Groundhog Day for TV Advertising - Brian Wieser, Pivotal Research
Monday is Groundhog Day, which seems as good a time as any to ponder the year ahead for owners of media properties focused on national TV advertising sales. Will the shadow of weak recent results for advertising loom large in the year ahead and result in a demoralizing repeat of 2014 for sellers of TV ad inventory? Or will the cyclical nature of marketing mean that new budgets – if not new marketers – allow the industry to break free of last year's trends to witness a flowering of growth once again?
As media companies begin to emerge from the hibernation that is their quiet period to release fourth quarter results and provide updated outlooks on the state of their businesses for 2015, it seems appropriate to ponder at this time what Groundhog Day means for the owners of TV networks. Will the shadow of weak recent results for advertising loom large in the year ahead and result in a demoralizing repeat of 2014 for sellers of TV ad inventory? Or will the cyclical nature of marketing mean that new budgets – if not new marketers – allow the industry to break free of last year's trends to witness a flowering of growth once again?
The arguments for a permanent decline generally go as follows:
· Consumers are spending a growing share of time with pure-play suppliers of digital media, especially including digital video from sources such as Google's YouTube.
· This coincides with rising costs and lower ratings (as well as fragmentation in general) which make traditional TV increasingly less cost-effective, especially on a relative basis.
· During 2014 prominent public statements from many senior marketers and agency executives regarding these trends supported the vantage points that digital media owners themselves put forward.
· Revenue growth figures from digital media owners generally accelerated through 2014, while at the same time we saw meaningful weakness in revenue growth from owners of properties dependent upon national TV advertising.
Put together, anecdotes and data caused most investors – and many in the industry – to believe that TV advertising is structurally impaired. It follows that if this trend took place last year, it should probably continue going forward.
Regular readers of Madison & Wall will be unsurprised to see our counter-view:
· Digital media generally satisfies different goals than does TV (engagement vs. awareness, for example) and is not a true substitute for most advertisers, which means for meaningful budget shifts to occur, marketers would need to change their goals meaningfully (which we don't think happens particularly quickly).
· Online video accounts for a still-small share of total video/TV viewing activity which is to say, there simply isn't enough quality inventory on the web to account for the scale of revenue declines traditional TV saw last year. Further, online video is heavily concentrated among a relatively small share of the population, and even most of this group still consumes more TV than digital video.
· The quality of pure-play online video is generally viewed by advertisers to be sub-par vs. TV and that most of the premium content is sold by the same national TV owners who sell TV, and in bundles with traditional TV inventory.
· Like-for-like TV inventory (network for network, say) is more expensive, but national TV – including cable and network – is generally viewed as part of one budget, and total spending can be made more cost-effective by substituting cable inventory for network inventory; better targeting also exists to improve frequency skews associated with heavier cable budgets, too.
· Few marketers or agency executives have any professional interest in "defending" TV, as doing so may lead to those execs branded as luddites by peers or more senior colleagues or may indirectly lead to higher pricing for TV inventory.
· While digital media owners did see acceleration in ad revenue over the course of the year, this also coincided with spending gains by "web endemics" (i.e. e-commerce-based digital media companies) which far outpaced digital advertising's revenue growth last year. By contrast, large marketers whose budgets have been historically skewed towards television generally decelerated or cut their budgets in total last year.
· Relatedly, total reported media owner ad revenue in 2013 was well above where our model suggested it should have been by around 200bps. TV maintained its share of ad spending that year, meaning that effectively TV outperformed above where it should have. On this basis we think it's pretty clear that spending was too strong in 2013, and provided a basis for expectations among investors (and even the media owners themselves) that were too aggressive.
Although we don't doubt that some marketers increased their spending on digital video or digital advertising at the expense of TV, we don't think this was the paramount cause behind what happened in 2014. Indeed, over the course of the year, even excluding Olympics-related spending on TV, TV advertising probably maintained its share of total ad spending (although we note that shares did fall towards the end of the year).
Instead, as we have argued previously, we think key problems that TV ad sales are facing include the absence of new blockbuster marketing categories which focus on mass awareness. The emergence of new categories is necessary to make up for what we have observed is a continuous (if modest) pace of decline in total ad spending among incumbent advertisers over time. It's all part of a natural evolution that brands and marketers go through as they depend less and less on awareness and know their customers more and more.
To the extent our optimism is warranted, there are some positive signs emerging. We have heard from some national TV buyers so far this month who have conveyed that while growth might not be ready to arrive yet, further declines are not in the cards. We have heard from others conveying that brands who suddenly cut budgets significantly in the early part of last year are once again expanding spending on TV, which would not be happening if digital video were taking budget share. Some large marketers with significant TV budgets such as Capital One, Carnival Corporation, Discover Financial, Kimberly-Clark and Microsoft have even made public statements on their recent earnings calls this month about increasing their total marketing or advertising budgets. Although this isn't specific to their activities within the US or on TV necessarily, it is nonetheless a positive consideration given the tepid increases or decreases from most marketers last year. That doesn't mean that 2015 will necessarily be a year of significant growth, as we struggle to point to the new categories that we think could drive that outcome for the medium.
Some readers might note we're being unpleasantly repetitive in making these arguments, following several other reports we have written over the last year conveying our beliefs that TV ad spending is most likely facing cyclical weakness rather than anything more permanent and structural. However, it is Groundhog Day, and to that end, what better time to focus on the potential for the end to a proverbial winter of television advertising and a rebirth for the medium.
REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison and Wall 1-30-15.pdf
Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are
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