Advertising & Media Predictions for 2009

I'm going to add my own commentary to this report from Mediapost. My comments will be in red and italics.

Most Media To Suffer Retrenchment in 2009

According to a new report by FitchRatings, the company forecasts that the contraction in output among the major advanced economies will represent the steepest decline since the Second World War, with GDP in the U.S. to decline approximately 1.2%, while inflation is forecast to be 2.7%.

Regarding the advertising environment, the Fitch media team is more cautious than most major advertising forecasts, none of which currently predict advertising to be nearly as weak as 2001.

Fitch's cautious view about advertising is, in part, supported by these underlying conditions:

• The 2001 ad downturn was concentrated in national advertising, while the 2008-2010 downturn will include both local and national components. Political and Olympic spending masked the local market weakness in 2008, but the report says the absence of these revenue sources in 2009 will expose the depth of this weakness.
• This weakness in local markets will be compounded by national advertising pressures due to the impact of the credit market events that hit while many large national advertisers were planning their 2009 ad spending budgets, forcing many companies to emphasize capital preservation and liquidity, not just earnings growth.
• With advertising being one of the most easily scalable fixed costs, some major advertisers could plan to pull back on national campaigns considerably until there is more visibility in the market.

Five of the top 10 advertising categories, or over 40% of the ad mix (according to Advertising Age), will be under meaningful pressure next year, says the report:

• No.1 Retail (12% of total)
• No.2 Automotive (12%)
• No.5 Financial Services (6%)
• No.6 General Services (6%)
• No.9 Airlines, Hotels and Car Rentals (4%)

And, notes the report, advertising inventory has proliferated (from online and emerging mediums as well as traditional ones) since previous downturns. Media companies are likely to compete more heavily on price in this downturn to fill the vast supply of ad space available.

Advertisers have many more options in the current environment than at any other time for maintaining a presence with consumers while trimming their budgets and scaling back high Cost Per Thousand (CPM) advertising campaigns, says the report. Even healthy advertisers are likely to use this increased bargaining power to command better price terms and concessions from media companies.

The study offers trends and outlooks for several advertising subsectors in the report, as estimated by Fitch:

Newspapers

Newspaper industry revenue growth will be negative for the foreseeable future as both ad pricing and linage will be under pressure within each of the four main components of newspaper companies' revenue streams. Fitch believes more newspapers and newspaper groups will default, be shut down and be liquidated in 2009 and several cities could go without a daily print newspaper by 2010. This has already happened in several cities and only those that can reinvent their business model to produce a balanced balance sheet will survive.

Yellowpages

Few markets will be able to support more than two directories and most markets will eventually only be able to support one book. Another year of accelerated declines in yellowpages advertising could significantly pressure the intermediate-term solvency of the two pure-play incumbent directories companies. This was once a growing industry but I believe there is nothing that can salvage it. It will die a slow death, 10 to 15 years at the most. It is a generational preference to online vs. a phone book coupled with the cost of advertising that will kill it off.

Terrestrial Radio

Radio has no unionized workforces, and convert a higher percentage of EBITDA to free cash flow giving them more cushion to endure the secular challenges. Listenership is likely to continue to fall, though available inventory should remain relatively stable, and pricing could be up on some advertisers. Internet streaming provides additional day parts to sell. The continued roll-out of factory-installed high definition (HD) radio into automobiles could provide upside to listenership.

This is my business. Between 80 to 90% of Americans listen to an FM or AM radio station weekly. Most of them listen daily. HD Radio is not the answer. Local and meaningful programming will keep the medium alive. The real challenge is, as it has always been, finding the sales staff that know how to sell so it is a win-win-win situation for the radio station-advertisiers-listeners.

Magazines

Fitch expects the larger players to rationalize available print advertising inventory through consolidation and closing down titles. Several categories that used to have multiple titles will likely have advertising bases that can support only one major title. With limited catalysts for growth in the core print product, magazine publishers have become more proactive online. I'm not sure about this one. Overall readership is down due to the internet, but as long as those that survive have a business plan that makes money, they should be okay.

Outdoor

Fitch believes the potential negative effects of increased inventory from digital roll-outs should be tempered by increasing appeal to national advertisers, as well as decreases in price per unit. Cost structures should benefit from digital billboards, as displays can be centrally managed without physical deployment of work crews. Low CPMs and better networked national sales pitches, position outdoor advertising companies to endure the downturn and rebound with the economy. This is one advertising medium that should always work as long as the creative is on target.

Cable Networks

Cable industry ad inventory has grown significantly over the past several years, causing a deceleration of the decades-long increase in ad dollars, but cable continues to be a targeted medium, at a lower price relative to broadcast and with significant reach. Fitch expects it to continue to gain share from broadcast. Fitch expects the cable networks to continue to embrace VOD and digital strategies, which could provide some modest upside to revenue growth. I've been told that over 80% of our city is wired. As long as the cable sales staff can create campaigns that make sense for the advertiser and not just line their own pockets, this media should continue to grow.

Online

Online could be negatively affected by advertisers scaling back experimental expenditures in favor of more proven, performance-based mediums. Search is likely to be more healthy than display. Remnant advertising is likely to be hit by a shakeout in the ad network space. While CPM growth is likely to moderate and could be under pressure, online video and social networking are likely to support growth. Regulatory issues associated with privacy could be a factor as firms attempt to implement more behavioral targeting. Over the longer term, online advertising is expected to rebound from economic weakness and continue to capture share from traditional outlets. This is the great unknown. Banner Ads, Text Ads, Web Buttons & Links, Social Media and what will be next? The big mistake I see is that people do not understand the motivational factors that prompt action to advertising and marketing, and those people are looking for the technology to be the answer. Money will be spent in 2009 and beyond as all of us try and apply advertising and marketing principles to this media platform we call the internet.

For more detailed information within the original report, please visit here.

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