Media and Internet -- Tectonic Shifts

We are updating our US and Global advertising models to incorporate further structural shifts towards digital media as well as some global macroeconomic softness. Not surprisingly, we expect online ad growth to remain the key growth driver of US and Global ad spend; incrementally, lower US cable and broadcast TV estimates offset modest upward revisions to our online ad forecasts, reducing our overall 2015E US ad spend growth estimate to 2.6%, from 2.7%, while essentially maintaining our 3.6% 2016E estimate. Concerns of slowing growth in emerging markets drive a reduction in our global growth estimate to 4.0% from 4.8% in 2015E and to 5.2% from 6.7% in 2016E including political and Olympics (P&O).

**Lowering US Cable and Broadcast Growth Estimates … Underlying trends in TV ratings have remained lackluster given the structural shifts in viewing behavior towards on-demand, ad-free viewership. In the near term, we expect these declines to manifest themselves as a deficiency of gross ratings points (GRPs), which serves to support scatter market ad pricing for those who have inventory to sell; however, this inventory shortage reduces dollar ad revenue growth for the group as a whole. Therefore, we believe the probability of a material near-term rebound in TV advertising revenue (whether cable or broadcast) remains low. Overall, we are now looking for 2015E TV advertising growth of <1%, and +1.6% in 2016E (excluding P&O), modestly below our previous forecast.

**… But Raising US Online Forecasts. 2Q15 internet earnings were characterized by broad-based acceleration across the US online advertising landscape; in our view, brand spend is moving to scaled video and social platforms at an increasing rate. Online continues to be the primary growth driver in our model, but is perhaps proving mildly deflationary to overall spend as advertisers adopt more stringent internal budgeting. We remain encouraged by accelerating trends at Google/YouTube and Facebook, as we believe online video and social categories will grow ~40% and ~33% YoY in 2016E. The strong growth profile of social and video is proving cannibalistic to both TV media and also standard online display formats. Given acceleration in the US and better visibility into the trajectory of growth in social and video, we increase our 2015-2018E by 50bps to 14.0% in the US and by 60bps to 14.9% globally.

**Shift to Digital is a Global Trend; Macro Uncertainty Drives Estimates Lower.  In light of the growing concerns regarding a macroeconomic emerging market slowdown, particularly in China and Brazil, we lower our 2015E and 2016E global ad estimates to 4.0% and 5.2% from 4.8% and 6.7%. Similar to the dynamic in the US, ongoing budget shifts towards digital are occurring across the global media landscape, which leads us to now estimate that online will surpass television's share of the global advertising market in 2017.

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Americas Media & Internet - Tectonic Shifts, Continued

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