Shift to Alternative Media strategies will drive U.S. Communications spending growth.

While communications spending growth accelerated in 2006, outpacing nominal GDP for the fourth time in five years, consumer media usage declined following two consecutive years of decelerating growth, according to exclusive data released by Veronis Suhler Stevenson (VSS).

Total communications spending increased 6.8% to a record $885.2 billion in 2006 and expanded at a compound annual growth rate (CAGR) of 5.9% from 2001 to 2006, exceeding GDP growth in both periods, according to the VSS Communications Industry Forecast 2007-2011 (VSS Forecast), the 21st edition of the leading source for media spending, usage, and trends data. VSS tracking data for the first half of 2007 indicates that the communications industry is on pace to grow 6.4% this year and will post a CAGR of 6.7% in the 2006-2011 period, making it the third fastest growing sector of the U.S. economy. Strong gains in the alternative media and institutional end-user sectors are expected to drive growth, as communications spending tops $1 trillion for the first time in 2008. In what would be a watershed moment in communications history, VSS predicts that Internet advertising – including pure-play websites and digital extensions of traditional media – will replace newspapers as the largest ad medium in 2011.

For the first time since 1997, consumers spent less time with media in 2006 than they did the previous year, as media usage per person declined 0.5% to 3,530 hours, due to changing consumer behaviors and digital media efficiencies, according to the VSS Forecast. The drop in consumer media usage was driven by the continued migration of consumers to digital alternatives for news, information and entertainment, which require less time investment than their traditional media counterparts. For example, consumers typically watch broadcast or cable television at least 30 minutes per session while they spend as little as five to seven minutes viewing consumer-generated video clips online. VSS expects consumer media usage to stabilize in 2007 and increase slightly through 2011, as out-of-home media and videogames will be the only major segments to achieve accelerating growth in the forecast period compared with the 2001-2006 timeframe. Overall consumer time spent with media will increase at a CAGR of 0.5% from 2006 to 2011, compared with 0.8% in the previous five-year period.

The VSS Forecast is the only source to track, analyze and forecast spending, usage and trends in all 19 segments and more than 100 sub-segments of the U.S. media industry. The VSS Forecast also features the industry’s most accurate spending forecasts, producing a margin of error of +/- 2% for 9 of the last 10 years. The margin of error for the 2006 forecasts was + 0.4%.

In addition to shifting their attention to alternative media, consumers are also migrating away from advertising-supported media, such as broadcast TV and newspapers, to consumer-supported platforms, such as cable TV and videogames. Time spent with consumer-supported media grew at a CAGR of 19.8 percent from 2001 to 2006, while time spent with ad-supported media declined 6.3 percent in the period.

While consumers spent less time with media in 2006, media usage by institutional end-users grew 3.2 percent to 260 hours per employee, according to the first-ever analysis of business and government media usage included in this year’s VSS Forecast. Institutional media usage climbed at a CAGR of 3.3% in the 2001-2006 period, driven by the continued integration and increased use of online and digital platforms to enhance business performance and workflow. Institutional media usage will continue to grow from 2007 to 2011, although growth will decelerate slightly as the forecast period progresses.

“We are in the midst of a major shift in the media landscape that is being fueled by changes in technology, end-user behaviors and the response by brand marketers and communications companies,” said James Rutherfurd, Executive Vice President and Managing Director at VSS. “We expect these shifts to continue over the next five years, as time and place shifting accelerate while consumers and businesses utilize more digital media alternatives, strengthening the new media pull model at the expense of the traditional media push model.”

