The broad-scale tumult is filtering down into the crevices of all media and advertising companies. They are making adjustments in spending as their costs, revenues and credit tighten. They are watching their stocks get hammered, and their ability to leverage assets or do deals is drying up--for now.
The normal retrenchment that comes during an economic downturn is being complicated by several unusual factors that could extend into 2009. Major advertiser categories, such as autos, financial and housing, are undergoing an unprecedented squeeze and will not provide the spending levels that ad-supported media needs. Retailers and packaged-goods marketers are also under pressure. Media itself is undergoing transformative change, moving from passive to interactive; the learning curve will last for years. Unlike recessions past, advertisers continue to shift some of their cautious strategic spending to new interactive platforms, where they can permanently realize more immediate returns.
These economic pressures will spill over into 2009, when there will be no $3 billion artificial boost of cyclical election-year dollars. Advertiser spending on traditional and new interactive marketing will continue to fragment, as will consumer attention. "It is going to be pretty ugly for a while--well into next year," says Lauren Rich Fine, formerly advertising guru at Merrill Lynch and now researcher in residence at Kent State University.
The stop gaps media companies in particular are hoping to fall back on--ramping digital revenues and international sales--will not increase rapidly enough to offset declines in diffused traditional advertiser spending. Most media companies remain vulnerable. Newspapers, outdoor, Internet display and radio have above-average exposure to the most risky advertising categories--including financial, real estate, retail and construction, which collectively account for nearly 10% of total U.S. advertising, according to Bernstein. Media companies are among the largest advertising categories, previously believed to be recession-proof.
Advertising contributes as much as 97% to the revenues of a media company such as Clear Channel Communications, 71% of CBS Corp. revenues, and as little as 22% to Walt Disney Co. Advertising also is a growing revenue component for Internet giants Google and Yahoo. Consumer spending, which may not be bolstered much by the government's proposed $150 billion stimulus package, contributes 55% to Disney's overall revenues and 72% to Time Warner. On the flip side, digital revenues contribute less than 10% of most media company revenues, and only News Corp. and GE (owner of NBC) rely on international markets for half of their income. The level of international growth that media companies seek will not come while foreign markets are being dragged down into U.S. economic jitters.
So, as advertisers go (in every conceivable industry), so go media companies. The economic uncertainty is creating mixed views for 2008, according to speakers at Bear Stearns' recent annual advertising summit. The outlook depends on who and where you are in the medium spectrum, according to Bear Stearns and industry trade groups. The most volatile--newspapers--could decline as little as 1.2%, or more than 7% in the case of a recession. Broadcast TV should top 9%, fed by the Olympics and elections. Cable could be up more than 5.5%, benefiting from audience and ad-dollar shifts from the writers' strike damage at the broadcast networks. Outdoor will be up 6%, and the Internet 22%.
However, all bets are off in 2009, when the economy and advertiser spending could still be under pressure. That prospect is impetus for all media and entertainment concerns to move more of their ad-supported branded content and services online. That is where double-digit growth will continue for years--as marketers move past search and text advertising into new forms of connecting and transacting with key consumers. The science of pitching, selling and buying is in the throes of a sea change that will alter ad spending among media platforms and devices.
There also is incentive for traditional media to alter the way it conducts its revenue-generating business. For instance, backing away from the costly upfront selling ritual and leaning toward a 52-week continuous selling cycle, based on the development and availability of new content, is a move that NBC Universal chief executive Jeff Zucker is initiating. With advertisers looking to solidly justify every dollar they commit, there is incentive for media and measurement companies to further sharpen and qualify their audience metrics.
In a bullish report titled "The Cowboys Dance On and On...," Yankee Group analyst Daniel Taylor recommends that advertisers use these uncertain times to incorporate interactive into mainstream media spending schedules, invest in building and maintaining data interchange, grow online expenditures more than 100% annually, and explore sponsored content and "advertainment."
Media companies should create new marketing segments, take the lead in online privacy, invest in online content, focus on cross-media opportunities and develop social networks. The reason: even as the number of Internet users levels off, Internet advertising will continue to grow at a 24% compounded annual rate to more than $50 billion in 2011, surpassing all forms of broadcast television, cable and radio spending. That's why the Internet cowboys are the only ones dancing.