The document provides forecasts for advertising spending growth in the United States in 2011 and 2012. It expects advertising to grow 1.0% in 2012, driven primarily by new brands and categories rather than increased spending by existing brands. Individual medium growth trends will reinforce a "have and have-not" economy between television and digital media, which will see higher growth, versus other traditional media seeing declines. National media is expected to outpace local media as brands seek advertising efficiencies on a national scale.
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Brian Weiser Pivotal US Ad forecast for 2012
1. PIVOTAL U.S. Equity Research
Advertising
Pivotal Research Group
Advertising November 30, 2011
2012 AD FORECASTS: A Have and Have-Not Media Economy
BOTTOM LINE: During 2012, we expect advertising will grow by 1.0% on a normalized Brian Wieser,
basis in the United States (excluding the impact of political and Olympic-related activity), CFA
based on our extensive ongoing conversations with practitioners of media buying and 212-514-4682
selling. Revenue growth almost solely arises from the introduction of new categories or brian@pvtl.com
emergence of new brands and that individual marketer budgets tend to hold constant over
time. We do not foresee any significant new categories/brands emerging in 2012.
We expect that spending levels will generally flatten through the middle of 2012, after
which the impact of status quo “new normal” should return, with weak growth in the
periods that immediately follow. In the shadow of August’s U.S. debt downgrade, budget-
setters approached uncommitted advertising expenditures with hesitation, although not to the
extent initiatives were halted outright (as occurred during 4Q 2008). For a detailed model
please contact Pivotal Research Group.
Expectations for soft economic conditions reinforce short-term view and drive long-
term view. Macro-economic data offers a proxy for new category and brand creation.
Quantifying the creation of brand-differentiated categories is an elusive goal, but we posit that
such activity tends to coincide with economic growth. We focus upon Personal Consumption
Expenditures (PCE) and Industrial Production given the high correlation these variables have
with changes in media owners’ advertising revenues. The Philadelphia Federal Reserve
recently released its updated Survey of Professional Forecasters, which provides consensus
expectations from more than 50 economists. The Survey indicates approximately 4% growth
in nominal PCE in 2012, which compares with nearly 6% levels from between 1991 and 2007.
If, in parallel, Industrial Production rises by 3% the regression model we use to predict
advertising growth yields only 1% growth. Assuming industrial production picks up in following
years - reflecting a modestly improving economy in 2013 and beyond - we would expect 2-3%
growth rates for the market over longer time horizons, at least until broader economic
conditions meaningfully improve.
Individual medium growth trends in 2012 will reinforce a “have/have-not” media
economy, between TV and Digital on one hand and other forms of traditional media on
the other. Simply put, in scarce times, marketers are concentrating their budgets among their
primary medium (often network TV for large brands seeking awareness) and a secondary
medium (often Digital platforms for traditional brand marketers, who typically pursue
engagement-based outcomes among a subset of the population who are aware of their brand
attributes). In general, we expect to see National Mass Media continuing to gain share at the
expense of Local Mass Media. But Direct Media should continue to grow faster than Mass
Media. In this context, Mobile advertising will grow fastest, up 37% in 2012, decelerating in
percentage terms from 2011, but adding a comparable amount of dollars in absolute terms.
Paid Search will add the most in absolute dollars among all media during 2012, up from
$14.8B to $17.0B. Also of note: while we expect National Cable will perform well vs. other
media, that medium should slow significantly in 2012, rising by only 4.8% (compared to a gain
of 9.0% in 2011). Unsurprisingly, Local Newspapers will fare worst during 2012, falling by
9.4% to generate $1.8B less revenue than in 2011. Only Directories will perform weaker in
percentage terms, falling by another 22.6% for the year.
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Important Disclosures Are Located In The Appendix
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FORECAST: 2011 AND 2012 ADVERTISING GROWTH & COMMENTARY
MEDIUM 2011 2012 SUMMARY COMMENTARY
National Cable +9.0% +4.8% Large national advertisers continue to seek lower cost substitutes to network inventory.
