PIVOTAL                                                                                   U.S. Equity Research            ...
PIVOTAL    Pivotal Research GroupFORECAST: 2011 AND 2012 ADVERTISING GROWTH & COMMENTARYMEDIUM                          20...
PIVOTAL Pivotal Research GroupINDUSTRY APPROACH: LONG-TERM MODELS, SHORT-TERM ANECDOTESAdvertising is highly correlated wi...
PIVOTAL Pivotal Research GroupINDIVIDUAL MEDIA: FORECAST AS SHIFTING SHARES WITHIN SEGMENTSHaving established a view on to...
PIVOTAL Pivotal Research GroupMany of the trends affecting National and Local Mass Media are similar, albeit from differen...
PIVOTAL Pivotal Research Groupgiven that budgets for online advertising are not unlimited, the prognosis for premium inven...
PIVOTAL  Pivotal Research GroupIMPLICATIONS FOR MEDIA COMPANIESEven with a slowdown in 2012, National Cable advertising wi...
PIVOTAL  Pivotal Research GroupONLINE PUBLISHINGGoogle (GOOG)                       Dominance in paid search likely to be ...
PIVOTAL    Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#1): ANECODTAL NEAR-TERM FORECASTINGOur earliest experiences f...
PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#2): ADVERTISING AS A PRISONERS’ DILEMMAWhen making public statem...
PIVOTAL Pivotal Research Groupcontinues to spend nothing. Presumably brand awareness is not the only factor causing aconsu...
PIVOTAL Pivotal Research GroupAuto insurance provides another example of this hypothesis playing out. That sector was, unt...
PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#3): NEW MARKETERS = NEW MONEYThe introduction of a) additional c...
PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#4): NEW MEDIA = NEW MARKETERSAn important additional considerati...
PIVOTAL Pivotal Research GroupCompanies Mentioned in This Report            COMPANY                      TICKER           ...
PIVOTAL Pivotal Research GroupAppendix: Important DisclosuresAnalyst CertificationI, Brian W. Wieser, hereby certify that ...
PIVOTAL Pivotal Research GroupPast performance is not indicative of future performance and estimates of future performance...
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Brian Weiser Pivotal US Ad forecast for 2012

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Brian Wieser, - Pivotal Research Group
2012 US Media Market Growth analysis
I always learn from Brians analysis

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Brian Weiser Pivotal US Ad forecast for 2012

  1. 1. PIVOTAL U.S. Equity Research Advertising Pivotal Research GroupAdvertising November 30, 20112012 AD FORECASTS: A Have and Have-Not Media EconomyBOTTOM 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), CFAbased on our extensive ongoing conversations with practitioners of media buying and 212-514-4682selling. Revenue growth almost solely arises from the introduction of new categories or brian@pvtl.comemergence of new brands and that individual marketer budgets tend to hold constant overtime. 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, afterwhich the impact of status quo “new normal” should return, with weak growth in theperiods that immediately follow. In the shadow of August’s U.S. debt downgrade, budget-setters approached uncommitted advertising expenditures with hesitation, although not to theextent initiatives were halted outright (as occurred during 4Q 2008). For a detailed modelplease 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 thatsuch activity tends to coincide with economic growth. We focus upon Personal ConsumptionExpenditures (PCE) and Industrial Production given the high correlation these variables havewith changes in media owners’ advertising revenues. The Philadelphia Federal Reserverecently released its updated Survey of Professional Forecasters, which provides consensusexpectations from more than 50 economists. The Survey indicates approximately 4% growthin 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 predictadvertising growth yields only 1% growth. Assuming industrial production picks up in followingyears - 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 economicconditions meaningfully improve.Individual medium growth trends in 2012 will reinforce a “have/have-not” mediaeconomy, between TV and Digital on one hand and other forms of traditional media onthe other. Simply put, in scarce times, marketers are concentrating their budgets among theirprimary medium (often network TV for large brands seeking awareness) and a secondarymedium (often Digital platforms for traditional brand marketers, who typically pursueengagement-based outcomes among a subset of the population who are aware of their brandattributes). In general, we expect to see National Mass Media continuing to gain share at theexpense of Local Mass Media. But Direct Media should continue to grow faster than MassMedia. In this context, Mobile advertising will grow fastest, up 37% in 2012, decelerating inpercentage 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. othermedia, that medium should slow significantly in 2012, rising by only 4.8% (compared to a gainof 9.0% in 2011). Unsurprisingly, Local Newspapers will fare worst during 2012, falling by9.4% to generate $1.8B less revenue than in 2011. Only Directories will perform weaker inpercentage terms, falling by another 22.6% for the year. Pivotal Research Group 853 Broadway, Suite 1406 New York, NY 10003 Important Disclosures Are Located In The Appendix
