Veronis Suhler Stevenson Forecast: overall communications spend.

Overall communications spending is on pace to grow at an accelerated rate in 2006, driven by double-digit growth in alternative advertising and marketing strategies, according to exclusive data released by Veronis Suhler Stevenson (VSS).

Total spending on media and communications is expected to rise 7.2 percent in 2006 to $961.90 billion, following a 6.3 percent gain in 2005, posting a compound annual growth rate (CAGR) of 6.6 percent in the 2005-2010 period, reaching $1.236 trillion, according to the Communications Industry Forecast 2006-2010.

Over the forecast period from 2005 to 2010, spending on media and communications will increase by more than $330 billion to $1.2 billion. In 2000 the industry spending total just over $700 billion.

Internet and mobile services is one of the fastest growing segments of the media industry with a projected growth rate of 14.7 percent over the next five years, but according to new data compiled by VSS the fastest growth within internet and mobile services is coming from traditional media companies. Despite increased competition and fragmentation, traditional media companies have positioned themselves to capitalize on an increasing share of the surge in spending on broadband video advertising, music and game downloads, and mobile marketing services. Spending on Internet and mobile advertising, marketing and paid content through traditional media companies is expected to reach $25.57 billion by year-end 2006, growing 26.1 percent from the 2005 level. Traditional media companies will account for 45.0 percent of total spending on Internet and mobile services by the end of this year, up from only 16.0 percent in 2000, according to VSS.

Marketing services was the largest and fastest growing communications sector in 2005, growing 9.1 percent to $309.93 billion, and is expected to rise at a five-year CAGR of 8.0 percent to $455.72 billion in 2010, fueled by growth in direct response media, event marketing and custom publishing, according to the Communications Industry Forecast 2006-10. Other areas of relatively high growth include Professional & Business Information Services, which is forecast to grow at 7.8 percent per year and Out-of-Home Advertising, particularly the Alternative Out-of-Home sector.

“While there is a shift in spending from conventional media to new media strategies, our research indicates that traditional media companies are aggressively pursuing online and mobile platforms, protecting their brands and developing new revenue streams,” said James Rutherfurd, executive vice president and managing director at VSS. “If one word could describe the media business in 2006 it would be fragmentation. Never have there been so many media options available to advertisers and consumers, a trend that has both excited and frustrated brand marketers as media buying decisions have become more complicated by a market veering toward new media. But traditional media companies have responded by investing in multiple media platforms to reach this increasingly fragmented audience.”

VSS tracking data indicates that the hours consumers spent with media increased 0.4 percent in 2005 to 3,543 hours per person and are forecast to climb to almost 10 hours per day by year-end 2010 to 3,620 hours per person annually. The shift from advertising-supported media to end-user-driven media will continue with overall end-user time spent on media forecast to grow at a CAGR of 8.7 percent in the 2005-2010 period compared with a 3.2 percent decline in usage of ad-supported media over the net five years.

Advertising spending is on pace to finish 2006 with 6.4 percent growth to $210.29 billion, following a 4.3 percent increase to $197.59 billion in 2005. Key growth drivers this year have been the strong demand for Internet advertising through both traditional media and pure-play Web enterprises and the accelerating shift of ad spend to alternative advertising platforms. Ad spend is projected to grow at a 5.5 percent CAGR over the next five years to $258.58 billion in 2010. Consumer spending on media was the slowest growing communications sector in 2005, with spending up only 2.8 percent to $185.90 billion, the lowest growth rate in 30 years, primarily due to the declining growth in many entertainment media subsegments, such as box office, recorded music, and videogames. Consumer media spend is estimated to inch up at a 4.5 CAGR from 2005 to 2010, reaching $231.22 billion.

Institutional spending on communications, meanwhile, will expand 8.0 percent in 2006 to $219.83 billion, driven by strong growth in the Professional & Business Information Services segment and the Education & Training market, both of which are growing at high single-digit rates for year-end 2006. Institutional spending on media will grow at a CAGR of 7.4 percent from 2005 to 2010, reaching $290.46 billion. Institutional end-user spending on communications was the second largest and second fastest growing media sector in 2005, climbing 7.6 percent to $203.53 billion, led by double-digit growth in K-12 educational materials and marketing information. This sector will grow at a 7.4 percent CAGR to $290.46 billion during the 2005-2010 period, according to VSS.