But growth slows as advertisers shift into lower priced (i.e. non-prime) dayparts
National Broadcast – English +1.3% -0.3% High price points push brands to shift budget shares into cable despite broadcast
network advantages (broad reach, high impact units), independent of declining ratings
• + Olympics -2.3% +4.5% Olympics may be increasingly important vs. other sports, but absolute levels of demand
not evidently rising at a meaningful level over four year periods
National Broadcast – Spanish +5.8% +4.4% 2011 figures were muted by tough comparables due to impact of World Cup in 2010,
damping underlying rapid growth. Macro-headwinds will hold back medium in 2012
National Syndication +1.7% -2.5% While still an outlet for cost-conscious national TV buyers looking for broadcast
substitute, there is a dearth of premium content (better provided by cable presently)
Total National TV +6.0% +2.7% National TV’s budget share has grown significantly in recent years, but may be
hitting a peak given pressures to use other media (i.e. Digital)
• + Olympics +4.4% +4.4% ------
Total Magazines -2.7% -4.2% Circulation decline creates perception that “print is dead,” but more importantly,
engagement-focused budgets increasingly satisfied online
National Digital Display +15.8% +9.1% Three segments: Facebook, exchange-based (often remnant and often audience-based)
and premium display. The first two are growing rapidly, offset by weakness in the third
Online Video +33.9% +21.8% Rising inventory availability off of a low base paired with latent demand from marketers
for perceived benefits from the medium contribute to sustained rapid growth
Mobile +52.4% +37.0% Improved aggregation of fragmented audiences drives ad networks, but development of
endemic ecosystem (i.e. m-commerce) causes underlying long-term growth
Total National Digital +21.5% +13.9% National Digital gains share because of market expansion (from new brands who
can use medium) and a shift of budgets from brands with engagement objectives
Total Network+Satellite Radio +1.8% -1.0% Medium still challenged to find new brand categories which uniquely benefit from
radio’s unique advantages. some improvement due to Digital initiatives
Total National Newspapers -6.0% -6.7% No end in sight to declines, albeit with better results than local newspapers.
Credible alternatives exist to satisfy brand goals, leading to budget shifts
Total Cinema +5.2% +4.8% Nascent medium still growing due in part to novelty, but also because of genuine
buyer and marketer interest in the medium’s characteristics
TOTAL NATIONAL MEDIA +5.2% +2.4% National continues to outpace local as brands continually seek efficiencies via
national media. local has real constraints on declines at same pace as recent years
• + Olympics +4.4% +3.4% ------
Local Broadcast TV +3.0% -0.3% Local broadcast TV remains best alternative for large local and regional brands to drive
awareness. impact of political skews annual results significantly
Local Cable TV +10.1% +2.7% Beyond same trends affecting local broadcast, local cable sees extra growth from
advanced TV initiatives and rising use of local cable as substitute for local broadcast
Total Local TV +4.5% +0.3% Local TV generally remains the best vehicle to drive awareness of brand attributes,
but political advertising remains key driver of year-year changes
• + Political -4.0% +9.9% Political should generate $2.5 billion in incremental advertising during 2012, up
from $551 million in 2001 and $2.2 billion during 2010
Total Local Newspapers -9.6% -9.4% Continual advertising erosion as perception of near-term death from sector extends
across the industry
Total Local Radio 0.0% +0.2% Local radio still valued by core advertisers, but the medium has lost its sheen for
most of the largest marketers, many of whom are unlikely to consider the medium
Total Outdoors +4.8% +6.5% New displays – Digital OOH and Digital billboards – contribute to significant part
of growth, as they represent incremental inventory which seek different marketers
Total Local Digital +10.5% +9.3% Robust growth ahead, as initiatives are underway to integrate Digital sales with
local media properties. Much of the growth comes from new media advertisers
TOTAL LOCAL MEDIA -0.9% -1.6% Local continues to be less robust than national in large part because national brands have
focused upon cost-effective marketing substitutes from national media channels
• + Political -3.4% +1.4% ------
Paid Search +23.6% +15.0% Paid search continues to grow its customer base of small brands, but concurrently is able
to increase use of paid search by newer – usually very large - advertisers
Other Direct Online +12.3% +15.0% Internet yellow pages are the sole bright light in advertising for legacy print directories.
Lead generation and other direct online activities continue to grow
Direct Mail -0.6% -1.8% Marketers seeking alternatives to satisfy goals may find that direct mail finds targets, but
underlying business is still require for sending physical media
Directories -21.9% -22.6% No end in sight for recent pace of decline. All publishers are observing falling revenues
TOTAL DIRECT MEDIA +3.7% +2.6% Accountability claims of direct media hold up the business somewhat. Marketers
seeking to deliver physical media will rely upon this as primary platform
TOTAL ADVERTISING +2.5% +1.0% Total market growth of 1% in 2012 reflects muted, stop-and-go recovery for the
period ahead
• + Political + Olympics +1.2% +2.5% ------
-2- Brian Wieser 212-514-4682 Pivotal Research Group
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INDUSTRY APPROACH: LONG-TERM MODELS, SHORT-TERM ANECDOTES
Advertising is highly correlated with macro-economic variables. While many industry observers
describe advertising as a percentage of an economy’s Gross Domestic Product – which
indicates a decline of advertising over time – we argue that the very nature of GDP (which
includes significant government expenditures in the United States) is an imperfect proxy for
assessing advertising. Instead, we look at advertising as a function of personal consumption
expenditures on a nominal basis (consumer spending remains the underpinning of why most
advertising exists; nominal figures are used to enable a match with media owners’ revenues,
which are reported in nominal terms) and industrial production (which not only mirrors
manufacturers’ production for the very sake of selling things, but happens to match the “dips” in
advertising better than other variables).
