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.
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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.