  2. 2. PIVOTAL Pivotal Research GroupFORECAST: 2011 AND 2012 ADVERTISING GROWTH & COMMENTARYMEDIUM 2011 2012 SUMMARY COMMENTARYNational 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) daypartsNational 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 periodsNational 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 2012National 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 onlineNational 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 thirdOnline 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 growthMobile +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 growthTotal 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 objectivesTotal 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 initiativesTotal 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 shiftsTotal 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 characteristicsTOTAL 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 significantlyLocal 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 broadcastTotal 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 2010Total Local Newspapers -9.6% -9.4% Continual advertising erosion as perception of near-term death from sector extends across the industryTotal 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 mediumTotal 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 marketersTotal 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 advertisersTOTAL 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 - advertisersOther 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 growDirect 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 mediaDirectories -21.9% -22.6% No end in sight for recent pace of decline. All publishers are observing falling revenuesTOTAL 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 platformTOTAL 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
  3. 3. PIVOTAL Pivotal Research GroupINDUSTRY APPROACH: LONG-TERM MODELS, SHORT-TERM ANECDOTESAdvertising is highly correlated with macro-economic variables. While many industry observersdescribe advertising as a percentage of an economy’s Gross Domestic Product – whichindicates a decline of advertising over time – we argue that the very nature of GDP (whichincludes significant government expenditures in the United States) is an imperfect proxy forassessing advertising. Instead, we look at advertising as a function of personal consumptionexpenditures on a nominal basis (consumer spending remains the underpinning of why mostadvertising 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 mirrorsmanufacturers’ production for the very sake of selling things, but happens to match the “dips” inadvertising better than other variables).The regression formula for predicting media owners’ advertising revenues we rely upon wasdeveloped 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 an8.6% decline in advertising; every incremental percentage of PCE adds 2.06% of advertisingrevenue growth, and every incremental percentage of Industrial Production adds 0.55% ofadvertising growth. We believe this model is most appropriate for predicting long-term trends inadvertising, 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 GlobalWhile our near-term forecasts happen to match our regression model-driven expectations for2012, our confidence in near-term forecasts are based upon more “philosophical” elements. Aswe describe below (“An Approach to Near-Term Forecasting”) our ongoing conversations withpractitioners of media buying and selling, paired with the absence “blockbuster” new marketingcategories or obvious new large marketers within existing categories, indicates flattish growthfor the year ahead. -3- Brian Wieser 212-514-4682 Pivotal Research Group
  4. 4. PIVOTAL Pivotal Research GroupINDIVIDUAL MEDIA: FORECAST AS SHIFTING SHARES WITHIN SEGMENTSHaving established a view on top-line industry growth, we next want to look at our individualmedia forecasts in more depth. Our approach reflects the manner in which budgets areactually set by marketers and their agencies. Budgets are not commonly allocated on abottoms-up basis (i.e. by establishing a desired number of impressions or gross ratings pointson an individual medium then rolling them up to derive a budget). Instead, budget levels are setby a marketer after some back-and-forth between the marketer’s media director and theirinternal finance team, almost always referencing prior year budgets for a given brand. Budgetlevels are then adjusted to reflect changes in the competitive environment or altered brandgoals. Once those budget levels are set, the marketer’s media director works with their mediaagency 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 reflectidiosyncratic preferences for the year ahead. Metrics such as impressions or reach andfrequency (what we would call “media goals”) are generally determined after the budget hasbeen finalized.To reinforce the point, historical advertising revenue trends show generally stable andpredictable share shifts. Predicting growth indirectly – i.e. predicting a medium’s shareof the total industry size weighted against the industry’s growth – is likely to be moreaccurate than attempting to predict growth directly.An important element of this process is the identification of appropriate sub-sets of media. Weseparate Mass Media from Direct Media, and inside of Mass Media, further separate Nationalfrom Local Media. These divisions broadly reflect key differences within the market (i.e. themedia director working for a large manufacturer may have no discretion to allocate budgets tolocal media, because co-op dollars have already been allocated to local retailers to spend asthey wish. Similarly, within large marketers’ organizations, there may be separate budgetholders 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 -4- Brian Wieser 212-514-4682 Pivotal Research Group
