MAGNA US Advertising Forecast – September 2020

KEY TAKEAWAYS

•     MAGNA analysis reveals that advertising sales decreased by -7.2% in the first half of 2020, including the impact of cyclical events, as resilience in digital media advertising sales (+5.7%) mitigated heavy declines in linear media (-23.1%).
•     MAGNA expects the market to nearly stabilize in the second half (-2%) as the economy reopens, consumption resumes and political ad spend piles up, leading to a full-year decline of -4.6%, to $213 billion.
•     Record political ad spend ($5 billion, +32% vs 2016) will mitigate local TV losses and pump close to a billion dollars into digital media for the first time (three times the amount of 2016).
•     MAGNA forecasts a rebound in advertising spending 2021 (+4.0%), driven by a recovery in consumption and mobility, and the return of normal event schedules (new shows, domestic sports, Olympics).
•     Seven of the top ten industry verticals are forecast to regrow ad budgets in 2021, but automotive and retail will continue to struggle.

According to Vincent Letang, EVP, Global Market Intelligence, MAGNA, and author of the report: “The COVID crisis has hastened the normal end of the economic cycle and brought on the worst recession ever. In this context, classically, branding budgets and linear media spend are cut disproportionally while lower-funnel market mechanisms and digital ad formats show much greater resilience, boosted further by the acceleration of e-commerce in the COVID and post-COVID world. The sheer size of digital advertising in 2020 (approx. 55% of the US ad market) and its resilience in this economic environment explains the relatively modest decline MAGNA forecasts for the whole year (-4.6%) despite the severity of the economic recession, compared to the double-digit decline 2008-2009 (-12%) when digital media was still nascent. For linear media, however, 2020 remains brutal, but MAGNA is confident that ad revenues will stabilize and recover in 2021”.

AD MARKET IN THE FIRST HALF:  HISTORIC DECLINE FOR LINEAR MEDIA; DIGITAL RESILIENCE

In the second quarter of 2020, based on MAGNA’s analysis of media owners financials, advertising revenues dropped by -17% to $46bn.

Linear media ad sales were down by a massive -38% in the quarter, due to declines in both national and local media formats, while digital media was flat year-over-year. National television advertising sales saw their worst quarter ever, at -30%, compared to the 2008-2009 recession drop of only -8% in 1Q09, due to the absence of sports and a pullback in advertiser demand. Search posted its first decline ever in the second quarter, at -3%, as Amazon search growth could not offset declines at Google.

The resilience of digital media ad spend was driven by an acceleration in digital media consumption during the COVID lockdown (social media, digital video, e-commerce) that MAGNA believes will permanently accelerate the ongoing transition towards a digital-centric economic and media landscape. The three digital giants reported mostly better-than-expected advertising revenues in 2Q, domestically and globally. Google reported declining US advertising sales (the company’s first ever quarterly decline) but the decrease was moderate considering the depth of the economic recession (-6% to $14 billion) and concentrated on search, while Youtube ad sales grew year-over-year. Facebook’s US revenues increased +14% year-over-year to $8.3 billion, as volume growth (monthly users up +5% and growing time spent) compensated for weaker pricing. E-commerce behemoth Amazon reported US ad sales growth of +43% to $2.5 billion, with its live streaming video platform Twitch (+52%) growing even faster than the larger product listing search segment (+42%).

For the entire first half media owners advertising revenues fell by -7.2% vs 1H19 (or -8.1% excl. the impact of the presidential election). Linear ad sales declined by -23.1% while digital ad sales grew by +5.7%. Print (-33%), radio (-33%), out-of-home (-22%) and on-screen cinema advertising (-63.6%) suffered the heaviest declines, while national and local TV (both -19%) were marginally more resilient. The upfront sales system, where volumes and rates are negotiated and locked for the entire broadcast year, limited the decline for national TV (even though many campaigns and upfront commitments were cancelled), while local TV had strong political ad spend mitigating the decrease in local ad spend (car dealers, retail, restaurants…).

SECOND HALF AND FULL-YEAR 2020: ECONOMIC REOPENING AND POLITICAL DOLLARS HELP AD MARKET STABILIZATION

Advertising spending trends are strongly correlated to the economic environment and consumer trends. According to the latest macro-economic forecasts, the US economy will drop by -5.2% in 2020 (real GDP) after falling by -10% year-over-year in 2Q, according to the Federal Reserve. Retail sales (excluding cars) were down by -2% in the second quarter, as declines in April and May were partially offset by a +5% growth in June. E-commerce sales surged +44% in the quarter, a huge acceleration above the long-term growth pace of +10% year-over-year. Meanwhile, car sales were down -33% in the quarter, as most dealership remained closed and consumers delayed making big purchases.

Based on first half actuals and the latest macroeconomic data, MAGNA has updated its full year growth forecast. Media owners net advertising revenues (NAR) (all media, linear + digital) will fall by -4.6% to $213 billion in 2020. Advertising sales will gradually stabilize in the second half: all-media ad spend will decline by -2% vs 2019 (-4% in 3Q, flat year-over-year in 4Q), compared to a -8% decline in the first half.

The new forecast is essentially in line with MAGNA’s previous forecasts (-4.3% in June). Excluding the $5 billion of incremental advertising revenues from political campaigns this year, all-media non-political advertising revenues would actually drop by -6.1% vs 2019, which remains slightly better than MAGNA’s global forecast for 2020 (-7.2%).