The regression formula for predicting media owners’ advertising revenues we rely upon was
developed by Magna Global, and is described as -8.6% + 2.06x PCE + .55x IP. In other words,
if Personal Consumption and Industrial Production were flat in a given year, we would expect an
8.6% decline in advertising; every incremental percentage of PCE adds 2.06% of advertising
revenue growth, and every incremental percentage of Industrial Production adds 0.55% of
advertising growth. We believe this model is most appropriate for predicting long-term trends in
advertising, and should be used as a rough guide for any near-term forecast.
Advertising and Macro-Economic Variables
20.0%
Nominal Personal
15.0% Consumption
Growth
10.0%
5.0% Industrial
Production Growth
0.0%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-5.0%
Media Owner
-10.0% Advertising Revenue
Growth
-15.0%
-20.0%
Source: US Census Bureau, Federal Reserve, Magna Global
While our near-term forecasts happen to match our regression model-driven expectations for
2012, our confidence in near-term forecasts are based upon more “philosophical” elements. As
we describe below (“An Approach to Near-Term Forecasting”) our ongoing conversations with
practitioners of media buying and selling, paired with the absence “blockbuster” new marketing
categories or obvious new large marketers within existing categories, indicates flattish growth
for the year ahead.
-3- Brian Wieser 212-514-4682 Pivotal Research Group
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INDIVIDUAL MEDIA: FORECAST AS SHIFTING SHARES WITHIN SEGMENTS
Having established a view on top-line industry growth, we next want to look at our individual
media forecasts in more depth. Our approach reflects the manner in which budgets are
actually set by marketers and their agencies. Budgets are not commonly allocated on a
bottoms-up basis (i.e. by establishing a desired number of impressions or gross ratings points
on an individual medium then rolling them up to derive a budget). Instead, budget levels are set
by a marketer after some back-and-forth between the marketer’s media director and their
internal finance team, almost always referencing prior year budgets for a given brand. Budget
levels are then adjusted to reflect changes in the competitive environment or altered brand
goals. Once those budget levels are set, the marketer’s media director works with their media
agency account team, and these parties then determine the shares allocated to different media,
usually based in some way against the prior year media mix, with some alterations to reflect
idiosyncratic preferences for the year ahead. Metrics such as impressions or reach and
frequency (what we would call “media goals”) are generally determined after the budget has
been finalized.
To reinforce the point, historical advertising revenue trends show generally stable and
predictable share shifts. Predicting growth indirectly – i.e. predicting a medium’s share
of the total industry size weighted against the industry’s growth – is likely to be more
accurate than attempting to predict growth directly.
An important element of this process is the identification of appropriate sub-sets of media. We
separate Mass Media from Direct Media, and inside of Mass Media, further separate National
from Local Media. These divisions broadly reflect key differences within the market (i.e. the
media director working for a large manufacturer may have no discretion to allocate budgets to
local media, because co-op dollars have already been allocated to local retailers to spend as
they wish. Similarly, within large marketers’ organizations, there may be separate budget
holders for Direct Media and Mass Media, each with differing business and branding objectives).
National Media Budget Shares
70.0%
Television
60.0%
Magazines
50.0%
40.0% Digital
30.0% Radio
20.0%
Newspapers
10.0%
Cinema
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Pivotal Research Group, Magna Global
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5. PIVOTAL
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Many of the trends affecting National and Local Mass Media are similar, albeit from different
bases of size and share. Inside of Mass Media, National advertising will continue to grow faster
than Local advertising, in part because large regional advertisers continue to find greater
efficiency in allocating budgets to national media suppliers, but also because many of the
smaller advertisers who were otherwise using local platforms are finding Digital – and largely
direct – media platforms to be generally more cost-effective marketing vehicles.
Local Media Budget Shares
60.0%
Television
50.0%
Newspapers
40.0%
30.0% Radio
20.0% Outdoor
10.0%
Digital
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Pivotal Research Group, Magna Global
We also continue to see a bifurcation of share trends between “have” and “have-not” platforms.
Generally, Television and Digital media are growing at the expense of print-based media
platforms.
