Twelve Pivotal Predictions for 2015 - Brian Wieser & Jeff Wlodarczak, Pivotal Research
As 2014 comes to a close, Pivotal’s Media & Communications analysts Jeff Wlodarczak (cable & satellite) and Brian Wieser (internet and advertising) bring you 12 predictions for the year ahead.
1) Google and Facebook's walled gardens become increasingly clear to the detriment of basically everyone else in digital advertising. Recent moves by Google to commercially tie together its DSP, exchange and ad serving products seem to make clear what has long been expected from Google, and will probably help grow Google's share of display budgets. Similarly, Facebook's investment in Atlas last year and LiveRail this year are more of an outline than anything else at this point in time, but will have a similar effect. More generally, intensifying competition will lead to less interoperability of buying tools associated with different media owners and more challenges in attributing cause and effect in digital media buying.
2) Another major company gets hacked, with costs for IT rising and commercial risks expanding. The Sony hack is a wake-up call for all industries, and no less advertising and media. Arguably the social relevance of the media industry to broader consumer populations and the degree of concurrent collaboration and competition within the industry (meaning: a lot of email and commercial information moves between companies) heightens its risks.
3) National TV ad revenue growth returns. Current conditions for national TV advertising are weak. By our estimates, revenues were flat year over year in the third quarter and will likely be down in the fourth quarter. But we have disagreed with the widely held view that there has been a meaningful acceleration in spending shifts from non-digital to digital media by advertisers. Our perspective is supported by data that shows clearly that companies which are endemic to the web are accelerating their marketing spending at a substantially faster rate than digital media owners are generating ad revenue, and data that also shows significant tempering of growth or outright declines in total marketing spending from advertisers who concentrate their budgets on TV. To the extent that this means current weakness is primarily (although not exclusively) cyclical, we expect the cycle to mostly rebound, if perhaps not until later in the year.
4) Agency practitioners will complain more about fee squeezes caused by client procurement officers…all the while revenues and margins expand. One of the key issues the agency industry has faced in recent years is the rise of the procurement officer as a key influencer – if not an outright decider – on agency compensation. Complaints about the impact of procurement on the industry and margins are commonplace among practitioners. We see no signs that procurement's role will diminish in 2015. However, this does not mean that holding companies – and no less individual business unit – margins necessarily fall. The "product" mix that each agency offers is what provides for improving economics for the agency business, as newer services related to digital media tend to be less commoditized and less subject to pricing and margin pressures. Further, the labor intensity of marketing via digital media means a greater volume of activity is required.
5) Nielsen will remain the dominant TV currency. To most who follow Nielsen closely this won't be a surprise, but to casual observers who tend to pay attention at more of a distance, it may be news to know that there is no meaningful threat to Nielsen's role in providing the only broadly used currency for TV ratings. 2014 was a pretty good one for Rentrak, but the industry's reliance on Nielsen for TV ratings remains as strong as ever. Long-term, staggered contracts should help provide confidence to this effect, but practically, no agency can be without Nielsen when pitching for new business. To the extent that the bulk of marketers still demand that they buy against Nielsen metrics, this then means that media owners must also remain as customers. All measurement systems are flawed, but Nielsen's are at least well-understood not least as its methodology has been developed and socialized across the industry over the course of decades. Any entity providing a genuine alternative for nationally oriented advertisers and the media owners who sell to them – rather than a complementary offering as we see Rentrak – would need to do much the same.
6) More ad tech consolidation will happen in 2015. Venture-funded companies have limited shelf-lives, in part timed to the investment horizon of the venture capital firms who fund them. For a fund with a ten year life which only began deploying capital after two or three years, companies founded before the 2008 downturn – which includes many of the most dominant players in ad tech today – exits for portfolio companies will be increasingly top-of-mind. Most of the largest ones are sufficiently mature that they can be profitable (or cashflow positive) on their own and interest late stage venture cross-over investors, but the aforementioned dominance of Google and Facebook will push growing numbers of their competitors to look for significant acquisitions in order to keep up. This confluence of interests will build on what we have seen so far in 2014 (we can identify nearly $8bn in relevant acquisitions this year vs. more like $3bn in 2013) and make 2015 an even bigger year for ad tech consolidation.