Positive overall industry growth trends, however, will be tempered by the rapid decline of many media formats, such as VHS, PC games and CDs; consolidation in the retail and telecommunications industry and the slowing growth of the U.S. automotive industry, which are adversely impacting advertising spending; and a higher reliance on blockbuster hits in the box office and music segments. Meanwhile, as traditional media companies expand their presence in the burgeoning online and mobile markets, they are facing challenges, VSS found. Online and mobile platforms are not likely to generate spending tantamount to traditional media in the near-term due to changing media usage patterns. Consumers spend less time with online and mobile versions of traditional media; for example, they tend to read only a few news stories on the Web, but entire sections of a printed newspaper. Furthermore, consumers are reluctant to pay for online content because they have grown accustomed to receiving content for free on the Web. The emergence of free user-generated content, such as blogs and podcasts, is further limiting opportunities to charge for content, although advertising growth in this segment is exploding.

VSS Communications Industry Segments

Broadcast Television

Driven by Olympics-related advertising and heated mid-term political races in the second half of 2006, total spending on broadcast television is expected to climb 8.7 percent to $46.64 billion this year, according to the VSS Forecast. We expect on-air broadcast TV advertising, excluding barter syndication, to grow at a CAGR of 2.9 percent from 2005 to 2010, reaching $48.35 billion in 2010. Broadcast television spending declined 2.7 percent to $42.89 billion in 2005, weakened by comparisons to heavy 2004 spending on the presidential election campaign and Olympics-related advertising. However, a new niche, mobile TV — which includes clips of programs, information alerts and mobile marketing — soared 350.0 percent to $90.0 million in 2005 as more consumers accessed video content outside the home.

Cable & Satellite Television

VSS forecasts overall consumer and advertiser spending on cable and satellite TV will grow at a decelerated, but relatively strong 9.9 percent in 2006 to $124.32. This segment is forecast to grow at a CAGR of 8.4 percent from 2005 to 2010 to $169.43 billion. Key drivers will include the success of the cable industry’s bundled services, increased ARPU, reduced churn and accelerated ad spend growth. Total spending on cable and satellite TV climbed 11.1 percent to $113.13 billion in 2005, the fifth straight year of double- digit growth. The industry’s growth continued to outpace that of nominal GDP and the overall media business, as subscription spending rose 7.8 percent, and advertising and marketing spend increased 13.1 percent to $22.58 billion. Spending on other revenue streams, such as license fees, cable modems, and online and mobile content, grew 16.1 percent to $31.73 billion in 2005.

Broadcast & Satellite Radio

Total broadcast, satellite and online radio spending is forecast to increase 5.3 percent to $22.01 billion in 2006, driven mainly by further expansion of satellite radio and Web initiatives, with some upside in the broadcast sector via inventory reduction, new technology and growth in niche formats. Broadcast radio advertising increased a mere 0.3 percent to $20.07 billion in 2005, despite improved GDP growth and renewed listener interest in new audio broadcasting technologies. Meanwhile, satellite radio received more than its share of adulation from Wall Street and the media industry in 2005, considering its relatively small share of overall radio spending. Satellite radio, including subscriptions and advertising spending, grew 156.9 percent in 2005 to $752.0 million as subscription spend surged 156.3 percent to $726.0 million and ad spend jumped 177.0 percent to $26.0 million. By 2010 satellite radio subscription spending is forecast to grow 40.3% per year to $3.9 billion and satellite radio advertising by 98.2% to $794 million for combined spending of $4.7 billion compared to the broadcast satellite spending in 2010 of $22 billion. Broadcast and satellite radio spend will grow at a CAGR of 5.4 percent from 2005 to 2010, reaching $27.19 billion, as growth in satellite and online radio will augment slower growth in broadcast radio.