Digital advertising is the fastest growing “have” platform by far. Growth has occurred with the
sustained rise of e-commerce-based endemic marketers and because large brands have
generally allocated budgets for “engagement”-based objectives towards Digital media types.
Importantly, there is a further divide occurring within Digital along the lines of premium,
“remnant” and Facebook (as an almost separate category unto itself), at least for the largest
brands. Premium inventory – such as takeovers of portals’ homepages – is still an important
part of online advertising, but whereas large brands used to be wholly reliant on such units, they
are now increasingly happy with inventory which can be described as remnant. This has
occurred not least because of the ease with which audiences can be targeted in any context,
but also because of the radically different pricing structures between the two types of inventory.
Facebook is growing separately, in large part because it represents the best known environment
for a marketer seeking to execute a campaign with social media elements. For this reason it
appears to be capturing the bulk of the growth in online advertising outside of that which has
been driven by exchanges and demand side platforms for remnant inventory. By implication,
-5- Brian Wieser 212-514-4682 Pivotal Research Group
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given that budgets for online advertising are not unlimited, the prognosis for premium inventory
appears bleak for online media owners.
Television has also captured a growing share of the industry’s advertising revenues. Pricing
may have something to do with this, but arguably it is marketers’ sustained reliance on
awareness as a core brand goal – and a desire to at minimum match a competitor’s awareness-
levels – that drives marketers into Television. No medium comes close to Television’s tonnage
of advertising impressions and opportunities to reach virtually all consumers in the course of a
marketing campaign. Pricing strength on English-language Network TV in particular has mostly
meant that nationally-oriented marketers have shifted significant portions of their budgets out of
Network inventory and into National Cable (“downgrading the mix” even if content is sometimes
superior), contributing indirectly to growth of that medium.
By contrast, traditional Radio and print platforms are losing share of advertisers’ budgets, and
will continue to do so at least until (or if) new categories of marketers emerge who differentiate
themselves through characteristics which these media uniquely offer. Outdoor advertising finds
itself somewhere in the middle, as the medium loses out by virtue of its local orientation, but at
the same time it captures some growth because of the vast expansion of surfaces (primarily
Digital screens) on which to advertise, helping to expand the range of prospective marketers
who find the medium appealing for its unique attributes.
Within Direct Media we expect to see continued growth relative to Mass Media, primarily
because of the sustained rise of paid search advertising (largely driven by increasing reliance
on the medium from small and medium-sized enterprises and endemic marketers – mostly
representing a market expansion of sorts – but also in part because marketers who otherwise
focus on awareness and engagement for their brand goals continue to increase their use of paid
search, albeit from a small base). This growth is partially offset by the decline of print-based
Directories.
Direct Media Budget Shares
70.0%
60.0% Direct Online
50.0%
40.0%
Direct Mail
30.0%
20.0%
10.0% Directories
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Pivotal Research Group, Magna Global
-6- Brian Wieser 212-514-4682 Pivotal Research Group
7. PIVOTAL
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IMPLICATIONS FOR MEDIA COMPANIES
Even with a slowdown in 2012, National Cable advertising will still capture more growth (most
purely benefiting Discovery (DISCA), Scripps (SNI) and AMC (AMCX)) than any other directly
inevitable medium, other than paid search (for which Google (GOOG) is the primary
beneficiary). Other forms of online advertising will continue to grow rapidly, but the growth is
mostly occurring in sectors which are difficult to benefit from directly, as the fastest growing
market segments will include Facebook as well as exchanges and ad networks (although
Google offers exposure via its dominant Doubleclick exchange and AdSense ad network)
Media companies with high concentrations of print assets, including the New York Times (NYT),
Gannett (GCI) and Meredith (MDP) will be among the most negatively impacted by the
underlying trends we have identified.
COMPANY COMMENTS ON US-BASED ADVERTISING BUSINESSES
MEDIA CONGLOMERATES / TV PROGRAMMING
Time Warner (TWX) Favorable mix of growth from national cable assets (Turner Networks) vs. broader industry with only
modest negative impact from absence of NBA. Likely to experience long term structural weakness
from magazine division (Time Inc.). Digital extensions should contribute some upside to traditional
media portfolio
Walt Disney (DIS) Favorable mix of growth from national cable assets (both ABC Cable and ESPN) vs. broader industry
with only modest negative impact from absence of NBA. National network business (ABC) is durable
and strategically important, but will not see long-run growth. Local broadcasting business (ABC local
stations group) will fare better than other local media assets. Digital extensions should contribute
some upside to traditional media portfolio
News Corp (NWSa) Favorable mix of growth from national cable assets (Fox Cable and Fox News) vs. broader industry.
