We recently conducted a survey of media industry participants, cutting across different functions to gather a broad perspective on the state of advertising. We heard almost universally that uncertainty in the macro-economy is having no impact on advertising budgets. A slow economy is, however, having its expected effects. On this basis, if we apply economists' consensus forecasts for the two most important variables which drive our forecasts, we would expect 1% growth in normalized (ex-Political and incremental Olympics) advertising in the United States during 2013, broadly in line with 2012 results, but well below the 3% growth rates exhibited in 2010 and 2011.
We asked those focused on TV buying and selling for their expectations of volume changes in the network TV upfronts. We focus on this variable as we have observed that network TV pricing of the dominant network is best predicted by changes in volumes in network TV; further, we have noticed that national cable TV pricing is ultimately benchmarked to these numbers given that network TV continues to be more important than cable. Consensus on volumes in the primetime upfront from the buyers we engaged with indicated expectations of 0 to -2%; expectations from sellers was for slightly positive volume changes. In our model, a -1% volume change (which feels like the most appropriate expectation at this time) translates into a reported 7% CPM increase for the leading broadcast network, CBS. We would expect other networks' CPM increases to come in at between 4-6%, and leading national cable networks to fall in this range as well. Leading cable networks will probably fall on the lower end of this range. Importantly, figures could change somewhat if C7 is embraced by a meaningful number of advertisers. Buyers have indicated that C7 may allow for some flexibility in pricing and lead to more investment (i.e. because for some advertisers a shift to C7 would allow the advertiser to realize a lower CPM increase).
For all of this, changes in price rarely predict changes in revenue at broadcast networks. Beyond the fact that trade press-reported CPM changes may not reflect negotiated CPM changes, we have slippage (committed volumes of spending do not necessarily go to contract, and alternately, new volumes may show up at the time at which contracts are signed), options (advertisers may reduce commitments in the first, second and third quarters without penalties), changes in numbers of commercial units, shifts between the use of commercial units for in-house promotions or public service announcements, changes in scatter volumes, etc. Given all of this, our favored approach to forecasting network TV revenues remains in the context of our full industry model, whereby we predict it on the basis of the share allocations marketers make to the medium. In context of a 1% growth environment for 2013 - and maybe only slightly better in 2014? - network TV remains essentially a flat medium, with potentially slight declines and revenues year over year, and CBS will only outperform this trend if it can outperform meaningfully on the share of audience it captures vs. Fox, NBC and ABC.
That growth in digital spending continues is unsurprising, of course, but emerging trends are worth monitoring in order to identify how the industry is evolving. Perhaps the most salient point highlighted to us is that while budgets are strong, they are being allocated to an increasing number of media opportunities. The question this will beg is how many of the venture-funded companies in the market - few of which are likely profitable - will be able to sustain themselves as they necessarily continue to invest in growth? Further, for all of the success of digital media and all of the focus agencies place on it, areas of concern relate to measurement and reporting, and this only becomes more challenging with more fragmentation. Still, as Google and Facebook remain the dominant media owners in this space they will continue to benefit from interest in the inventory they sell for the foreseeable future.
We asked media researchers for their views on topics that are prevailing at present. Among those topics, researchers noted the increasing use / testing of single-source research products (those which measure anonymized TV viewing and subsequent sales for the same people). They also noted an ongoing focus on cross-media or other convergent measurement (i.e. OCR). As well, an increasing need for agency professionals to work with and manage increasingly big data sets was also referenced.
We also asked marketers about observations they had on agencies. They noted a range of trends, but none indicating to us a meaningful near-term shift. However, the topics of focus do provide some insight into areas that agencies must react to, most of which relate to improving efficiency on an ongoing basis, including. The largest holding companies have been managing these factors for many years, and have managed to mostly expand margins all the while. For all of the fragmentation and increasing range of services that agencies must provide, we continue to view their prospects very favorably, as an industry (our preferred name among agencies remains IPG, which has greater opportunity for appreciation as its revenue growth and operating income margin profile approaches industry norms).
Brian Wieser, CFA
Senior Research Analyst
Pivotal Research Group