  5. 5. PIVOTAL Pivotal Research GroupMany of the trends affecting National and Local Mass Media are similar, albeit from differentbases of size and share. Inside of Mass Media, National advertising will continue to grow fasterthan Local advertising, in part because large regional advertisers continue to find greaterefficiency in allocating budgets to national media suppliers, but also because many of thesmaller advertisers who were otherwise using local platforms are finding Digital – and largelydirect – 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 GlobalWe 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 mediaplatforms.Digital advertising is the fastest growing “have” platform by far. Growth has occurred with thesustained rise of e-commerce-based endemic marketers and because large brands havegenerally 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 largestbrands. Premium inventory – such as takeovers of portals’ homepages – is still an importantpart of online advertising, but whereas large brands used to be wholly reliant on such units, theyare now increasingly happy with inventory which can be described as remnant. This hasoccurred 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 environmentfor a marketer seeking to execute a campaign with social media elements. For this reason itappears to be capturing the bulk of the growth in online advertising outside of that which hasbeen driven by exchanges and demand side platforms for remnant inventory. By implication, -5- Brian Wieser 212-514-4682 Pivotal Research Group
  6. 6. PIVOTAL Pivotal Research Groupgiven that budgets for online advertising are not unlimited, the prognosis for premium inventoryappears bleak for online media owners.Television has also captured a growing share of the industry’s advertising revenues. Pricingmay have something to do with this, but arguably it is marketers’ sustained reliance onawareness 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 tonnageof advertising impressions and opportunities to reach virtually all consumers in the course of amarketing campaign. Pricing strength on English-language Network TV in particular has mostlymeant that nationally-oriented marketers have shifted significant portions of their budgets out ofNetwork inventory and into National Cable (“downgrading the mix” even if content is sometimessuperior), contributing indirectly to growth of that medium.By contrast, traditional Radio and print platforms are losing share of advertisers’ budgets, andwill continue to do so at least until (or if) new categories of marketers emerge who differentiatethemselves through characteristics which these media uniquely offer. Outdoor advertising findsitself somewhere in the middle, as the medium loses out by virtue of its local orientation, but atthe same time it captures some growth because of the vast expansion of surfaces (primarilyDigital screens) on which to advertise, helping to expand the range of prospective marketerswho find the medium appealing for its unique attributes.Within Direct Media we expect to see continued growth relative to Mass Media, primarilybecause of the sustained rise of paid search advertising (largely driven by increasing relianceon the medium from small and medium-sized enterprises and endemic marketers – mostlyrepresenting a market expansion of sorts – but also in part because marketers who otherwisefocus on awareness and engagement for their brand goals continue to increase their use of paidsearch, albeit from a small base). This growth is partially offset by the decline of print-basedDirectories. 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. 7. PIVOTAL Pivotal Research GroupIMPLICATIONS FOR MEDIA COMPANIESEven with a slowdown in 2012, National Cable advertising will still capture more growth (mostpurely benefiting Discovery (DISCA), Scripps (SNI) and AMC (AMCX)) than any other directlyinevitable medium, other than paid search (for which Google (GOOG) is the primarybeneficiary). Other forms of online advertising will continue to grow rapidly, but the growth ismostly occurring in sectors which are difficult to benefit from directly, as the fastest growingmarket segments will include Facebook as well as exchanges and ad networks (althoughGoogle 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 theunderlying trends we have identified.COMPANY COMMENTS ON US-BASED ADVERTISING BUSINESSESMEDIA CONGLOMERATES / TV PROGRAMMINGTime 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 portfolioWalt 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 portfolioNews 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 portfolioComcast (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 portfolioScripps (SNI) Favorable growth trends from national cable programming assets vs. broader industry. Digital extensions should contribute some upside to traditional media portfolioAMC (AMCX) Favorable growth trends from national cable programming assets vs. broader industry. Digital extensions should contribute some upside to traditional media portfolioDiscovery (DISCA) Favorable growth trends from national cable programming assets vs. broader industry. Digital extensions should contribute some upside to traditional media portfolioCBS (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
