National TV: Still Tepid but Not Dying - Brian Wieser, Pivotal Research

BOTTOM LINE: Despite positive commentary from owners of national TV networks last week about the state of advertising, our checks with buyers continue to convey a tepid market, if one that might see some rebound in quarters ahead.

Presentations at a competitor's investor conference last week conveyed a relatively positive tone around the state of national TV advertising, especially in context of what was certainly a decline during the second quarter (we estimate a -3% decline following a +2% normalized gain in the first quarter).  Comments from management at different companies included the following:

*CBS (CBS, Buy): "The third quarter scatter has been terrific. It's been the best quarter of the year"

*Comcast (CMCSA, Buy covered by Pivotal's Jeffrey Wlodarczak): "Right now the advertising market is very strong.  Scatter is strong. We're seeing tremendous strength across the board"

*Fox (FOXA, N/R): "The market at the moment from a scatter standpoint feels pretty good"

*Time Warner (TWX, N/R): "For third quarter in particular, I would say that the advertising environment is clearly better than it was in the first part of the year. I think we are seeing very strong advertiser demand, and that's driving solid price increases"

Our own checks with multiple buyers showed a concurrence that scatter pricing is in fact strong at the present time, although this is almost entirely due to ratings declines and limited inventory availabilities.  As we have noted in the past, pricing is not necessarily a driver of revenue – it is more of an output than an input for modelling purposes. Similarly, the tone of a scatter market doesn't necessarily say much about total spending volumes in part because scatter-centric marketers tend to have higher cost bases than upfront-centric marketers, raising average scatter price increases relative to upfront prices.

In contrast to the tone conveyed last week, our checks conveyed total spending volumes – which should matter much more than pricing – are not particularly strong across the industry at the present time, although nowhere near as bad as the second quarter.  Our industry-level forecast of +1% growth for national TV advertising continues to "feel" about right for 3Q15, ahead of low single digit growth for total national TV advertising in the broadcast year ahead.   We argue that if the dominant narrative around TV budgets shifting to digital were the primary factor in the market, sustained declines would be far more likely.  Instead, we continue to believe that constraints on total budgets for the largest advertisers who drive national TV advertising paired with an absence of meaningful new categories are more critical factors impacting the industry at the present time. 

Please do not forward outside your firm. Contact Pivotal Research for additional information including risks and disclosures.

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are impacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at brian@pvtl.com.


Americas Media & Internet - Fantasy Football's All-Out Ad Blitz - Anthony DiClemente, Nomura Securities

Following the recent surge in ad spend from daily fantasy sports (DFS) platforms – DraftKings and FanDuel – which may have spent more than $30mn on TV advertising combined just last week, we attempt to roughly estimate the potential incremental contribution to US 3Q ad spend from this burgeoning new ad category. Although perhaps a temporary phenomenon, we believe that growth in ad spend from DFS could drive an incremental 40-60bps in 3Q15 internet/media ad spend growth. An incremental 50bps represents roughly a third of our estimated +1.5% YoY 3Q15E TV advertising growth assumption, with most benefits accruing to broadcasters of the NFL.

*DFS TV advertising spend in 3Q15E spend could exceed $150mn. Based on extrapolation, 3Q spend from DFS could range from $140-175mn, or ~50bps of our aggregate 3Q15E ad spend forecast. In our estimates, we assume that DFS spend peaked during the first week of the NFL season at ~$50mn, and had ramped to that level over the three prior weeks; we estimate the final weeks of 3Q represent a combined $50-60mn in further spending. Further, we assume DFS ad spend was split ~60/40 between TV and digital; there may also be an indirect "virtuous circle" benefit given that the services themselves likely increase TV ratings.

*We believe CBS and ESPN are likely to see greatest support from DFS spend given their NFL and college football broadcasts. Industry checks indicate that relative to expectations, spend from DFS and app-based games are providing a modest CPM pricing uplift in the scatter market. ESPN is certainly positioned well given $250mn of ad spend guaranteed by DraftKings over the next three years. CBS also is likely to capture a large share of the dollars spent. FOXA and NBCU likely captured share commensurate with their sports/NFL content as well, but owing to a larger absolute revenue base, observable impact is likely more limited.

*YHOO, FB, GOOGL are also beneficiaries. YHOO, given its leading position in fantasy sports, likely provides some of the most valuable internet ad inventory for DraftKings and FanDuel, and we estimate that YHOO could see ~$10-20mn of net revenue lift from DFS advertising. We estimate that FB and GOOGL capture the largest share of DFS internet ad spend, however, their large revenue bases make the incremental revenue contribution less obvious.

*Longer-term commitments in place despite some concerns. After 3Q, the phasing of DFS ad spend becomes less clear, particularly following the conclusion of football season. DraftKings and FanDuel have made significant spending commitments, including $250mn from DraftKings to ESPN over the next three years in exchange for an exclusive partnership. However, questions exist regarding regulations around these services given nuanced differences between pay-for-play fantasy sports and gambling (i.e., should fantasy football be deemed a game of skill?); there are also reports that a disproportionate amount of the winnings are accruing to a few players given algorithmic/machine-based player selection systems.

CLICK BELOW TO ACCESS RESEARCH REPORT/PRESENTATION (including important disclosures):

Americas Media & Internet - Fantasy Football's All-Out Ad Blitz

Prepared by Nomura Securities International, Inc. For complete details of the research together with the associated important disclosures, analyst certification, valuation methodology and discussion of risks, please see the full publication attached.

Anthony DiClemente, CFA is Managing Director at Nomura Securities. Anthony can be reached at Anthony.diclement@nomura.com

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