U.S. AD MARKET OUTLOOK down by 1% based on economic impact of Russian Invasion of Ukraine

MAGNA reduces its 2022 advertising spending growth expectation due to economic and geopolitical uncertainty, but media owners’ ad revenues should still grow by +11% this year to pass the $300 billion milestone.

KEY FINDINGS

Final 2021 estimates: US advertising revenues grew by a record +25% to reach $287 billion. As expected, the pace of growth continued to slow in the fourth quarter:

• +14% YoY compared to +26% in 3Q21 and +46% in 2Q. All media types benefited from the strong economic environment and spending recovery, notably Search (+42%), Social (+36%), Audio (+24%) and Video (+12%).
  For 2022, the geopolitical crisis leads MAGNA to anticipate lower-than-expected economic activity, continued supply issues and protracted inflation.
• On the other hand, organic growth drivers remain strong and Mid-Term elections will bring $6.2 billion in incremental ad revenues (+41% vs 2018 cycle).
• Overall, MAGNA reduces its 2022 growth forecast by one percentage point vs. pre-Ukraine expectations: media owners advertising revenues will grow by +11.5% to reach $320 billion, passing the $300 billion milestone for the first time (previous forecast +12.6%).
• Technology, Telecoms, Entertainment, Travel and Betting are among the industries expected to grow advertising spending the most, while Automotive continues to struggle with supply issues.
• Most media types will grow advertising revenues again: Search (+17%), Social (+16%), OOH (+11%) and Cross-Platform Video (+8%).

Vincent Létang, EVP, Global Market Intelligence at MAGNA and author of the report, said: “The Ukraine crisis has already hit consumer and business confidence. It will slow down economic growth in 2022 and fuel the inflationary trend. It is too early to assess the depth and length of economic repercussions, but MAGNA believes the U.S. economy is strong enough to weather this new challenge. Looking at marketing and advertising, the macro-economic headwind will be mitigated by continued organic drivers (innovation, emerging verticals, ecommerce) and stronger-than-expected political fundraising (leading to at least six billion dollars in incremental ad spend). Balancing all factors, MAGNA reduces its 2022 advertising revenue growth forecast by one percentage point, as media owners’ ad revenues will grow by +11% this year to pass the $300 billion milestone for the first time”.

AFTER RECOVERING FROM COVID, THE ADVERTISING MARKET IS FACING NEW CHALLENGES

Before the invasion of Ukraine and the geopolitical crisis it triggered, the 2022 forecast consensus was another year of robust economic growth in the U.S., e.g. +3.7% for real GDP. Economists predicted a mild slowdown in economic activity, compared with the v-shaped recovery of 2021 (GDP +5.5%), with the main economic indicators remaining above the pre-COVID long-term averages, while inflation would gradually slowdown from the 2021 spike as supply chain issues would fade away.

However, since the war broke in Ukraine, uncertainty and volatility have come back. The stock market was hit; oil prices grew from $90 to $130 before stabilizing – for now – around $110; regular gas averaged $4.30 a gallon on 03/14 compared to $3.50 mid-February and $2.80 in March 2021. The economic sanctions against Russia will also hurt the global economy and rekindle the global supply crisis. Pre-Ukraine, U.S. consumer inflation was expected to slow from 7% in 2021 (headline CPI inflation) to +3.8% this year, but now prices, costs and wages are likely to stay inflationary (5% to 7%) for at least one more year.

As for economic activity, economists have already revised their 2022 GDP growth expectations downward between half a point and a full percentage point. Goldman Sachs, for instance, revised its forecast from +2.9% pre-Ukraine to +2.1% in early March. The combination of higher inflation, stock market volatility and economic uncertainty already hit consumer confidence, which fell to index 59.7 in early March, its lowest level in more than ten years (lower than any point into the COVID crisis).