National network business (Fox Network) is durable and strategically important, but will not see
long-run growth. Local broadcasting business (Fox local stations group) will fare better than other
local media assets. National newspaper business (Wall Street Journal) will continue to perform
better than other titles because of unique position in the marketplace. Digital extensions should
contribute some upside to traditional media portfolio
Comcast (CMCSA) Favorable mix of growth from national cable programming assets (NBC Universal Cable properties)
vs. broader industry. Primary national network business (NBC) is durable and strategically
important, but will not see long-run advertising revenue growth. Primary local broadcasting
business (NBC local station group) will fare better than other local media assets. Secondary network
and local broadcasting businesses (Telemundo) should generally capture higher growth rates
associated with Spanish-language media. Digital extensions should contribute some upside to
traditional media portfolio. Unique opportunity for growth from online inventory given status as the
country’s dominant ISP. Local cable advertising also in a unique position given dominance in
country’s largest local markets, so best positioned to capitalize on advanced TV to the extent a
significant business model emerges.
Viacom (VIAb) Favorable growth trends from national cable programming assets (MTVN) vs. broader industry.
Digital extensions should contribute some upside to traditional media portfolio
Scripps (SNI) Favorable growth trends from national cable programming assets vs. broader industry. Digital
extensions should contribute some upside to traditional media portfolio
AMC (AMCX) Favorable growth trends from national cable programming assets vs. broader industry. Digital
extensions should contribute some upside to traditional media portfolio
Discovery (DISCA) Favorable growth trends from national cable programming assets vs. broader industry. Digital
extensions should contribute some upside to traditional media portfolio
CBS (CBS) National network business (CBS) is durable and strategically important with best-in-class outcomes
to be expected, even if long-term growth is unlikely. Strong local broadcasting business (CBS local
stations group) will fare better than other local media assets. Active efforts to capitalize on
emerging trends bridging local radio and Digital media should provide some upside vs. radio
industry. Outdoor assets should grow ahead of broader advertising industry. Online properties
(primarily CNET) remain important premium supplier for certain categories of marketers
-7- Brian Wieser 212-514-4682 Pivotal Research Group
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ONLINE PUBLISHING
Google (GOOG) Dominance in paid search likely to be as durable as the media type itself for key segments of
marketers – small and medium-sized enterprises. Display-based initiatives based around legacy
Doubleclick assets, YouTube and its home –grown AdSense network will outpace growth rates to be
experienced by premium publishers by a significant margin. Mobile initiatives also likely to
contribute to sustained high levels of growth. Initiatives in television are primarily long-term plays
Yahoo (YHOO) Weakness in paid search and softening trends for premium inventory suggest challenges will persist.
long-term growth from ad network and exchange businesses unlikely to compensate
AOL (AOL) Softening trends for premium inventory suggest challenges will persist. Ad network business
generally weak vs. rest of industry. Local initiatives are yet to provably capture meaningful
advertising revenues
Pandora (P) Significant volume of display advertising opportunities allows for large potential base of ad sales.
Future opportunity to capture rising share (from almost non-existent base) of traditional radio
advertising despite otherwise soft market for that medium
PRINT PUBLISHING AND BROADCASTING
Meredith (MDP) Weak magazine sector will be difficult to overcome. TV stations offer a durable, if slow-growth
business. Digital extensions should contribute some upside to traditional media portfolio
Gannett (GCI) Weak newspaper sector will be difficult to overcome. TV stations offer a durable, if slow-growth
business. Digital extensions should contribute some upside to traditional media portfolio, but active
efforts to grow or acquire new Digital businesses should have favorable impact on the company
New York Times (NYT) Weak newspaper sector will be difficult to overcome at the national level and moreso at the local
level. Digital extensions should contribute some upside to traditional media portfolio. Stand-alone
Digital business (About.com) faces very high levels of competition and will be pressured indefinitely
Washington Post Co (WPO) Weak newspaper sector will be difficult to overcome. TV stations and local cable advertising offer a
durable, if slow-growth business. Digital extensions should contribute some upside to traditional
media portfolio.
Sinclair (SBGI) TV stations offer a durable, if slow-growth business. Digital extensions should contribute some
upside to traditional media portfolio
OUT-OF-HOME
Lamar (LAMR) Outdoor advertising should continue to grow even in a weak economy, but the bulk of growth is
likely to come from new screens (whether Digital or traditional) placed in new environments.
Underlying “same store” sales for signs are likely to be somewhat weak
Clear Channel Outdoor (CCO) Outdoor advertising should continue to grow even in a weak economy, but the bulk of growth is
likely to come from new screens (whether Digital or traditional) placed in new environments.
