• by Diane Mermigas , August 5, 2008

The $3 billion bite that the collapsing domestic automobile market is taking out of this year's advertising spend is a dramatic sign of deeper, broader bad news set to hit company balance sheets in the second half of 2008. But there are measures that will soften the blow.

Shifting marketing dollars to media that provides interactive access to consumers who can instantly acquire goods and services is one way to more immediately translate ad dollars into actionable information and income. Maximizing value to consumers, and concentrating on their most fundamental needs and concerns, will stimulate spending even in tough times.

The most important thing that companies can do is to comprehend and adjust for the essentials of the continuing credit crisis and its permeating impact on so many other sectors of the economy. It is a vicious cycle that consumers and businesses will not break free from for at least another year. Advertising-supported media will feel the brunt of spending reductions by both consumers and companies.

Historical comparisons will only go so far, as the current economic crisis involves some unique factors for which there are no precedents. These include the radical impact of the digital transition, as well as globalization's effect on traditional media operations, financials and growth strategies. Hard data will only go so far in analyzing such disruptive forces.

With economic-related revenue shortfalls mounting well beyond nominal 5% to 10% gains from new digital sources, many media companies are struggling.

The auto industry's pullback is just the beginning of a broader advertiser downturn that will become more obvious later this month when advertisers can begin reneging on their $9.2 billion upfront network TV commitments and possibly cut back on spot and scatter market spending. P&G'S cuts, which slashed its measured media spending by nearly 20% last quarter--and others from Unilever to Johnson & Johnson trimming by single digits--do not bode well for television stations or their networks.

In 2007--a year without presidential campaign spending--the automobile industry outspent two other leading advertising categories by more than 2 to 1--telecommunications and restaurants. Other top television ad categories being pummeled by the economic downturn include real estate, financial and travel, according to the Television Bureau of Advertising. Clearly, companies that are slashing headcount and costs will think nothing of reducing and shifting marketing and ad budgets.

The auto industry crisis also underscores so many of the issues, challenges and changes that are clashing in a volatile economic climate. Consumer and company credit will tighten even more as national financial woes seep into the local and regional bank markets. On the second rail of this crisis, corporate and consumer debt will continue to deteriorate and bankruptcies will rise; the valuation of all assets will continue to deflate and require resetting; and some global expansion will go soft. Dig deeper and there is housing inventory that will take years to burn through, and an estimated 1 million more job losses to sustain, which will result in rising defaults among homeowners with good credit. Not surprisingly, an estimated $2 billion reduction exceeds the short-term government stimulus recently provided, experts say.

Airline and other transportation industries, along with financial and real estate, are in the throes of the same angst as auto firms, having to realign costly legacy structure, slash headcount and other costs, and generally atone for past bad practices. So an understanding of the overall impact of the auto business helps to explain why there is more pain to come, especially for local ad-dependent media.

As pointed out earlier in this column, automobiles dominate national advertising, with 12% of total ad spend. But this sector comprises 28% of local TV advertising, 18% of local newspaper advertising and 15% of radio--all already hard-hit in this environment. Automobile advertising will fall to about $15 billion in 2008, from a high of $24 billion in spending in 2004, according to Bernstein Research. Auto ad reductions could trim at least 5% of all local television station revenues in 2008, including broadcast network TV-owned large market stations.

"The high fixed-cost nature of the TV station business means that cuts to advertising revenue will have a relatively large impact on operating income and earnings," said Bernstein Research analyst Michael Nathanson. The incremental margin on TV advertising generally is in the 80% range.

Although media conglomerates appear to be hedged against automobile industry woes with their diversified portfolios, nearly all of their businesses are vulnerable to overall consumer and advertiser spending.

For instance, Walt Disney's recently in-line second-quarter earnings were bolstered by theme parks, which benefited from international visitors and advance bookings, offsetting weaknesses in advertising at its owned ABC TV stations and networks as well as ESPN due to reduced spending in key categories.

Disney's owned TV station group is more adversely impacted than its rivals by declines in auto advertising, although the company overall loses less than 1% of its earnings per share. Disney could suffer along with the rest as more advertiser categories show weakness, and lower consumer discretionary spending takes a toll on its theme park and products businesses.

Indeed, even the Beijing Olympics--which is expected to generate $1.5 billion in ad revenues, 10% from online and half from official sponsors--is not sold out with less than a week to go--and some of the ad inventory has been heavily discounted. While about $150 million of the revenues will be shared with NBC affiliates, pricing is virtually flat with the 2004 Olympics, according to Lehman Brothers analyst Douglas Anmuth. But the real disruptor could be YouTube's three hours daily of exclusive content from the Olympic Games as well as some of its unsanctioned content. So much for big events and other panacea theories.