Advertising spending on TV stations is expected to tumble next year following double-digit revenue growth in 2006. According to a survey of several Wall Street firms by the Television Bureau of Advertising, national spot will decline an average of 4 percent; local spot—a single purchase of commercial time in one market as opposed to a buy-by-one-advertiser purchase in several markets—will be flat.
Politics figures prominently in the decline because 2007 is a nonelection year. TV stations won't benefit from candidate and issue-related ads that are expected to boost revenue this year and in 2008. Stations traditionally experience revenue swings year to year because of elections. This two-year business cycle—revenue rising in even-numbered years, dipping in odd-numbered years—is typical.
However, politics isn't all to blame. In recent years, stations have been posting steeper revenue declines in the odd-numbered years and not quite as big gains in the even-numbered years, according to a study by Veronis Suhler Stevenson, a private equity investment firm specializing in the media industry. For example, in 2002 national spot was up 18.4 percent from the previous year. This year, national spot is expected to be up 15.5 percent to $12 billion, according to the VSS Communications Industry Forecast. Looking at nonelection years, in 2001 national spot was down less than 1 percent. In 2005, it fell 7.5 percent.
"There are two macro shifts we see happening," says Jim Rutherfurd, VSS executive vp and managing director. "One is from traditional advertising to marketing services—direct mail, event marketing and public relations. There we see high single-digit growth." The other shift, he adds, is people spending more time with cable, movies and videogames. Total-day ratings at network affiliates declined to 13.7 during the 2004–05 television season from 14.2 during the previous season, according to a VSS analysis of Nielsen Media Research data.
On a micro level, key advertisers are spending less. Financial woes at several domestic automakers, most notably Ford Motor Company, have contributed to a decline in overall auto advertising on local stations. (On a positive note, foreign auto companies, especially those in Asia, like Toyota, have experienced high-sales performance in the U.S., thanks to their production of more fuel-efficient cars, and have continued to spend heavily on advertising on the local and national level.)
Elsewhere, the retail sector, once a key part of a station's marketing mix, has shifted dollars from local stations to the networks. This is largely due to the consolidation of local department stores across the country. "Retail is a challenge," says Chris Rohrs, president of the Television Bureau of Advertising. "The game plan is to build out stores to cover 80 percent of the U.S., and when this happens, they go to the networks."
Topping all of this are consumer jitters about the economy and the outcome of elections this year and in 2008. Although gas prices fell at the end of the summer, it is unknown whether they might spike again. This makes the consumer nervous about spending and the advertiser nervous about marketing to them. "The price of gas really does impact whether a TV station's inventory pricing is up or down," says Kevin Gallagher, senior vp, director of the local investment group for Starcom USA. "The higher the price of gas, the more you have to think about buying that new car or outfit."
There are bright spots. The financial and insurance categories are expected to remain strong as they market to aging baby boomers who are planning for retirement. Also, competition among companies in the telecommunication sector could drive up spending in some markets.
The best news, notes Rohrs, is that online revenue for TV stations has increased significantly in recent years. Internet advertising spending on TV station Web sites increased 137.8 percent to $283 million in 2005, according to Veronis. With a multimedia approach that includes on-air and online components, Rohrs thinks TV stations might be able to recapture part of the retail market—and other lost revenue—that has shifted to national. "It's all about targeting," he says. Megan Larson is a contributing writer to Mediaweek.