Despite the geopolitical crisis and stress on energy markets, the U.S. economy’s fundamentals remain strong for now, with low unemployment, stronger savings than pre-COVID, and consumer mobility expected to resume its recovery as we emerge from the Omicron wave of January 2022. Moreover, marketing activity and advertising demand will continue to be driven by both organic and cyclical factors in 2022: marketing innovation will continue to fuel competition and advertising spending; Winter Olympics and mid-term elections are generating incremental advertising spending.

POLITICAL ADVERTISING WILL MITIGATE THE UKRAINE HEADWIND

The major cyclical driver in 2022 will be the November elections. With $5.7 billion already raised by February according to the Federal Election Commission (+72% vs 2018 at the same stage), MAGNA now expects incremental advertising revenues generated by political campaigns to reach $6.2 billion for media owners for the entire cycle. This would represent an increase of +41% vs the previous mid-term cycle in 2018 (our previous forecast was +31%). Local television may get $4.2bn (+26% vs 2018), Direct Mail $600 million, and Digital Media formats close to $1.5 billion.

In addition to political spending, ballot measures will bring millions of dollars into local and digital media. Already 77 statewide ballot measures are scheduled for the November election, on various topics including abortion, marijuana, sports betting, environment and voting rights.

AD MARKET TO PASS THE $300 BN MARK THIS YEAR

Considering remaining drivers and growing headwinds, MAGNA adjusts its short-term advertising revenue forecast downwards by one percentage point in this spring update. Media owner revenues are still expected to grow in 2022 to $320 billion, a new all-time high. However, our top-line forecast (all-media, including cyclical) goes down from +12.6% in our previous update (Dec. 2021), to +11.5% in the March update. Excluding cyclical effects, 2022 growth will be +10%, down from +28% in 2021.

Technology, Telecoms, Entertainment, Travel and Betting are among the industries expected to grow faster than average, while Automotive continues to struggle with supply chain issues.

Search advertising sales will grow by +17%, as demand for lower-funnel media channels, and organic growth of e-commerce spending should mostly insulate Search from macro-economic volatility. Social Media ad sales will grow by +16% (incl. political) in 2022 down from +27% in 2021 (+20% in 4Q21). Two factors are contributing to slower growth for the channel looking forward: Volume saturation (reach, consumption and ad impressions are now plateauing again after the COVID surge), and an erosion in pricing power and brand attractiveness as millions of social media app users on Apple smart phones opted out from targeted ads in recent months. Meanwhile Short-Form Pure Play Video will continue to grow strongly (+23%) benefitting from continued consumption growth and political spending.

National TV ad revenues (cross-platform national long-form video) will stabilize around -1% (traditional ad sales -5%, AVOD/OTT/CTV +27%). Local TV ad revenues (cross-platform local long-form video) will grow by +16% in 2022, thanks to record political spending and despite the continued weakness of one key vertical, car dealers.

Cross-Platform Audio advertising revenues (linear radio, streaming and podcasting) will grow by +5% (linear radio flat, digital audio +15%). Audio media will also suffer from the continued weakness of the Automotive vertical but benefit from the recovery of consumer mobility and the growing adoption of digital audio.

OOH advertising revenues will grow double-digits again (+11% to $8.2 billion), as consumer mobility recovery helps the Transit segment (+29%), which lagged Billboards and Street Furniture in 2021. During COVID (and despite a severe loss in revenues in 2020) OOH media owners have continued to invest in the conversion of premium locations to digital ad units, attracting new advertisers (Sports Betting, Finance, Streaming etc.) and generating additional revenues per location. Revenues from digital OOH units will reach 30% of total ad sales.

Finally, cinema advertising revenues will recover to approx. $450 billion (+170% vs 2021). After a disappointing year in 2021 (full-year ad sales reaching just 24% of pre-COVID levels), cinema advertising will enjoy its first quasi-normal year since 2019. Admissions and audiences will be boosted by a large slate of blockbuster releases that were delayed in 2020-21 e.g. Batman, Spiderman, Black Panther, Avatar, Dr Strange, Bullet Train, Hotel Transylvania etc.
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