7) U.S. PayTV subscribers will grow in 2015 despite the effects of SVOD. While there has much noise regarding digital OTT substitution for Pay TV, we believe the real driver of mediocre U.S. Pay TV additions is the still weak overall U.S. economy (historically low housing formation and flat household incomes in the face of rising costs) and consumers are increasingly moving to the "original OTT" over the air antennas [with broadcast only households up +1.2M over the last 4 years according to Nielsen vs. +450K net new Pay-TV and 2.65M additional occupied households implying +1M incremental households elected to go without TV or to a digital alternative over the last 4 years]. As for the argument that millennials are less interested in Pay-TV, Pay-TV penetration among 18-24 is actually higher today (90.5%) than it was 4 years ago (88.2%) [although PayTV viewership hours declined over the same period] according to Nielsen. In our view, if household incomes continue to rise, household formation accelerates off historically low levels, and millennials keep moving out of the basement of their parents' home PayTV results could improve materially.
8) The FCC will invite years of lawsuits (and Republican attempts to attack the FCC) and move forward with forbeared Title II on distributors. Thanks to President Obama's public move on advocating the stringent forbeared Title II net neutrality regulation the net neutrality debate has become completely politicized with most consumers believing (wrongly) that distributors are against net neutrality and the President is for net neutrality when the reality is this is all about how the FCC should regulate net neutrality. While Title I based FCC regulation (the industry solution) would invite no distributor lawsuits and get the FCC what they are looking for, the move by the president seems to have moved the hybrid solution (Title II in the interconnect) to the middle ground. Based on the FCC chairman's recent public commentary it appears that he is going to go the President's route of forbeared Title II. This move is unlikely to have any effect on results, but opens up the specter of some future president unforbearing regulations related to things such as pricing. While unforbearing is evidently extremely difficult it could happen with a left wing enough President (Warren?). The good news is we believe that distributors have strong grounds for a lawsuit that will challenge the FCC's right to initiate Title II, a Republican led congress is likely to put extreme pressure on the FCC which may lead them to back off and a change in administration in late 2016 could lead to favorable changes around regulation of data. In the end, we believe FCC Title II regulations will ultimately be thrown out by the courts or overturned by a Republican president/congress, it is frankly unlikely Title II will be unforbeared and have no actual effect on distributor results.
9) 2H'15 investors will begin to focus on the upside on cable data ARPU and market share from the launch of DOCSIS 3.1 tech allowing cable to offer "Google Fiber like" (1 gig+) download speeds inexpensively . While clearly no one needs 1+ gig download speeds during the 2H of 2015 investors should begin to focus on cable's massive last mile speed advantage over their copper based competitors when operators begin to discussing roll-out plans for 2016 for fiber like speeds. In addition, this should materially strengthen cable when competing against FIOS or Google Fiber competition. In the end with the ability to offer 1 gig plus (inexpensively) cable will be able to clearly win the marketing battle vs. copper and more than hold their own vs. fiber to the home.
10) DISH does nothing with its spectrum hoard in '15 and it continues to become increasingly valuable as consumer bandwidth needs explode - We believe ultimately Ergen's play here is that spectrum is likely only going to increase in value as consumer bandwidth needs only continue to rise substantially. As an example, euro cable player LBTYA's average data usage rose 45% y/y so far in 2014. In our opinion, Internet players will always fill all available capacity. Importantly, Ergen has shown an ability to get FCC build-out deadline's pushed back. Ultimately we continue to believe he will monetize this spectrum by signing a long term lease arrangement with T or VZ in conjunction with a favorable wireless wholesale arrangement for DISH or an outright sale of the entire company.
11) SatTV industry subscriber growth is over. The cable industry has caught up enough with their video product and the presence of AT&T at DIRECTV (which we believe will end up driving slower growth in and of itself) is likely to offset improvements in the economy and SatTV is unlikely to show annual video subscriber growth ever again.
12) TWC/CMCSA deal will receive regulatory approval as they offer concessions that put feathers in regulators/politicians caps without changing the inherent upside of the deal. In our view the regulators do not have leg to stand on to nix the deal between TWC and CMCSA given the two players do not compete against each other. The practical reality is that TWC and CMCSA together or separate have interests that are highly aligned so practically speaking there is not much of a difference if they are together or apart and if the FCC does not approve the deal they get nothing. On the other hand it is reasonably certain that the regulators can get many "feathers in their caps" via concessions (Internet essentials everywhere, guaranteed minimum consumers speeds by a certain date, net neutrality, among many others) that do not materially affect the upside from a CMCSA/TWC deal.
Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which areimpacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at firstname.lastname@example.org.
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