Out-of-Home Media

Total spending on out-of-home advertising is expected to grow 7.9 percent in 2006 to $6.80 billion and increase at a CAGR of 7.5 percent from 2005 to 2010, reaching $9.06 billion. In addition to strong growth in alternative media and the rollout of digital billboards, new audience measurement systems are expected to drive growth during the forecast period. Total spending on out-of-home media increased 8.0 percent in 2005 to $6.30 billion, driven by growth in all four subsegments, including static billboards, transit displays, street furniture and alternative out-of-home media. Billboards are the largest sector, controlling 61.3 percent of overall spending, but alternative out-of-home is the fastest growing, surging 35.0 percent in 2005 to $290.0 million. Aggregate expenditures on out-of-home media grew at a CAGR of 3.8 percent from 2000 to 2005.

Entertainment Media

Entertainment media spend, including box office, recorded music and videogames, among others, fell 2.3 percent to $83.82 billion in 2005, the first decline in more than 25 years. Entertainment media spending is expected to grow 4.3 percent in 2006 to $84.42 billion and rise at a CAGR of 3.7 percent from 2005 to 2010, exceeding the $100 billion mark in 2010. Growth is decelerating in entertainment media spend as a result of several dying formats, including VHS and PC videogames. Filmed entertainment will remain the largest subsegment of entertainment media, with spending of $75.73 billion by year-end 2010, up at a 3.8 percent CAGR from 2005 to 2010. The decline in entertainment spend in 2005 resulted in a modest CAGR of 3.9 percent in the 2000-2005 period, the lowest five-year growth rate since spending data was first collected in 1975.

Internet & Mobile Services

Spending on Internet and mobile advertising, marketing and paid content through traditional media companies is expected to reach $25.57 billion by year-end 2006, growing 26.1 percent from the 2005 level. Traditional media brands will account for 45.0 percent of total spending on Internet and mobile services by the end of this year, up from only 16.0 percent in 2000, according to VSS. Spending on online and mobile products from traditional media companies accounted for 43.6 percent of overall Internet and mobile spending in 2005. Internet and mobile spending associated with traditional media properties has been, and is forecast to continue to be, the fastest growing part of the Internet and Mobile Services industry. Combined, spending on pure-play and traditional media online advertising, marketing and content rose 20.5 percent in 2005 to $48.20 billion and by 2010 will total $96.7 billion. Pure-play Internet and mobile services grew 11.1 percent in 2005 to $27.92 billion, driven by double-digit gains in Internet advertising, especially keyword search, mobile marketing and content, and broadband access. This growth was tempered by declines in dial-up access spending and in several paid content categories. Total spending on pure-play Internet and mobile services is expected to climb 11.9 percent in 2006 to $31.24 billion and grow at a CAGR of 11.9 percent from 2005 to 2010, reaching $49.04 billion. Including traditional online media and mobile spending, overall Internet and mobile services spending is expected to increase 17.9 percent in 2006 to $56.81 billion and projected to grow at a CAGR of 14.7 percent from 2005 to 2010.

Newspaper Publishing

Total newspaper spending, including print, online and mobile platforms, is projected to edge up 1.5 percent in 2006 to $67.76 billion. With Internet spending siphoning dollars away from print newspapers, spending on print dailies is expected to rise at a CAGR of just 0.2 percent from 2005 to 2010 to $58.69 billion. The weak print performance will be offset by strong online and mobile advertising, marketing and content spending, which is expected to rise at a CAGR of 20.0 percent from 2005 to 2010. Newspaper spending rose 2.3 percent in 2005 to $60.64 billion, spurred by gains in online and print advertising spending, but hampered by a decline in circulation expenditures. Total daily newspaper spending was essentially flat between 2000 and 2005.

Consumer Book Publishing

Total spending on new, used and online books will increase 2.7 percent in 2006 to $21.88 billion. The rise of used books is expected to alter the spending pattern on consumer books in the years to come. Spending on used books is projected to grow at a 25.0 percent compound annual rate over the next five years, reaching $2.25 billion in 2010. Record-setting demand for Harry Potter and the Half-Blood Prince, plus strong spending on titles related to the movie The Chronicles of Narnia, helped to boost total consumer spending on new books by 3.6 percent in 2005 to $20.48 billion. The used book market, limited primarily to small retail outlets, libraries and the neighborhood tag sales in the past, has become a more important factor in the consumer book market due to the Internet, jumping 25.0 percent in 2005 to $736.0 million. Used book spending pushed total spending on consumer books to $21.31 billion, a 4.4 percent increase over the 2004 level. The Consumer Book publishing industry is forecast to have total spending in 2010 of $24.9 billion.

