• by Diane Mermigas , October 2, 2008

Some of the ad dollars lost in the contracting finance, automotive and real estate sectors may not return.

The continuing consolidation and collapse of finance, automotive, real estate and other major categories are taking a big chunk out of deflated advertiser spending--some of which may never return to the media fold. That prospect is fraying the nerves, as well as the revenue and earnings forecasts, of ad-supported media from broadcast and cable to print, outdoor and even Internet display.

This huge unraveling of advertising dollars is just becoming evident, and local newspaper and TV broadcasters in particular are running scared and slashing costs to cut their losses. It is becoming more apparent that even after the economic recession hits bottom and ad spending rebounds, there will be fewer brand marketers and small local businesses.

The devastated finance and real estate/insurance sectors were the largest contributors to overall U.S. advertising growth, collectively contributing 23% over the past four years. Real estate and insurance spending averaged 16% and the finance sector spending averaged 8.4%, compared to a mere 4.3% of growth in total U.S. advertising from 2003 to 2007, according to Bernstein Research. The credit-market bust and the collateral damage that has ensued will likely end the advertising growth surge fueled by the finance, insurance and real estate sectors. "History suggests that another industry will eventually fill the growth void left by these two sectors, but the operative word is clearly 'eventually,'" said Bernstein analyst Michael Nathanson.

Compounding the problem is the collapse of the U.S. automobile industry--which has dominated domestic advertising by contributing 12.5% of total dollars--as well as a dismal retail market, the second-highest ad category contributing 12% of all U.S. advertising dollars. Major auto manufacturers Wednesday continued to report double-digital sales declines for September, down as much as 34% for Ford.

There are mounting examples of how the prevailing economic crisis will become an especially lethal advertising downturn for local TV and newspapers. For instance, J.P. Morgan Chase's acquisition of Washington Mutual and CitiGroup's acquisition of Wachovia pose a special threat because the two mergers involve the elimination of a direct competitor for bank deposits and services. "Despite the emergence of several national bank brands, the banking business remains a locally driven enterprise," Nathanson said. Nearly 70% of Washington Mutual's total ad spend was directed to local TV, local newspapers and other regional media outlets.

Bernstein estimates that exposure to the finance, real estate and insurance sectors is 7% of total advertising for local TV stations, 8% for stations' all-important syndicated TV, 9% for the broadcast networks, 10% for cable networks, 11% each for local and national radio, 13% for local newspapers, 16% for outdoor, 20% for Internet display advertising and 21.4% for national newspapers.

The picture worsens considerably when including auto advertising, where spending is on a downward trajectory, with thin sales and dealers' inability to secure consumer credit or capital. One of every four car dealerships nationwide could fail into 2009. Auto advertising has contributed 28% of overall TV station advertising revenues, 18% for local newspapers, 15% for local radio and 12% for the broadcast networks.

Retail advertising--which could be flat at best through the holidays--comprises 26% of overall local newspaper ad revenues, 14% of TV stations, 9% of the broadcast networks, 8% of TV syndication and 6% of cable networks. Experts say the long-held notion that many brand marketers will continue to advertise their way through tough times may not fully materialize in this particular mess.

Some of the largest TV station groups are vulnerable, as advertisers are expected to more selectively spend on just the top two TV stations in a given market. This situation could favor ABC and Fox, while making CBS and NBC more vulnerable to declining ad dollars at their owned TV stations, analysts say. In addition, the major broadcast networks are likely to see their revenues under siege as the continuing ratings slide and the economic squeeze fosters costly makegoods. Advertisers could increasingly opt out of upfront commitments, making scatter markets more difficult.

Gannett, Belo, Hearst and Raycom are among the independently owned local TV and newspaper players that are positioned better than most to generate a growing portion of their overall revenues from digital to partially offset this decline. Still, Standard & Poor's put Gannett on credit watch Wednesday, citing plummeting ad revenues, which could push double-digit declines in company earnings even lower in the second half of 2008. As media companies and advertisers head into what could be a calamitous nonquadrennial 2009, they will have additional incentive to seek improved ROI in a continued migration to digital. The challenge, then, will be improving the measurement and monetization of the Internet, mobile, video games and other interactive platforms and devices.

The gradual emergence of Canoe Ventures' proposed addressable advertising plan over the next several years--offering consumers opt-in electronic transactions within new forms of personally targeted infomercials--could generate a windfall of marketing/e-commerce revenues once interactivity is ubiquitous among all media.

Such digital options may provide some of the only short-term glimmers of hope even for mega media players.

JP Morgan analyst Imran Khan says he sees a "deteriorating international advertising environment," which prompted him to lower his estimates for Viacom. He now expects that global advertising will be flat to slightly negative the second half of 2008 (instead of the previously forecast 12% growth), and will remain flat through 2009.

International represents 12% of total Viacom revenues and 6% of its media networks' revenues, the majority of which comes from Europe. It is yet another troublesome indication of the slowdown and redistribution of advertising spending that awaits.