National TV- Still Tepid, But Not Dying. Driven by Fantasy Football?

National TV Still Tepid but Not Dying Brian Wieser Pivotal ResearchBOTTOM 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 aheadPresentations at a competitor39s 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 quarteramp160 Comments from management at different companies included the followingCBS CBS Buy quotThe third quarter scatter has been terrific It39s been the best quarter of the yearquotComcast CMCSA Buy covered by Pivotal39s Jeffrey Wlodarczak quotRight now the advertising market is very strongamp160 Scatter is strong We39re seeing tremendous strength across the boardquotFox FOXA NR quotThe market at the moment from a scatter standpoint feels pretty goodquotTime Warner TWX NR quotFor 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 that39s driving solid price increasesquotOur 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 availabilitiesamp160 As we have noted in the past pricing is not necessarily a driver of revenue amp8211 it is more of an output than an input for modelling purposes Similarly the tone of a scatter market doesn39t necessarily say much about total spending volumes in part because scattercentric marketers tend to have higher cost bases than upfrontcentric marketers raising average scatter price increases relative to upfront pricesIn contrast to the tone conveyed last week our checks conveyed total spending volumes amp8211 which should matter much more than pricing amp8211 are not particularly strong across the industry at the present time although nowhere near as bad as the second quarteramp160 Our industrylevel forecast of 1 growth for national TV advertising continues to quotfeelquot about right for 3Q15 ahead of low single digit growth for total national TV advertising in the broadcast year aheadamp160amp160 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 likelyamp160 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 timeamp160Please do not forward outside your firm Contact Pivotal Research for additional information including risks and disclosuresBrian 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 brianpvtlcom Americas Media ampamp Internet Fantasy Football39s AllOut Ad Blitz Anthony DiClemente Nomura SecuritiesFollowing the recent surge in ad spend from daily fantasy sports DFS platforms amp8211 DraftKings and FanDuel amp8211 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 4060bps in 3Q15 internetmedia ad spend growth An incremental 50bps represents roughly a third of our estimated 15 YoY 3Q15E TV advertising growth assumption with most benefits accruing to broadcasters of the NFLDFS TV advertising spend in 3Q15E spend could exceed 150mn Based on extrapolation 3Q spend from DFS could range from 140175mn 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 5060mn in further spending Further we assume DFS ad spend was split 6040 between TV and digital there may also be an indirect quotvirtuous circlequot benefit given that the services themselves likely increase TV ratingsWe 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 appbased 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 sportsNFL content as well but owing to a larger absolute revenue base observable impact is likely more limitedYHOO 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 1020mn 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 obviousLongerterm 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 payforplay fantasy sports and gambling ie 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 algorithmicmachinebased player selection systemsCLICK BELOW TO ACCESS RESEARCH REPORTPRESENTATION including important disclosuresAmericas Media ampamp Internet Fantasy Football39s AllOut Ad BlitzPrepared 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 attachedAnthony DiClemente CFA is Managing Director at Nomura Securities Anthony can be reached at AnthonydiclementnomuracomThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of 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