Wall St Speaks Out : TV's Ad Revenue Growth Opportunities

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Yielding To TV Ad Revenue Growth Opportunities - Brian Wieser

Our view on the state of TV advertising – that there is not some meaningfully different secular change going on, that conditions are more impacted by broader economic conditions than anything else and that growth in digital advertising is primarily driven by new categories of marketers first and large, TV-centric brands second – is not exactly the dominant one among investors these days. Fears of an acceleration of spending shifts are amplified by current period weakness in national TV ad revenue growth, a soft Upfront and poor current ratings trends for broadcast and cable networks alike. While these conditions may persist in the business and among most investors for a little while longer, we remain confident that fears will turn out to be over-done.

But then what? A national TV market that grows at 3.5% beyond this year for the foreseeable future, slightly better than overall underlying advertising growth of 2.5%? And cable eventually converging towards market level growth because, well, it increasingly is the market? It's not bad growth, per se, but neither is it particularly exciting, either. On the other hand, we can see the potential for something more, even if it may take several years to play out. Specifically, we can see opportunities to add to growth driven solely by macro-economic conditions because of the potential application of new tactics in advertising inventory yield management and in the potential to bring online video advertising into traditional TV environments.

Yield management is an after-thought for most industry observers, but represents an important approach to maximizing revenues for TV stations and national networks. In television, effective yield management should mean that the media owner supplies the fewest number of ad units possible to a marketer in order to satisfy an obligation associated with a media sale, freeing up incremental units to sell to other advertisers. Tools from companies including WideOrbit help with this process already. However, recent news associated with Nielsen provided useful illustrations of additional ways that network owners can improve the average revenues they receive per unit of inventory.

First, earlier this month trade publications indicated that Nielsen would be testing the incorporation of data from the company's local people meters and set-meters into its national panel. A richer data set means reported ratings become more stable and predictable for less watched programs (with a smaller sample size, there are fewer households included in the panel in absolute terms, meaning changes in viewing habits for any reason can cause significant changes in reported ratings). Given that marketers buy guaranteed ratings, whereby underperformance is compensated with the delivery of additional units but over-performance is simply bonused to the marketer, more stable ratings mean that ad sales teams can more accurately forecast how many units they will need to satisfy an obligation. This in turn should free up units to sell to other marketers.

Second, Nielsen announced this week an agreement with Simulmedia that is intended to facilitate long-tail TV network measurement via set-top box data. Although there are other sources of set-top box data available today, including Rentrak, Nielsen's "stamp-of-approval" has a high likelihood of making ratings from long-tail networks more palatable for more national TV buyers. On our read of Nielsen and Rentrak data, we estimate that somewhere around 5-10% of total traditional TV viewing is on unmeasured networks, and improved measurement will mean more inventory for networks to sell.

A third approach relates to more inclusive definitions of TV viewing. This was highlighted in the past few weeks when at a recent investor conference the CEO of Discovery Communications noted that viewing levels in Norway, where Discovery is one of the leading owners of TV properties, are up by 15% as a result of the methodology change. As of July, out-of-home viewing (provided by Nielsen's PPM) of traditional TV is now included alongside measurement of viewing which occurs conventionally as measured by WPP's Kantar.

So while none of these approaches impacts national TV today, we can see how new inventory can be produced or freed up in the future. New inventory is useless if new advertisers don't show up. Otherwise a fixed pool of advertising budgets merely gets shifted around. However, we think such an outcome would be unlikely. First, direct response advertisers provide a reasonably fluid source of incremental demand for national TV networks. While their effective CPMs are low, they help ensure that all inventory is ultimately sold. Second, we have seen repeatedly that the production of new inventory in television produces new demand. For example, the rise of cable advertising expanded supply significantly. When cable advertising began to take off in the mid-1980s, the primary source of incremental spending came from smaller advertisers whose budgets would not have made sense on broadcast networks.

If new inventory is freed up as characterized here – and even if it is not – we can still envision two other sources of incremental revenue, potentially: programmatically-driven data-driven or audience-driven buying and the shift of online video onto traditional TV (rather than the other way around).

The first approach relates to interest that we see at the agency holding companies with respect to using data to drive decisions in spending their clients' money on traditional TV. Several companies are providing the technology and infrastructure to enable this. AOL is notable here because of their purchase last year of Adap.TV and subsequent purchase this year of PrecisionDemand which, if not scaled, at least highlights a direction in which that company sees a potential opportunity. How this plays out is mostly to-be-determined, but to the extent that TV networks convey that they are willing to participate in these initiatives with even limited inventory (and we know there is some interest, as expressed most prominently through the Magna Consortium organized by Interpublic, and including network groups including A&E Networks) real demand will probably follow, eventually. This may result in a simple shift of spending out of age-gender-demo based spending, but it's also possible that a higher quality of targeting for at least a portion of a budget might lead to higher budgets to support the conventional broad-reaching campaign.

The second area of incremental revenue noted here is somewhat counter-intuitive. After all, haven't the large brands which dominate TV shifted their spending to online video at a rapid pace? Not exactly, and the reasons why highlight the opportunity. First, consumption of web video remains highly concentrated among a small share of the population. Further, there remains relatively little consumption of high quality conventional TV content on the web; even short-form video is relatively scarce, except for user-generated content, and this is typically undesirable inventory for many advertisers. Certainly, new inventory is created as video is placed in the middle of bodies of text, on Facebook's News Feed, before casual games, etc. But regardless of whether or not the running of a video asset in that environment is more or less efficient than conventional TV, it is perceived as different by most advertisers when compared with ads that run adjacent to premium video-based content. This is the key reason why we remain confident in our view that few large advertisers have shifted much spending into online video advertising, at least in its current form.

Consequently, a digital media-focused marketer who might have prioritized its spending on the web, has video-based advertising assets and/or has no existing or recurring relationship with traditional TV networks may find the traditional TV environment to be just as appealing a place to run a TV ad when compared with the web, especially as the tools to buy media in this manner become increasingly mature. Executing on a campaign via traditional TV may very well prove to be a lot cheaper, too, at least when compared with digital environments (most cable TV ad inventory can be had for $10 CPMs or less; online video associated with premium content can be multiples more expensive). Niches with narrowly defined targets that are hard to find in volume, even on the web, such as political fund-raising-focused advertising or B2B advertising probably fit our criteria and might contain advertisers who would drive incremental buying of video from the web onto TV. Conversely, there will a range of web endemics such as Netflix who don't tend to buy traditional TV but who may believe they have advantage in running video-based branding focused campaigns; running ads in traditional TV may be an appealing way for them to satisfy their goals.

While these initiatives are unlikely to have any impact on reported results for owners of national TV properties any time soon, they do highlight that over the long-run, television as we've known it still has opportunity to grow from new sources of revenue. If there is a concern that we have – and that most investors and observers ignore – it is that there is always risk that the economy might produce fewer brands who differentiate themselves on the basis of awareness of differentiation and who compete in nationally-oriented sectors that are highly competitive rather than stable, concentrated oligopolies. Awareness-based marketing goals lend themselves uniquely well to television, and competitive categories lend themselves well towards growing budgets That categories exist or come into existence which fit this profile is far more critical to the health of the medium than shifts of spending to online video at this point in time. On balance, so long as the TV sector allows for innovation and process improvements, TV as we've known it can sustain modest growth for years to come – with some highs as we saw last year, and lows as we are seeing this year – despite ongoing progress into an era increasingly dominated by newer digital media.

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,Brian WieserPublicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at brian@pvtl.com.


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