Technically, it's less a recovery than abatement, despite the sudden premature talk of a bad news bottom. If economic stabilization has begun, what will it mean to media companies and the advertising and marketing business that binds them? What is needed is achieving an equilibrium between historical and new expectations.
Consider the imploding auto industry that has sustained the bankruptcy of two major manufacturers, the elimination of historic brands, and the loss of thousands of dealerships. Overall auto ad sales declined -17% in 2008, with TV stations suffering the bulk of the decline (-33%). This year's first-quarter auto ads declined -29%, with TV stations enduring 41% of that drop and local newspapers -26%. Auto advertising should decline another -22% in 2009 before recovering halfway to gain about 12% in 2010, according to an extensive analysis by Bernstein Research's Michael Nathanson. That's less than a one-third recovery to late 2007 ad sales levels, which some analysts warn will not be seen again anytime soon.
CBS CFO Fred Reynolds gets it. Addressing a Merrill Lynch Media Technology Conference last week, he observed there are "clear signs of emerging from the recession, "but that's not to be confused with growth to make up for the drop," since the start of the economic downturn.
Clinging to broken business models and expectations on permanently improved spending would be a huge mistake. Structural changes in the automotives will result in streamlined production costs and marketing with fewer national brands and regional dealerships. Automotives generally have comprised about one-fourth of TV station revenues and one-eighth of broadcast network revenues. Of the estimated $6.1 billion decline in aggregate advertising spending from 2007 to 2009, only $1.5 billion -- or 25% of that reduction -- will return to the market in 2010 if an economic recovery materializes, according to Nathanson.
Believing that TV stations will be a major beneficiary of increased auto advertising -- perhaps because they have been the hardest-hit -- he has raised his earnings estimates at large market caps like CBS, Disney and Fox.
But even by Nathanson's own admission, it is too early to start celebrating. Although autos comprised the largest single category dive of overall U.S. ad spending in 2008 (of about 37%), cars and other major categories such as retail, real estate and financial services collectively accounted for nearly 80% of the year's advertising decline. And that doesn't reflect the plummeting viewership and deteriorating value of network television, which will continue to see dollars and consumers siphoned by new media platforms and devices.
If the TV networks' $17 billion in across-the-board ad revenues fall as much as 20% this year, there is a good chance most of those dollars won't be coming back. Such permanent dislocation cannot be offset by the deepest cost cuts in woefully inefficient legacy structures.
Given the systemic damage done and the shift of dollars to digital, it is difficult to imagine what won't change along the production and marketing food chain. Was General Motors launching its makeover campaign on YouTube and on the Web site (a 60-second TV commercial began running two days later) a sign that it will lean more heavily on social network marketing and online advertising? Or was the move a nod to the media platforms' convergence, given new Yahoo and YouTube TV applications?
Domestic advertiser spending at TV stations, consumer magazines, broadcast networks and newspapers will continue to erode -- mustering only 1.7% growth in 2010, even with midterm political spending, according to analysts. At that rate, it would take at least the next decade for media companies to regain the ad spending ground they have lost -- even if that were possible.
"When does advertising growth resume and at what rate of growth?" asks Nathanson, noting that positive ad growth historically lags the return of positive GDP growth by two to four quarters. The answer will hinge on unprecedented factors: the dismantling of major industries, such as automotives and financial services, the over-leveraging of companies and consumers, and the realignment of credit and valuations.
Media companies that will never be able to attract the same level of revenue from advertising on traditional platforms or make it up on new platforms are forced to resort to different revenue strategies. The one sure path to new income is studying, tracking, catering to and facilitating the interest and needs of the individual consumer. The task has many plausible approaches because digital interactivity is still new and uncharted terrain.
In assessing the equally problematic restructuring of U.S. financial services during a congressional hearing last week, Federal Reserve Chairman Ben Bernanke warned that even as the recessionary bottom appears, a system-wide, collaborative reinvention is required to spread the prevailing risk, adjust for systemic change and prevent a relapse not unlike the "second" depression that followed the Fed's intervention to halt the initial 1929 Depression. The economic historian was quick to point out that these dynamic downturns are never easily solved and require profound and lasting change.
Bernanke might have been talking about the media and advertising industries.