Fueled by faster growth in the alternative media segments, as well as the institutional end-user and marketing services sectors, total communications spending grew at an accelerated rate in 2006 and rebounded from the 2001-2002 recession to post solid growth for the 2001-2006 period. VSS divides the communications industry into four major end-user sectors – advertising, marketing, consumer, and institutional – and 19 different media segments in which those end users spend their dollars (see sector and segment analysis below for more details). The institutional sector, including business, education and government spending on media, information and related services, was the fastest-growing in the 2001-2006 period, expanding at a CAGR of 6.9% to $226.9 billion in 2006. Marketing services, exemplified by segments such as direct marketing, branded entertainment and promotions, followed with a CAGR of 6.6% from 2001 to 2006, with spending reaching $254.01 billion, making it the largest communications sector, according to the VSS Forecast. Advertising was the slowest growing sector with a 4.5% CAGR in the 2001-2006 period, due to the recession and challenges impacting traditional ad-based media.

The alternative advertising and marketing segments produced the strongest gains in the 2001-2006 period, as intensified competition for consumers’ time and attention amid a dizzying array of media choices prompted major brands to ratchet up their use of alternative media strategies. Spending on alternative advertising – including Internet, mobile, videogames and digital out-of-home, among others – grew 36.6 percent to $26.53 billion in 2006 and posted a CAGR of 23.9 percent from 2001 to 2006. Traditional advertising spending, however, grew only 2.4 percent to $183.21 billion in 2006 while producing a CAGR of 2.8 percent in the five-year period, hindered by slow growth in print-based newspapers, yellow pages and consumer magazines. Meanwhile, spending on alternative marketing – including branded entertainment, interactive marketing and e-custom publishing – increased 17.3 percent to $61.67 billion in 2006, and experienced a CAGR of 15.3 percent from 2001 to 2006. In contrast, spending on traditional marketing, such as direct mail and promotions, grew only 5.0 percent to $192.34 billion in 2006 and climbed at a CAGR of 4.5 percent from 2001 to 2006, according to the VSS Forecast.

The fastest growing media segments in the 2001-2006 period were outsourced custom publishing, branded entertainment; cable, satellite and RBOC TV services; and pure-play Internet and mobile services, all of which posted double-digit growth (see segment breakdown that follows).

“Leading national advertisers have accelerated their diversion of dollars from traditional print and broadcast media to alternative digital platforms to combat media and audience fragmentation, increased consumer control and multitasking, and the growing impact of advanced technology on conventional media models. The result has been the extraordinary growth of alternative advertising and marketing,” Rutherfurd said. “Meanwhile, the consumer sector has been hampered somewhat in recent years by downtrends in recorded music, home video and print circulation, although we expect improvement during the next five years. And the institutional sector has been buoyed by increased demand for digital workflow tools that improve efficiency and boost performance, a trend we anticipate to continue going forward.”

VSS projects total spending on communications will expand at a CAGR of 6.7% in the 2006-2011 period, outpacing U.S. economic growth and accelerating over the 2001-2006 industry performance. Primary drivers will be accelerating growth in institutional end-user and marketing services spending, in addition to the faster growth in alternative advertising and marketing. Communications spending will exceed $1 trillion for the first time in 2008 and reach $1.222 trillion in 2011, according to the VSS Forecast.

Institutional end-user spending is expected to remain the fastest-growing communications sector in the forecast period, producing a CAGR of 7.6 percent to $327.85 billion in 2011, followed by marketing services, which will remain the largest sector, climbing at a CAGR of 7.5 percent to $365.41 billion in 2011 (see forecast breakdowns below). Consumer end-user spending on cable TV access, videogames, music and books, among others, will post a CAGR of 5.8 percent from 2006-2011, while overall advertising spending will be the slowest growing industry sector with a 5.2 percent CAGR, VSS forecasts.

Alternative advertising and marketing will continue to spur growth in the communications industry in 2007 and through 2011, as alternative media is expected to expand at a CAGR of 17.4 percent in the period to $197.11 billion, while traditional advertising and marketing will post an aggregate CAGR of 3.2 percent to $438.99 billion in 2011. VSS projects the fastest-growing media segments over the next five years will be pure-play Internet and mobile services, branded entertainment, out-of-home media, outsourced custom publishing and public relations, with each producing CAGRs of between 10% and 15% in the five-year period. VSS expects total Internet advertising to reach $61.98 billion in 2011, surpassing newspapers as the nation’s largest ad medium.
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