Yellow Pages Directories

Yellow pages advertising increased 2.3 percent to $15.79 billion in 2005, driven by independent (competitive) and Internet yellow page (IYP) directories. Telephone company directory spending declined 0.3 percent to $12.35 billion due to increased competition from competitive directories and other advertising options available. Spending in independent yellow pages increased 13.4 percent to $3.10 billion in 2005 due to increased penetration in existing markets and start-up directories in new markets. IYP experienced the strongest growth rate in 2005, up 24.6 percent to $966 million, including print publisher websites. Spending in telephone company directories is expected to be limited through 2010, with a five-year CAGR of only 0.2 percent to $12.45 billion. While spending in independent directories is expected to remain strong in the forecast period, growth will likely moderate but still exceed GDP as the revenue base increases and opportunities for expansion diminish. Spending in competitive independent directories is expected to increase at a CAGR of 11.7 percent from 2005 to 2010 to $5.39 billion. Growth for IYP, including print publishers’ websites, will increase at a CAGR of 20.9 percent to $1.61 billion in 2010. Total industry spending in 2010 is forecast to be $17.8 billion.

Consumer Magazines

Overall consumer magazine spending growth will decelerate in 2006, rising less than GDP at 2.7 percent to $24.15 billion. Ad growth will continue to decelerate in the 2005-2010 period, although the segment’s CAGR of 3.4 percent will be higher than in the previous five-year period because of the dramatic decline during the recession of 2001. Spending on consumer magazines, including print advertising, circulation and online advertising and content, increased 3.6 percent in 2005 to $23.40 billion. E-media spending growth also decelerated, but still climbed a strong 30.7 percent to $302.0 million, accounting for 1.3 percent of total segment spending. Between 2000 and 2005, the consumer magazine segment experienced a CAGR of just 1.0 percent, largely due to a 10.3 percent decline in advertising spending in 2001 and a 0.9 percent downturn in 2002. Print advertising expenditures increased 5.0 percent in 2005 to $12.73 billion, surpassing spending in 2000. Circulation spending increased a modest 1.3 percent in 2005 to $10.47 billion. By 2010 Consumer magazine spending will have grown at 3.0% per year to $27.2 billion.

Business-to-Business Media

Driven by new online media options and integrated marketing opportunities, b-to-b media spending is expected to increase 6.3 percent to $23.69 billion in 2006. Spending will reach $30.17 billion by year-end 2010. Print advertising, still the core revenue stream of many b-to-b media companies, continues to experience weakness as marketers divert funds to online and other media outlets that provide a more measurable ROI. Trade show spending will grow at a CAGR of 5.8 percent from 2005 to 2010, reaching $12.89 billion. Spending on e-media, an important component of this integrated media strategy, climbed 27.0 percent to $1.87 billion in 2005 due to the medium’s ability to offer relatively low prices, generate leads and measure ROI. Meanwhile, b-to-b magazine spending grew 4.0 percent in 2005 to $10.70 billion, spurred by growth in print advertising spending in all but four of the 15 VSS industry categories and aided by a slowdown in subscription spending declines. Spending on trade shows grew 6.3 percent to $9.71 billion in 2005 as business travel continued its recovery. Faster than GDP annual growth of 6.2% will drive total Business-to-Business Media spending to be $30.2 billion by 2010.

Educational & Training Media in 2005 and 2006

Total spending on educational and training media is projected to grow 4.9 percent in 2006 to $22.28 billion, primarily due to continued spending on outsourced training by corporations, tempered by slower growth in K-12 spending due to a weak adoption cycle. Educational and training spending is expected to increase at a CAGR of 5.3 percent in the forecast period, reaching $27.48 billion in 2010. Spending on educational and training media, including K-12 educational materials, college educational materials and services, and outsourced training, rose 9.3 percent to $21.24 billion in 2005, the first time in at least five years that growth in this segment outpaced nominal GDP expansion. Expenditures on K-12 instructional materials reached $5.41 billion, up 12.6, fueled by a sharp increase in spending on textbooks and testing materials in adoption states. Educational & Training Media is forecast to grow 5.3% per year to $26.4 billion by 2010.

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