  8. 8. PIVOTAL Pivotal Research GroupONLINE PUBLISHINGGoogle (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 playsYahoo (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 compensateAOL (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 revenuesPandora (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 mediumPRINT PUBLISHING AND BROADCASTINGMeredith (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 portfolioGannett (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 companyNew 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 indefinitelyWashington 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 portfolioOUT-OF-HOMELamar (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 weakClear 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 weakNational 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
  9. 9. PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#1): ANECODTAL NEAR-TERM FORECASTINGOur earliest experiences from inside the industry illustrate to us the difficulties associated withanticipating near-term macro-level advertising revenue growth trends by direct application ofany specific forecasting formula. Instead, we discovered that expectations for the comingyear are best-informed through i) ongoing conversations with industry practitioners andii) anticipating the near-term emergence of “blockbuster” new marketing categories ornew marketers within existing categories which practitioners may not have detailedperspectives on. Expectations for longer time horizons are best predicted via regression model.For the purposes of forecasting, our historical interactions with practitioners have focused ontesting hypotheses for how and why advertising is growing or shrinking among advertisers whoare already in the market. Those hypotheses were then refined and applied across the broaderindustry. Our preferred hypothesis is a prisoner’s dilemma-based perspective on advertisingbudgeting, which will be described later in this document. From this framework, we assert thatthe 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 beapproximately flat year over year. To the other key variable, we are unaware of new blockbustercategories or marketers set to launch in the near-term, beyond those which are driving thegrowth of mobile and paid search advertising. The absence of large groups of large newmarketers will ultimately be responsible for holding back meaningful growth.Our observational approach differs from any which rely upon bottoms-up forecasts of marketingcategories or individual media platforms. Bottoms-up estimates of marketing categories can bechallenged 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 dependentupon expectations of pricing growth and inventory utilization which are equally difficult toascertain.21 The only underlying industry sources for historical category expenditures base their figures on nominal “ratecards” 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 largestadvertisers are both global and their brands cut across multiple categories, thus rendering any guidance on marketingexpenditures as at best directionally useful)2 Bottoms-up forecasts of individual media which rely upon changes in pricing and inventory utilization generallylack “actual” historical data against which to benchmark future trends with any precision. -9- Brian Wieser 212-514-4682 Pivotal Research Group
  10. 10. PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#2): ADVERTISING AS A PRISONERS’ DILEMMAWhen making public statements, marketers are prone to discussing inspirational ways to pursueprofitable growth for their companies through better marketing. While most do seek growththrough smarter – and often more – marketing, such strategies are often operationallychallenging and usually require time-consuming consensus-building with constituents inside of amarketer’s broader organization. The most important constituent within the marketer’sorganization will be the budget-setting finance function. Those very budget-setters often – butnot always – establish spending levels based upon what they observe competitors doing, giventhe risks associated with allocating budgets against otherwise unproven, theoretical models forgrowth.With this in mind, a key supporting point to our view on advertising growth in 2012 – or anyparticular year – is that advertising tends to exist because of the competitive dynamics within acategory. Budget growth does not always happen after a marketer has developed a plan tocatalyze growth via branding. Instead it is much more likely to occur in response to a loss ofmarket share.A variant on the “prisoner’s dilemma” can explain this phenomenon, as illustrated in the matrixbelow: Source: Pivotal Research GroupThe matrix can be read to illustrate a starting situation (“I”) where there are two brands, each ofwhom 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 owngrowth and break this stasis by spending $100 on advertising while the other company - 10 - Brian Wieser 212-514-4682 Pivotal Research Group
