Traditional business models continue to crash through the continuously lowered revenue and earnings estimates in a downturn that has yet to hit bottom. Digital media is still driving growth, albeit at much slower rates. The free fall in U.S. consumer and advertiser spending is taking ad agencies and other media support services with it. It has become a global phenomenon that threatens both established and emerging countries. Without transformational change in 2009, companies will not be positioned to capitalize on digital trends, which will be an essential growth engine in a recovery.
In other words, the deadly double whammy of overexposure to troubled advertising, coupled with their highly negative operating leverage and valuation multiples, spells bottoms-up change for traditional media. Bernstein Research recently demonstrated the potentially toxic nature of the status quo. It created a mythical television company P&L based on 40% margins. Assuming a 10% decline in revenues and a 3% decline in costs over the next two years, earnings would plummet 39% and margins would collapse. Negative operating leverage would be around 80%--lower than it has been recently at Gannett TV stations or CBS Radio.
With such crushing economic dynamics at work, UBS analysts Thursday issued a new round of wide-ranging downgrades and lower estimates they fear will prove too conservative. "Our 'Black Sky' scenarios have become the base case for our forecasts," UBS analysts said in a report entitled "Reality Check." Macroeconomic weakness and uncertainty will hold global advertising growth to barely 4% this year before reversing for a 4% decline in 2009.
Broadcasters, print publishers and major marketing services companies, such as Omnicom and Interpublic, are among those hit hardest globally. Divergent ad spending in 2009 will range from a 9% decline in Russia to an anemic 1.8% in emerging Europe and Asia, to an 11% decline for traditional U.S. broadcast, print and outdoor--its worst nominal decline in 60 years. As evidenced by the rapid deterioration in local advertising, now expected to decline 13% in 2009, this could trigger a domino effect on other media platforms. Overall U.S. ad spending will decline 9% next year, with only the Internet posting growth.
The worst projected performance in UBS' global database will be traditional broadcasting, print and outdoor--shrinking nearly 6% in 2009, since they do not deliver reach and high engagement to advertisers. Digital media--encompassing out-of-home Internet wireless, interactive TV, online video games, branded Internet ads and virtual worlds--will grow by 10% globally and 7% in the U.S. in 2009. Online could account for 14% of global ad spending by 2010. Global agencies like Omnicom and Interpublic, which are heavily dependent on the U.S. automobile industry and still waiting for advertising clients to finalize their 2009 budgets, are under the same kind of pressure as media companies.
Little wonder, then, that many advertisers and their agencies are rethinking and reallocating dollars in response not only to plummeting sales, but their own tight capital, bank-financing and credit woes. Resorting to more creative and efficient use of digital and e-commerce platforms is considered more prudent and less risky. All are adjusting their creative and business models to universal screens rather than just TV audiences or unique Web visitors.
With two-thirds of UBS' universe of global media already below consensus EPS, companies are looking beyond devastated valuations and profits to a dramatic reshuffling. Even when consumers are not buying, advertisers will use this downtime to continue strengthening brand awareness. "We believe there is a shift to non-media within advertisers' marketing budgets," UBS analysts said, citing growing investments by large brands on their direct online presence--partly in response to climate change issues and taxes on paper use.
Brand advertisers also will continue to push across the digital divide to use interactivity to monetize target consumers, even within the context of social networks and niche communities. Executing on a less costly, more efficient e-commerce business model is an opportunity that Yahoo is uniquely positioned to enjoy but not aggressively exploiting.
With the U.S. comprising nearly half the global TV ad spend, domestic television is under the most pressure to change its business-as-usual model, whether it's a traditional syndication approach or first showing premium content on broadcast, then moving to cable. Will brand ad-dependent television use the downturn to become more nimble in expanding its share of alternative Internet, digital outdoor, online video and wireless platforms? If so, will the upside of this recession mean finding its more lucrative digital footing?