Advertising Update: Light at the End of the Tunnel.

The latest economic forecasts have confirmed that the US is on a slow but steady trajectory towards recovery. Four months into 2013, there are clearer signs that this year will show moderate economic growth, despite the fiscal austerity and uncertainty that plagued the beginning of the year.

The latest full-year GDP growth forecast (+1.9%) is marginally below the previous one (a decrease of -0.1%); Nominal Personal Consumption will grow less than previously anticipated (+3.9% vs. +4.1%) and Industrial Production will grow by a modest +2.4% (unchanged from previous forecast) (source: Survey of Professional Forecasters, Philadelphia Fed). Unemployment, on the other hand, is decreasing at a slightly faster rate than previously expected, although progress is bumpy (evidenced by weak job gain in April). The latest consumer sentiment index (published in April) was stable at 76.4, which confirms an improvement from the December-January low (around 73) induced by “fiscal cliff” anxiety, but remains as low as the average 2012 level (source: University of Michigan).

In summary, although consumers and businesses will remain cautious in the short term, fiscal austerity has not broken the recovery, and therefore we maintain a prediction of +1.0% for top-line normalized ad revenue growth this year, as suggested by our long-term statistical model. That top-line growth rate translates into +2.4% ex-P&O for core media advertising
(TV, radio, internet, out-of-home, magazines and newspapers) while traditional direct media (directories and direct mail) continues to underperform. Factoring in that 2013, unlike 2012, won’t see incremental ad revenues from the Olympic Games or elections, the actual change of ad revenues will be more modest, at +0.4%.

The television advertising market was slow in the first quarter, with cost-per-thousands (CPM) on the “scatter” market showing almost no premium over the 2012/2013 upfront cost increases. Pricing is up in the second quarter, but we believe this is mostly the result of low supply due to poor ratings, rather than a general surge in demand. We anticipate national television advertising to grow modestly, while local TV will be down and television ad revenues as a whole will decrease by -2.8% (+1.9% ex-P&O).

Digital media will be the only category to show significant growth this year (+11.5%), although the pace of growth should plateau slightly as a result of deflationary pricing trends affecting display formats.

Magazines continued to suffer in the first quarter. Advertising pages were down -4.9% during the quarter, and we believe ad revenues decreased in a similar manner, as CPM inflation barely makes up for audience erosion (full year forecast is -6.7%). Following a strong 4Q12 which was driven by political spend, the expectation is that radio advertising will revert to flatter growth in 1Q and 2Q (full year forecast is -0.2%). Outdoor advertising grew +4.2% in 2012, partly attributable to political spending in the second half of the year. Without that driver, we foresee smaller growth in the first half of 2013, and +3.5% on a full year basis.

Coming up again this spring, TV upfronts continue to be the media purchasing event of the year, with the bulk of the year’s TV inventory being negotiated over a few weeks in May and June. Many have called for this dated practice to end, in an age where real time, data-driven, auction-based, last-minute trading would rule instead. The reliance of advertisers and media sellers on the upfront market, however, has not dissipated, because the predictability and scale that upfronts provide for both the supply and demand side, remains valuable for most market players. Buying on the scatter market has almost always proved more expensive on a CPM basis during the last ten years.

Not only do the upfront negotiations survive in modern television, but they seem to be winning new converts in digital media too. The creation of the “new fronts” marks a whole new generation of digital media owners battling for upfront dollars and supporting a trading model similar to that of television, for some of their inventory (mostly video). The question is how successful these “new front” competitors will be in stealing share from traditional TV or in growing the upfront pie.

Economic forecasts for 2014 point to more robust growth, with GDP up +2.8% (almost one point above 2013 expectations) and, perhaps more importantly in terms of advertising spending, Personal Consumption up +4.6% (compared to +3.9% expected in 2013) and Industrial Production up +3.4% (compared to +2.4% expected in 2013). The unemployment rate is now forecasted to decline to 7.2% at the end of 2014 (previously 7.4%) (source: Survey of Professional Forecasters).
Vincent Letang, Director of Global Forecasting said: “The latest economic forecasts for 2014 may sound like a modest acceleration, but it should be enough to raise confidence to the point where marketers switch from optimization mode to expansion mode. For media owners, especially traditional mass media categories, this means that there is light at the end of the tunnel.”

Political adspend and Olympics will help, as is usual in even-numbered years. Although not quite as strong as Summer Olympics, incremental media revenues were strong during the last Winter Olympics four years ago. While Sochi, Russia is perhaps less convenient than Vancouver, Canada in terms of television scheduling, the London games last year were a complete success, and time zones did not get in the way of maximizing audiences and ad sales. We therefore forecast a +5% increase compared to the Vancouver Olympics in 2010, affecting mostly 1Q14. As for political spending, we anticipate a +12% increase from the last mid-term election in 2010. That should bring in almost $3 billion of incremental television revenues, with the bulk of it in local broadcast TV.

Combining a more robust economic prospect and a P&O impact that seems to be growing stronger every two years, MAGNA GLOBAL is upgrading its 2014 forecast to +5.9% (+3.8% ex-P&O) (previously +5.4%, with +3.1% ex-P&O).

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