that are NOT advertising dependent. In addition to the obvious moves to rebuild direct consumer spending for content, they will need to target marketers' non-advertising marketing budgets. These include consumer sales promotion (coupons, sweepstakes, incentives), trade promotion, merchandising, licensing, event marketing, cause-related marketing, public relations and other "below-the-line" investments. To accomplish this, these companies must invest NOW in building social networks around their content, establish legitimate user-generated content initiatives, integrate their content/editorial development process with their sales initiatives, involving agencies and marketers in content commitments instead of selling only their advertising reach and distribution data.
Jack Myers consults with media companies, agencies and marketers. He can be reached at email@example.com