Underlying “same store” sales for signs are likely to be somewhat weak
National Cinemedia (NCMI) Cinema benefits from perceived weaknesses of traditional television as an advertising medium, as
there remains much latent interest in the medium. Macro-conditions will likely restrain growth,
which ultimately will be limited in size given size of potential audience who are best reached via
cinema vs. television or other out-of-home platforms
-8- Brian Wieser 212-514-4682 Pivotal Research Group
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SUPPORTING IDEAS IN-DEPTH (#1): ANECODTAL NEAR-TERM FORECASTING
Our earliest experiences from inside the industry illustrate to us the difficulties associated with
anticipating near-term macro-level advertising revenue growth trends by direct application of
any specific forecasting formula. Instead, we discovered that expectations for the coming
year are best-informed through i) ongoing conversations with industry practitioners and
ii) anticipating the near-term emergence of “blockbuster” new marketing categories or
new marketers within existing categories which practitioners may not have detailed
perspectives on. Expectations for longer time horizons are best predicted via regression model.
For the purposes of forecasting, our historical interactions with practitioners have focused on
testing hypotheses for how and why advertising is growing or shrinking among advertisers who
are already in the market. Those hypotheses were then refined and applied across the broader
industry. Our preferred hypothesis is a prisoner’s dilemma-based perspective on advertising
budgeting, which will be described later in this document. From this framework, we assert that
the bulk of marketers who were active during 2011 are likely to maintain their spending levels –
neither cutting nor increasing meaningfully – during 2012, implying that spending should be
approximately flat year over year. To the other key variable, we are unaware of new blockbuster
categories or marketers set to launch in the near-term, beyond those which are driving the
growth of mobile and paid search advertising. The absence of large groups of large new
marketers will ultimately be responsible for holding back meaningful growth.
Our observational approach differs from any which rely upon bottoms-up forecasts of marketing
categories or individual media platforms. Bottoms-up estimates of marketing categories can be
challenged because of the absence of underlying “real” data1 against which to model. Bottoms-
up estimates of growth rates for individual media are also limited because they are dependent
upon expectations of pricing growth and inventory utilization which are equally difficult to
ascertain.2
1
The only underlying industry sources for historical category expenditures base their figures on nominal “rate
cards” which are typically overstated to a significant degree; in parallel, forecasts on a bottoms-up category-by-
category basis are inevitably incomplete given an absence of sufficiently granular estimates (most of the largest
advertisers are both global and their brands cut across multiple categories, thus rendering any guidance on marketing
expenditures as at best directionally useful)
2
Bottoms-up forecasts of individual media which rely upon changes in pricing and inventory utilization generally
lack “actual” historical data against which to benchmark future trends with any precision.
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SUPPORTING IDEAS IN-DEPTH (#2): ADVERTISING AS A PRISONERS’ DILEMMA
When making public statements, marketers are prone to discussing inspirational ways to pursue
profitable growth for their companies through better marketing. While most do seek growth
through smarter – and often more – marketing, such strategies are often operationally
challenging and usually require time-consuming consensus-building with constituents inside of a
marketer’s broader organization. The most important constituent within the marketer’s
organization will be the budget-setting finance function. Those very budget-setters often – but
not always – establish spending levels based upon what they observe competitors doing, given
the risks associated with allocating budgets against otherwise unproven, theoretical models for
growth.
With this in mind, a key supporting point to our view on advertising growth in 2012 – or any
particular year – is that advertising tends to exist because of the competitive dynamics within a
category. Budget growth does not always happen after a marketer has developed a plan to
catalyze growth via branding. Instead it is much more likely to occur in response to a loss of
market share.
A variant on the “prisoner’s dilemma” can explain this phenomenon, as illustrated in the matrix
below:
Source: Pivotal Research Group
The matrix can be read to illustrate a starting situation (“I”) where there are two brands, each of
whom spends nothing to promote their products. Both have 50% market share in their category.
As time moves forward (to either square marked as “II”) one brand decides to catalyze their own
growth and break this stasis by spending $100 on advertising while the other company
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continues to spend nothing. Presumably brand awareness is not the only factor causing a
consumer to choose one brand over another, and so we assume that the brand spending
money on advertising captures more – but not all – market share. The competing brand, by now
suffering from a loss of share, decides that advertising will help regain lost share and so seeks
to at least match its competitor’s efforts (as indicated in the square marked “III”).
In our illustration, both brands end up spending $100 on advertising and return to 50% market
share each. While more tit-for-tat increases may occur, both brands will eventually realize at the
same time that merely increasing spending on advertising will mostly serve to increase their
individual costs while doing nothing for long-term market share gains. However, neither brand
will trust the other to reduce spending and thus budgets should generally remain stable after a
plateau has been established.
