Merrill Lynch's New Advanced Television Advertising Report is Overly Bullish

Last month, Bank of America Merrill Lynch Research published its new report on Advanced Television, forecasting that more than $14 billion in annual incremental revenues will pour into the U.S. television industry by 2015 as a direct result of Advanced Advertising (AA). This forecast is in stark contrast to Myers' forecast that less than $15 billion in Advanced Advertising revenues will be generated annually in 2020. (The new Myers forecast will be released in December.) Myers' forecasts for Advanced Television Advertising growth are comparatively aggressive, but are downright bear-like compared to the BofA Merrill Lynch analysis.

The Merrill Lynch report makes many assumptions, but fundamentally argues that virtually every development in video-on-demand, interactive TV, dynamic ad insertion, and addressability will generate exceptionally positive ad growth over the next few years, with no meaningful set-back in sight. The report is detailed, well researched and offers the best available resource for fully understanding the complexity and issues inherent in the emerging interactive television industry. But in my opinion it grossly overestimates the industry's realistic short-term potential and overestimates both the TV industry's and the ad community's embrace of advanced technologies and offerings.

The Merrill Lynch report, titled "A New Life for Television", advises:

"We believe the U.S. television industry is finally on the cusp of transforming Advanced Advertising (AA) into meaningful reality. In our view, several dynamics will promote AA development over the next 12-24 months, including: 1) an installed base of ~91mn Cable/DBS/Telco digital subscribers, 2) heightened distributor focus on new sources of growth—especially with a combined CMCSA/NBCU entering the fold, 3) success in local Cable AA deployments, 4) a growing national ITV footprint via EBIF, 5) a pending national launch of ITV on Cable, 6) an addressable advertising launch to ~19.5mn DBS/Telco homes in 2011E and 7) robust growth in the dynamic ad insertion capable VOD footprint."

While I agree with this landscape, Merrill Lynch is overly bullish in projecting the ad revenues that are likely to result. There are several areas where the company's analysts appear to have embraced overly aggressive estimates. Although the availability of behavioral targeting in online advertising has not translated into premium costs-per-thousand, Merrill Lynch argues that "advertisers will pay a premium for AA's enhanced targeting and audience engagement…. Average CPM premiums could range from 20% to 400% depending on the type of service offered."

I thought my own estimates of network acceptance of addressable advertising technologies were on the bullish side, but Merrill Lynch's assumptions far exceed mine. Says the Merrill Lynch report:

"For modeling purposes, we have assumed 50 cable networks opt-in for addressability over the life of our projections [2010-2015], selling up to 40% of inventory as addressable spots. We have assumed the total number of broadcast networks participating in addressability reaches 4 over the life of our projection. We assume the national broadcast networks sell 40% of inventory with addressability, reserving the remaining portion of inventory for traditional linear buys to hedge against disaggregation risk and service the "plain-vanilla" buyer seeking as broad an audience as possible. We assume the local broadcast affiliate will sell 30% of local avails as addressable enabled. Our addressability premium (vs. a traditional linear CPM) is +90%."

My forecasts, due to be released in December, do not reach these aggressive expectations even by 2020 and assume TV industry embrace of addressable technologies at a rate of less than half Merrill Lynch's in 2015. $11.5 of the $14.0 billion of Merrill Lynch's 2015 Advanced Advertising revenues are projected to be generated by addressable advertising.

The Wall Street firm also believes linear (traditional) local and national broadcast and cable television advertising will increase an average of nearly 5.0% annually between 2010 and 2015. With the additional $14 billion generated by Advanced Advertising, total television revenues will increase 8.7% annually between 2010 and 2015, says the report.

Myers projections for linear TV advertising (30-second commercials) are considerably more conservative, and I believe long-term TV industry growth will be more dependent on the embrace of digital media opportunities such as online video, mobile and social media. The Merrill Lynch report makes no mention of online and mobile media, and fails to acknowledge that advertisers are looking toward these media's enhanced capabilities to deliver similar tools to Advanced Television.

Although overly bullish, the Merrill Lynch report is still worthwhile reading. Since the report is intended for investors and provides guidance on the shareholder value of TV networks and distributors, its aggressive market analysis should be viewed in context. It accurately identifies several obstacles and issues that could impact on the growth of Advanced Advertising, yet in every instance the report argues industry revenue growth potential will not be meaningfully affected.

Based on historical realities, it would be wise to adopt a more conservative view. I agree that Advanced Advertising is a growth business. Companies serving this business, many of which have been struggling for more than a decade to gain traction, have a positive long-term outlook. But $14 billion annually as early as 2015 is improbable.

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