Wall St. Speaks Out on Improved Ad Industry Growth Prospects

Raising A Glass (of Rosé) to Ad Industry Growth Forecast - Brian Weiser

REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison and Wall 6-13-14.pdf

Editor's Note: MyersBizNet forecast for above-the-line 2014 advertising growth, including digital media, is 7.4%

Ahead of the advertising industry's biggest annual event, the Cannes Lions, which are held next week, we find ourselves more optimistic about the industry. And it's not just because we expect to hear much positivity emanating from the leading lights of creative, media and (dare we say) ad tech excellence in the days ahead. Instead, it is because with yesterday's release of the IAB's first quarter estimates for online ad spending we have been able to add a key input into our US industry model. Combining all of the data now at our disposal, we have reassessed our expectations for the year ahead. Much like the French Riviera, it's downright sunny.

The first quarter of 2014 initially appeared disappointing given what appeared to be a tepid rate of growth for many industry sub-sectors, especially for higher profile media owners with national cable networks. Blame was duly apportioned to bad weather, the Olympics, or both in combination. However, on our current estimation, most media posted some acceleration (or less deceleration) vs. the fourth quarter of 2013.

Collectively we estimate the industry grew on a normalized basis (excluding incremental Olympic spending on national TV and political spending on local TV) by 4.4% during 1Q14, vs. 3.4% in 4Q13. While many traditional media continued to decline, local and national television continued to hold up with low to mid-single digit growth and online advertising accelerated to a 19% year over year gain. By itself, digital advertising's gains of $1.8 billion almost matched the entire industry's $1.9 billion of growth during the quarter. We could alternately suggest that television advertising's $1.6bn year over year gain (excluding the Olympics and Political advertising) was equally critical in driving the industry's growth, as most other traditional media tends to serve as the source of budget shifts into digital advertising.

Equally notable, it appears we are observing more than just a shift of spending. There is a heightened volume of money in the advertising economy, largely from the web endemics, including e-commerce based marketers, app developers and digital content distributors, who tend to concentrate their budgets within digital media. We've previously noted that web endemic companies account for a large share of online advertising, and their growth in ad spending has generally grown at a pace that exceeds online ad revenue, suggesting that these companies are accounting for a growing share of digital advertising. If the web endemics accounted for a third of digital advertising but grew their budgets by 25%, we could estimate that this group of marketers is driving half of web-based advertising's gains. Put differently, we could say that that half of the growth in all advertising spending is equal to the growth in spending by these marketers alone.

The presence of new money may be evident from our statistical analysis of the advertising economy. Historically, we have found the best fit between economic variables and advertising involves a formula that regresses Personal Consumption Expenditure growth and Industrial Production Growth against normalized (ex-Political and incremental Olympic) advertising growth. During 2013 our model would have predicted +0.5% growth, but instead we saw around 3.2% growth. While variations are to be expected, this seems like a fairly significant gap. And now, for 2014, using the Survey of Professional Forecasters' consensus estimates of economists' expectations around PCE and IP for this year, our model would predict 3.2% growth. But this level of growth would imply less than 3.0% growth in each of the year's remaining quarters, which would represent a slower pace of growth than any of the past four, an unlikely occurrence given the improving nature of the overall economy. Consequently, it seems appropriate to raise our expectations for the year, for now to 4.0% on an annual basis. This compares with our most recently published forecast for 2014 for 2.5% normalized industry growth. We have now made the same 4.0% forecast for next year to reflect what should be continuing above-normal trends. Perhaps we could consider raising our estimates higher, but we are mindful that there is some risk of spending on app installations tapering as time progresses.

E-commerce, app installs and digital content distributors probably won't get much focus at the Lions this year, although digital advertising in a broader context will certainly be a central element of the Festival along with the traditional focus on television commercials. And why not? These media provide the life-blood of much of the industry presently, and drive much of the industry's growth at the present time. But so long as the industry continues to grow one way or another, the industry can celebrate, and the rosé can continue to flow.

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 atbrian@pvtl.com.

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