Soft Ad Market Giving Media Firms a Hard Time

With the media landscape littered with layoffs, dot-com carcasses and lower-than-expected earnings reports, the refrain for 2001 quickly became: “Blame the soft advertising market.”

And spongy it is.

Analysts say ad revenues at local television stations will be down about 12% during the first quarter of this year, and by as much as 20% in smaller markets.

Radio stations that posted 35% gains during the first half of 2000 might see a 10% drop during the first six months of this year, according to some analysts.

But no one really knows how badly the market has tripped, or when it might pick up again.

“It’s like dipping your toe into the deep end--you’re never really sure how deep the water is,” said James Marsh, senior media analyst for Prudential Securities. “What we’re doing now is trying to find the bottom.”

Some Wall Street analysts say gloomy reports are overblown. They say revenue declines during the last few months should have been an anticipated hiccup after several fat seasons, including last year’s bounce from elections and the Olympics. The ad market will rebound by year’s end, several industry watchers predict.

But others aren’t so sure.

“The slowing down of the economy has directly affected the advertising market,” said Howard Nass, director of local broadcast advertising for TN Media Inc. “Dot-coms have either dried up and disappeared or cut back substantially on their advertising dollars. Mergers of telecom companies also mean fewer dollars, and retailers have softened their spending as well. It’s like a domino effect.”

Kevin Carton, global leader of PricewaterhouseCoopers’ entertainment and media group, described the market as “a mixed bag.”

“It’s not a downturn in terms of a major trough, but it is a downturn in terms of a major dip,” Carton said.

Free-falling Internet companies led the decline in advertising. By early last summer, dot-com companies that had binged for months on multimillion-dollar advertising budgets and marquee talent began to hit the wall. The carnage continued into this year with Walt Disney Co. announcing last month that it was abandoning its Go.com venture. News Corp., AOL Time Warner, Salon.com, Excite@Home and TheStreet.com have trimmed their Internet operations, laying off hundreds.

Not all signs point south.

Newspaper chains Gannett Co. and McClatchy Co., which owns the Bee papers in Sacramento, Modesto and Fresno, posted increases in advertising during the last quarter of the year. Gannett advertising revenue rose 6% in the fourth quarter, with national advertising rising 8% and classified advertising up 4%.

Analysts say earnings for some newspapers probably were boosted by late-season political spending. And, some analysts say, even if 2001 remains weak, the ad market will get a healthy bounce next year when control of Congress will be up for grabs and the Winter Olympics open in Salt Lake City.

“The reality is there are no real long-term indicators that point to any sustained downturn,” said Jack Myers, chief economist for the Myers Reports Inc., a New York-based research and consulting firm specializing in media. “We’re expecting the ad market to return.”

Part of the reason this year seems so bleak is because media companies and investors have been spoiled by double-digit increases during the last few years, analysts say. In 1990, $84.7 billion was spent on advertising in the U.S. By last year, that amount had nearly doubled.

“We’re coming out of the best decade for advertising in history--the best that any of us have ever seen--and anything in contrast to that is going to be hard,” Carton said.

Myers agreed. “In the media, and across the board, a correction has been due.”

Unless there is further bad news for the general economy--increases in inflation, oil prices, unemployment or turmoil with California’s energy supply--analysts say the year should end on a flat note or with modest increases in advertising revenues, from 2% to 7%.

Myers and others expect advertisers to be emboldened by proposed federal tax cuts and lower interest rates.

“Contrary to some overly pessimistic forecasts for an ad recession, that’s not going to happen,” said Lee Westerfield, media analyst for UBS Warburg in New York. Advertising is no longer considered discretionary spending, he said.

“It’s an intangible asset that you need to maintain,” Westerfield said. “It’s an investment that advertisers make in promoting consumer spending. Marketers are going to find a way to chase a dollar.”

But bargaining power has shifted from media companies to the advertisers, said Edward Hatch, senior media analyst for the investment firm S.G. Cowen in New York. Television ad rates have flattened, if not declined slightly.

“Once the momentum de-accelerates, it’s hard to get that back,” Hatch said.

Company officials also are more concerned about returns, agency executives said.

“We’re seeing a shift away from broader image-based advertisements,” said Cliff Sloan, president of the Sloan Group marketing agency in New York. Clients are demanding ads that produce some measurable return, he said.

“They are very direct and to the point. It’s much more issue-based, much more focused,” Sloan said. “There is more accountability on how dollars are being spent.”

Joe Casola, DaimlerChrysler’s vice president for global marketing operations, said his company trimmed planned advertising on television by a couple of million dollars.

Chrysler is spending more of its marketing budget on sponsorship deals, including one with NASCAR, he said. “You can measure the return on that type of an investment. You can target the customers and you have a much better chance of selling a car.”

Several analysts and agency executives said they don’t expect increases until next fall--or even next year.

“I don’t see any real big spending coming back until 2002,” said Tim Spengler, director of national broadcasting for Initiative Media in Los Angeles, an agency with clients that include Disney, Home Depot and Yahoo.

“We’re getting mixed messages,” Spengler said. “The market is not strong, but it’s not in dire straits either.”

Although CNN whacked 400 jobs and NBC announced it will trim 600 positions, analysts say those cuts are only remotely related to declining ad revenues. NBC was flush last year with huge events, including coverage of the Olympics and the presidential elections. And CNN has been losing market share to Fox News.

“The blame that corporate executives are placing on the ‘soft ad market’ is really a convenient excuse more than anything else,” said Myers of the Myers Reports.

Having fewer ad dollars forces executives to review more than just budgets, said Carton of PricewaterhouseCoopers.

“When things get tighter, it tends to expose business models that need to be tweaked if not outright changed,” Carton said. “The dip causes companies to focus not just on advertising spending but on infrastructure and staffing levels.”

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Advertising Spending in the U.S.

The amount spent on advertising continues to climb each year. And even though ad sales have been slow for media companies so far this year, analysts predict that 2001 will end with gains over last year.

*

Spending in each medium, in billions

Television: $57.4 billion

Newspapers: $52.1 billion

Radio/outdoor: $27.1 billion

Magazines: $24.7 billion

Internet: $12.1 billion*

Sources: PricewaterhouseCoopers/ Internet Advertising Bureau, Wilkofsky Gruen Associates, Universal McCann, Newspaper Assn. of America, Paul Kagan Associates