While reality is never as straight-forward as indicated by such simplistic frameworks, this one
tends to ring true for most advertising budget-setters as a reflection how and why they change
or hold static their budget allocations.
In any given category which has established itself in the media marketplace, when all
competitors trust each other to behave rationally – and this trust may be entrenched if a
category has exhibited stable behaviors for many years – there will be very little change in the
advertising intensity of the category. Each marketer is optimizing its own circumstances by
restraining further budget increases in an effort to manage costs prudently. At the same time,
under normal circumstances, few marketers will want to take the risk of trusting a competitor to
cut its budget for advertising given the downside risk of being wrong.
We have a high degree of confidence that the any given marketer typically contains their budget
increases from year to year. This is best illustrated by IRS data (shown in detail later in this
report) indicating the typical large company holds the line on advertising budgets over extended
time frames.
However, as we noted earlier some marketers are, in fact, able to make a business case to
generate higher spending levels from their companies, and can significantly increase spending
levels to sustainably drive growth. When this occurs, to invoke the prisoner’s dilemma analogy,
the marketer has “defected” and effectively forced other marketers to follow suit, lest they lose
market share.
While some advertising is budgeted primarily to pursue growth, we argue that a
significant portion of advertising exists to avoid a loss. This view is at sharp odds with
any view holding that advertising exists solely to pursue growth. The implications of this
perspective are significant as they relate to anticipating whether or not advertising will rise or fall
within any given category in a given year.
For example, in early 2009, the automotive sector essentially paused their advertising given the
state of the economy – not because no cars would be sold (although of course sales levels were
depressed) but because every automotive marketer could trust with a high degree of certainty
that their competitors would cut their budgets. By contrast, the effects of supply chain
disruptions in Japan during early 2011 had a muted effect on auto advertising primarily because
it was likely that only the Japanese manufacturers would cut their spending levels for any
extended time.
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Auto insurance provides another example of this hypothesis playing out. That sector was, until
recently, a fairly sleepy one. Near the beginning of the most recent decade, GEICO emerged
with hundreds of millions of dollars of new spending on advertising, leading to significant market
share increases. As a consequence, all other brands in the category were forced to sharply
increase their own spending levels in order to avoid losing share to the competition.
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SUPPORTING IDEAS IN-DEPTH (#3): NEW MARKETERS = NEW MONEY
The introduction of a) additional competition within an established category or b) the emergence
of new “blockbuster” categories – which in recent years have included national retail,
pharmaceuticals, wireless telephony and auto insurance – facilitates advertising growth which
can exceed rates of growth observed in the broader economy. We would posit that a weak
macro-economic environment is relatively less likely to foster the emergence of such new
marketers (although macro-economic growth is certainly not required). Consequently we would
anticipate that levels of advertising growth in the American economy are likely to be constrained
to the growth rates of spending by incumbent marketers.
This perspective on why advertising grows is reinforced by data from the IRS, which provides us
with a unique vantage point on the recent history of advertising given the underlying source, a
large sample of corporate tax returns. We can illustrate trends by focusing upon the largest
companies in the United States, starting with those which have revenues in excess of $2.5
billion. During the period between 2001 and 2008, averaging advertising spending was within a
narrow range, from $56 million to $59 million per year, essentially flat. Advertising spending did
grow in aggregate among this grouping of companies, but only because the number of
companies meeting our criteria rose from 1,391 in 2001 to 1,937 in 2008. Additional data is
available with lower asset cut-offs going back to 1994 illustrates the same trend.
Tellingly, the driver of weakness in 2008 – the most recent year for which this data is available –
was the significant decline in number of advertisers. Spending per advertiser held constant yet
again.
Collectively, this data reinforces our view that a) advertisers will hold their budgets flat, on
average, unless pressed to act differently and b) growth in the number of new marketers is
essential to longer-term growth in advertising. For the near-term, we are unaware of any new
blockbuster marketing categories which are immediately set to catalyze the industry upward in
the near-term. However, new types of consumer electronics, health care insurance and national
banking brands are all prospectively “on deck” to become significantly bigger categories in the
not-too-distant future.
100.0 3,000
Number of Large Companies
Number of Large Companies (Receipts
Average Advertising Expenditures Per
90.0
(Receipts >$2.5 Billion)
Large Company (MIllions of $)
2,500
80.0
70.0
2,000
>$2.5 billion)
60.0
50.0 1,500
40.0
Average Advertising Spending 1,000
30.0
20.0 Per Large Company
500
10.0
- -
2001 2002 2003 2004 2005 2006 2007 2008
Source: Pivotal Research Group analysis of IRS data
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SUPPORTING IDEAS IN-DEPTH (#4): NEW MEDIA = NEW MARKETERS
An important additional consideration in thinking about growth rates for the year ahead is the
notion that new media platforms enable new categories of marketers to allocate money to
what we define as media. This is a critical supplement to the notion that new categories of
marketers drive growth in advertising.