Linear advertising sales (linear TV, radio, print, out-of-home) will bear the worst of the decline, with full-year sales declining by -16% to $81 billion. It would be -19% excluding the impact of political ad spend. The economic slowdown has not only cut down on marketing activity from national brands and local businesses but has also affected audiences and media supply for some media types like radio and out-of-home.

In contrast, digital advertising formats have been remarkably resilient thanks to an acceleration in e-commerce consumption and the classic preference for lower-funnel marketing channels in recession times, while branding campaigns are typically more vulnerable to cost cutting. As a result, digital advertising sales will grow by +4.2% to $133 billion in 2020. Digital video will benefit from a surge in media consumption and full-year ad sales are forecast to grow by +12%, driven by YouTube and Amazon’s Twitch. Social media ad sales will grow by +11% as the COVID crisis has boosted the need for social networks. Search is slowing down from previous years but still post +3% growth, driven by the explosion of e-commerce during COVID. It will remain the largest digital advertising format with approx. 50% of total digital ad sales.

2021: STABILIZATION AND REBOUND

In 2021, MAGNA expects advertising sales to rebound, posting a gain of +4.0% (+5.4% excluding cyclical events). However, with a total of $222 billion, the US ad market will still be slightly smaller than it was in 2019 at nearly $224 billion. The ad market will benefit from economic stabilization (GDP expected to grow by +3.2% according to the Philadelphia Fed) and the Tokyo Olympic Games, which will generate approx. $800 million of incremental ad revenues.

The economic and advertising recovery is of course dependent on the COVID pandemic coming under control, and the availability of vaccination at some point in the first half, to fully restore business confidence. Even if that macroeconomic scenario materializes, the unemployment rate will remain elevated for many quarters and may remain as high as 8% by end-2021, according to the Philadelphia Fed. Unemployment, low consumer confidence and higher saving rates will continue to hurt consumption, especially big-ticket items like cars and travel, well into 2021 and 2022.

Many industry verticals continue to face significant economic headwinds and have been forced to cut marketing and advertising budgets this year. Despite some stabilization in the second half, MAGNA predicts that all key industry verticals will reduce linear ad spend this year: relatively mild cuts for personal care (-8%) and pharma (-6%), much deeper cuts for restaurants (-30%), automotive (-35%), travel (-50%), and entertainment/movies (-30%).

Looking at 2021, several industries will see an improvement in sales and business outcomes, and resume quasi-normal advertising spending as a result, as they will need to compete for share of voice and returning consumers. MAGNA expects seven of the top ten verticals to increase linear advertising spending in 2021, including entertainment (+12%, as movie theaters reopen and blockbusters start hitting big screens regularly again), and restaurants (+8% as indoor dining fully reopens), as well as technology, personal care and pharmaceuticals (all at +5%). But some industries will take years to fully recover from the pandemic and go back to their pre-COVID marketing spending. Travel advertising spend is expected to decline by a further -15% in 2021 as Americans will remain hesitant about flying and traveling, while retail ad spend will fall -7% as the pandemic has hastened the brick-and-mortar long-term decline. Finally, automotive ad spend may decrease by -5% as low consumer confidence and high unemployment will continue to hurt car sales.

POLITICAL SPENDING: A RECORD YEAR DESPITE COVID

The 2020 election cycle will generate $5.1bn in net incremental advertising sales, an increase of +32% compared to 2016 and a new all-time high. MAGNA raised its full-year expectation compared to the previous forecast of June 2020, as fundraising and ad spend turned out even stronger than expected in the first half, despite the COVID recession.

More than twice as many political dollars were raised ($11.3bn) through the first half of 2020 than were raised at this point in the 2018 midterms and last presidential election cycle in 2016 (both at $5.1bn), as an intensely divided political landscape and increase in the number of competitive races – especially in the House – has driven political fundraising and spending. The economic recession did slow down fundraising in 2Q compared to previous cycles, and may continue to affect donations from small donors and businesses, but the funds raised by candidates and political action committees (PACs) in the second half of 2019 and up to 1Q20 are more than enough to fuel historical levels of spending. Candidates have raised $4.2bn through the first half, or +140% more than in 2016, and the Biden campaign reportedly raised $300 million in August alone, a new record.

Who will benefit from that record political spending? Local TV will remain the primary avenue for political campaigns with $3.3 billion of incremental ad revenues (+17% over 2016), i.e. two thirds of total political ad dollars this year. The other big winner will be digital media, that will surpass direct mail to become the second largest political advertising format, generating close to a billion dollar this year almost three times the 2016 spending. All digital formats will benefit, with at least $500m for social media vendors, $300m for digital video and more than $100m for search. Direct mail will be the third largest political advertising format, with more than $500m in political ad sales (+12% growth vs 2016). Finally, national TV, usually a relatively small political media, may benefit more than usual this year, as shown by the Michael Bloomberg and Donald Trump campaigns that made the symbolic and unusual decision to run ads during the 2020 Superbowl.

Overall, incremental political ad sales will generate 1.5 point of extra growth – or decline mitigation – for the market this year. If not for political ad spend, all-media ad sales would decline by -6.1% instead of just -4.6%.