Stronger top-line growth the first half of 2010, aided by dramatic cost and spending reductions, are increasingly overshadowed by fears of a languishing recovery. "Macro trends have obviously become more of a concern to many investors," said JP Morgan analyst Michael Meltz in a new report. Just this morning, the Commerce Department reported that the U.S. economy slowed in the second quarter, pointing to a deeper recession and slower recovery.
Now that many broadcasters have recouped last year's double-digit ad revenue losses with double-digit gains the first half of 2010, expectations are being downsized for next year to around 3% for the broadcast networks and for overall U.S. ad spending, or about half their historical growth.
It's a little like taking four steps forward only to take two steps back. This year's 5% rebound in total ad revenues to $155 billion is roughly equivalent to 2000 spending levels -- even though there are more media platforms. All local ad spending of just over $70 billion expected in 2010 equates roughly to what was spent in 1996, according to Morgan Stanley analyst Benjamin Swinburne.
Genuine long-term revenue growth may prove as elusive in a future defined by mounting variables.
Swinburne's worst case scenario for 2011 is a 2% decline in total U.S. ad spending with as much as a 7% decline in local TV, reflecting virtually flat GDP growth in perhaps the most difficult non-election year yet. "The headwinds, as seen in recent retail sales and consumer confidence trends, create less upside potential for next year," Swinburne says.
The good news is that even as consumers spend more time and money with the Internet and connected mobile devices, TV still claims 99% of video consumption, Swinburne points out. The bad news is that dominance is not being leveraged into solid new ad or paid revenues.
Still, the Big 4 broadcast networks and their affiliates are among "the few true must-carry for consumers [and] retransmission payments should continue to grow over the next five-plus years," Meltz said.
But heightened scrutiny of the retransmission consent framework and the potentially negative regulatory and "headline risk" for broadcasters accompany new contentious negotiations with increasingly competitive cable, satellite and Telco operators. "Our contacts indicate the upcoming ABC/Time Warner renewal (in August) could be a doozy," says Meltz.
The retrans agreements are evidence that broadcasters are underpaid for their audience delivery.
Increased affiliate and subscription fees now represent nearly 35% of television revenues. Long-term earnings upside depends on the ability of the Big 4, content-producing networks to secure half of their affiliated and owned stations' retrans payments from cable and other distributors, Swinburne says. (Never mind that TV stations depend on the same retrans revenues to survive and may not be able to afford what is akin to reverse affiliation fees.)
Best case is that TV network revenues from affiliates and advertising could grow 8% annually by 2012 as a result of redistribution of retransmission fees, Swinburne says. Today, broadcasters receive only about 4 cents in of every $1 in ad-supported cable network subscription revenues. Cable networks receive 96% of subscription payments from distributors, even though they deliver less than 60% of the total TV ratings, he said.
Still, there are no guarantees. It's just another of the complex uncertainties that could make some of broadcasters' cyclical trends more secular.
Another example: this year's political ad spending could be up between 5% and 10% from 2008 levels, spurred by the Supreme Court's recent favorable ruling on corporate political spending. Although as much as 75% of political ad dollars are spent on local TV, more of it in the future will be diffused to online, mobile and other new media.
The slow, secular shift away from measured media to marketing services, TV's gradual disintermediation by Internet-connected media, and the movement toward more a la carte, on-demand video are among the wild cards. All will play havoc with once predictable advertiser spending, even in election years, analysts say.
"Media fragmentation could result in reduced audience share for TV. Tech innovation has created new types of competition for broadcast TV without the ads. ... Changes in consumer behavior could impact the demand for TV advertising longer-term," Meltz says. The one loud and clear message: TV broadcasters should enjoy one more quarter of easy year-over-year earnings comparisons before the fun begins.