3,000.0
New Platform Ad Revenues ($ in mm)
2,500.0
Mobile
2,000.0
Online Video
1,500.0
1,000.0
500.0
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Pivotal Research Grop, IAB
We saw this during the 1980s, as direct mail was newly enabled by database marketing,
opening up media to entirely new kinds of marketers. We saw this again by the 1990s, as cable
advertising achieved scale and enabled smaller advertisers to use Television for the first time,
given the lower absolute price points available for television-based media campaigns. And we
saw it during the last decade too, as Online advertising enabled millions of small and medium-
sized offline companies along with newly emerged endemic marketers – such as Amazon and
eBay – to advertise for the first time.
When we look to years ahead, mobile media may prove to be that next major platform, but only
to the extent that “mobile endemics” emerge at scale. That is to say, new categories of
marketers – at the brand level – whose underlying businesses are dependent upon mobility will
need to arrive before mobile marketing becomes a large media platform in its own right. During
2012, Mobile will likely add $240 million in advertising, and the medium’s total of $884 million
will likely be dominated by those marketers who are endemic to the medium.
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Companies Mentioned in This Report
COMPANY TICKER RATING STOCK PRICE (11/28/11)
Time Warner, Inc. TWX N/R 33.31
Walt Disney Company DIS N/R 34.07
News Corporation NWSA N/R 16.50
Comcast Corporation CMCSA HOLD $30.00 TP 21.75
Viacom, Inc. VIAB N/R 42.76
Scripps Networks Interactive, Inc. SNI N/R 38.89
AMC Networks, Inc. AMCX N/R 35.20
Discovery Communications, Inc. DISCA N/R 40.23
CBS Corporation CBS N/R 24.39
Google, Inc. GOOG N/R 588.19
Yahoo!, Inc. YHOO N/R 15.35
AOL, Inc. AOL N/R 13.79
Pandora Media, Inc. P N/R 10.52
Meredith Corporation MDP N/R 27.38
Gannett Co., Inc. GCI N/R 10.52
The New York Times Company NYT N/R 6.70
The Washington Post Co. WPO N/R 344.04
Sinclair Broadcast Group, Inc. SBGI N/R 9.43
Lamar Advertising Co. LAMR N/R 23.29
Clear Channel Outdoor Holdings CCO N/R 10.83
National Cinemedia, Inc. NCMI N/R 12.52
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Appendix: Important Disclosures
Analyst Certification
I, Brian W. Wieser, hereby certify that the views expressed in this research report accurately reflect my
personal views about the subject company and their securities. I further certify that I have not received
and will not receive direct or indirect compensation related to specific recommendations or views
contained in this research report.
Legal Disclaimers
Pivotal Research Group LLC is an independent equity research company and is neither a broker dealer
nor offers investment banking services. Pivotal Research Group LLC is not a market maker for any
securities, does not hold any securities positions, and does not seek compensation for investment
banking services. The analyst preparing this report does not own any securities of the subject company
and does not receive any compensation directly or indirectly from investment banking services.
Stock Ratings
Pivotal Research Group LLC assigns one of three ratings based on an expectation of absolute total return
(price change plus dividends) over a twelve month time frame. The ratings are based on the following
criteria:
BUY: The security is expected to have an absolute return in excess of 15%.
HOLD: The security is expected to have an absolute return of between plus and minus 15%.
SELL: The security is expected to have an absolute return less than minus 15%.
Ratings Distribution
Pivotal Research LLC currently provides research coverage of 10 companies, of which 90% are rated
BUY, 10% are rated HOLD, and 0% are rated SELL. Our company does not offer investment banking
services. This data is accurate as-of November 8, 2011.
Price Chart and Target Price History
Other Disclaimers
Information contained in this report has been prepared from sources that are believed to be reliable and
accurate but are not guaranteed by us and do not represent a complete summary or statement of all
available data. Additional information is available upon request. Furthermore, information and opinions
expressed are subject to change without notice and we are under no obligation to inform you of such
change.
This report is has been prepared solely for our institutional clients. Ratings and target prices do not take
into account the particular investment objectives, financial and/or tax situation, or needs of individual
investors. Investment decisions should take into account all available information, not just that which is
contained in this report. Furthermore, nothing contained in this report should be considered an offer or
solicitation by Pivotal Research Group LLC to buy or sell any securities or other financial instruments.
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