Will Advertising Take a Hit From the Shutdown?

It all depends on how long the government stays closed

The longer the federal government shutdown drags on, the more likely that the advertising business will not only take a hit, but find itself in the crosshairs of corporate tax reform.

Advertisers and media lobbyists were already ramping up defense of the advertising tax deduction before Tuesday when the government pulled the shutters down. But as the shutdown marked day three, lawmakers and staff in the House were beginning to make noises about what is being called a "broader solution," or "grand bargain" addressing both funding the government and raising the debt limit, which is facing an Oct. 17 deadline.

To offset spending, tax reform could be one of the pieces. And if that happens, advertisers and media have good reason to be worried.

"If the corporate tax code goes under review, they'll look at it line by line—and the advertising tax deduction is a very important line," said Dick O'Brien, evp of the 4As. "We could be right in the eye of the hurricane."

Even if the ad tax doesn't get inserted into last-minute negotiations, it could still be in play longer-term as comprehensive tax reform begins to take shape under the leadership of Rep. Dave Camp (R-Mich.), chairman of the ways and means committee, and Sen. Max Baucus (D-Mont.), chairman of the finance committee.

"I think tax reform will go on for a while. What I'm hearing is that the GOP wants a time frame for tax reform," said Paul Boyle, svp of the Newspaper Association of America, which is also lobbying heavily to keep the ad tax deduction in place. Boyle expects a series of hearings for a process that could carry over into 2015. "I don't see it in the short-term, but you never know," he cautioned.

The broader issue is what could happen to ad spending if the shutdown expands from days into weeks. If the worst happens and Congress fails to increase the debt limit, the economy could really melt down, shattering consumer confidence, weakening the stock market and making businesses so nervous, they hedge by cutting back on ad spending.

"If the economy gets a cold, the advertising economy gets pneumonia," O'Brien said.

Timing is also a factor. With the holidays just around the corner, the last thing advertisers want is a lot of uncertainty. The National Retail Federation's forecast of a modest 3.9 percent sales gain in November and December (higher than the 10-year 3.3 percent average) also came with a caveat. "Much remains up in the air, including fiscal concerns around the debt ceiling and government funding, income and even policies and actions surrounding foreign affairs," said the NRF in its forecast.

"The longer this drags on, the longer it will hit all sorts of sectors, including ours. I don't know anybody who knows how this will play out. We're still in the mid-game," said Dan Jaffe, evp of the Association of National Advertisers, on the eve of that organization's annual Masters of Marketing conference.

But Brian Wieser said it may all add up to a big ho-hum. "It would be indistinguishable from a general ecomomic weakness," said the Pivotal Research Group analyst, who added that it's unlikely to cause analysts to change estimates. "We saw this last year when the government walked right up to the cliff and e just kept going. It should make a difference, and yet it didn't."

Lobbyists continue to work the halls, hold meetings and do what they can to persuade decision-makers that advertising is essential for a healthy economy.

"There are conversations going on. Where we can't set up meetings, we're reaching them via mail and email," said Clark Rector, evp of government affairs for the American Advertising Federation. "We don't want to assume nothing will happen because everyone is focused on the shutdown."

"With just the essential employees, everything is moving at a much slower pace," O'Brien added.

The shutdown has already taken its toll, putting on hold or significantly slowing down several issues important to the advertising and media businesses:

1. At the top of the list is legislation to address abusive patent troll practices. Before the shutdown, there was strong momentum and good progress; Rep. Bob Goodlatte (R-Va.) had circulated and was working on a draft bill. But now, with only essential workers in place, the momentum has slowed, if not stopped.

2. Uncertainty is never a good thing for business. Because the Federal Communications Commission has stopped its 180-day merger review shot clock, all those TV group deals announced earlier this year are in suspended animation, such as Gannett-Belo, Sinclair-Allbritton, and Tribune-Local TV.

3. It could take longer than expected to get the FCC and the Federal Trade Commission up to the full complement of five commissioners. The Senate Commerce committee postponed an executive session for Thursday where members would have voted on the nominations for Terrell McSweeny (D) for the FTC and Michael O'Rielly (R) for the FCC. Though the committee could hold a cloakroom vote, it still looks like it's going to take a while longer before nominations are sent to the floor.

4. Privacy issues weren't on the fast track, but now they are even slower. The House Commerce committee's privacy task force, chaired by Reps. Marsha Blackburn (R-Tenn.) and Peter Welch (D-Vt.) postponed a closed-door meeting scheduled for Wednesday with the Electronic Privacy Information Center, the Center for Digital Democracy, and others. The group had its first background briefing with Google, Blue Kai and Wal-Mart and plans another nine meetings leading up to hearings before the subcommittee on commerce, manufacturing and trade chaired by Rep. Lee Terry (R-Neb.).