  11. 11. PIVOTAL Pivotal Research Groupcontinues to spend nothing. Presumably brand awareness is not the only factor causing aconsumer to choose one brand over another, and so we assume that the brand spendingmoney on advertising captures more – but not all – market share. The competing brand, by nowsuffering from a loss of share, decides that advertising will help regain lost share and so seeksto 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% marketshare each. While more tit-for-tat increases may occur, both brands will eventually realize at thesame time that merely increasing spending on advertising will mostly serve to increase theirindividual costs while doing nothing for long-term market share gains. However, neither brandwill trust the other to reduce spending and thus budgets should generally remain stable after aplateau has been established.While reality is never as straight-forward as indicated by such simplistic frameworks, this onetends to ring true for most advertising budget-setters as a reflection how and why they changeor hold static their budget allocations.In any given category which has established itself in the media marketplace, when allcompetitors trust each other to behave rationally – and this trust may be entrenched if acategory has exhibited stable behaviors for many years – there will be very little change in theadvertising intensity of the category. Each marketer is optimizing its own circumstances byrestraining 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 tocut 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 budgetincreases from year to year. This is best illustrated by IRS data (shown in detail later in thisreport) indicating the typical large company holds the line on advertising budgets over extendedtime frames.However, as we noted earlier some marketers are, in fact, able to make a business case togenerate higher spending levels from their companies, and can significantly increase spendinglevels 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 losemarket share.While some advertising is budgeted primarily to pursue growth, we argue that asignificant portion of advertising exists to avoid a loss. This view is at sharp odds withany view holding that advertising exists solely to pursue growth. The implications of thisperspective are significant as they relate to anticipating whether or not advertising will rise or fallwithin any given category in a given year.For example, in early 2009, the automotive sector essentially paused their advertising given thestate of the economy – not because no cars would be sold (although of course sales levels weredepressed) but because every automotive marketer could trust with a high degree of certaintythat their competitors would cut their budgets. By contrast, the effects of supply chaindisruptions in Japan during early 2011 had a muted effect on auto advertising primarily becauseit was likely that only the Japanese manufacturers would cut their spending levels for anyextended time. - 11 - Brian Wieser 212-514-4682 Pivotal Research Group
  12. 12. PIVOTAL Pivotal Research GroupAuto insurance provides another example of this hypothesis playing out. That sector was, untilrecently, a fairly sleepy one. Near the beginning of the most recent decade, GEICO emergedwith hundreds of millions of dollars of new spending on advertising, leading to significant marketshare increases. As a consequence, all other brands in the category were forced to sharplyincrease their own spending levels in order to avoid losing share to the competition. - 12 - Brian Wieser 212-514-4682 Pivotal Research Group
  13. 13. PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#3): NEW MARKETERS = NEW MONEYThe introduction of a) additional competition within an established category or b) the emergenceof new “blockbuster” categories – which in recent years have included national retail,pharmaceuticals, wireless telephony and auto insurance – facilitates advertising growth whichcan exceed rates of growth observed in the broader economy. We would posit that a weakmacro-economic environment is relatively less likely to foster the emergence of such newmarketers (although macro-economic growth is certainly not required). Consequently we wouldanticipate that levels of advertising growth in the American economy are likely to be constrainedto the growth rates of spending by incumbent marketers.This perspective on why advertising grows is reinforced by data from the IRS, which provides uswith a unique vantage point on the recent history of advertising given the underlying source, alarge sample of corporate tax returns. We can illustrate trends by focusing upon the largestcompanies in the United States, starting with those which have revenues in excess of $2.5billion. During the period between 2001 and 2008, averaging advertising spending was within anarrow range, from $56 million to $59 million per year, essentially flat. Advertising spending didgrow in aggregate among this grouping of companies, but only because the number ofcompanies meeting our criteria rose from 1,391 in 2001 to 1,937 in 2008. Additional data isavailable 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 yetagain.Collectively, this data reinforces our view that a) advertisers will hold their budgets flat, onaverage, unless pressed to act differently and b) growth in the number of new marketers isessential to longer-term growth in advertising. For the near-term, we are unaware of any newblockbuster marketing categories which are immediately set to catalyze the industry upward inthe near-term. However, new types of consumer electronics, health care insurance and nationalbanking brands are all prospectively “on deck” to become significantly bigger categories in thenot-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 >$2.5 billion) 60.0 50.0 1,500 40.0 Average Advertising Spending 1,000 30.0 20.0 Per Large Company 500 10.0 - - 2001 2002 2003 2004 2005 2006 2007 2008 Source: Pivotal Research Group analysis of IRS data - 13 - Brian Wieser 212-514-4682 Pivotal Research Group
  14. 14. PIVOTAL Pivotal Research GroupSUPPORTING IDEAS IN-DEPTH (#4): NEW MEDIA = NEW MARKETERSAn important additional consideration in thinking about growth rates for the year ahead is thenotion that new media platforms enable new categories of marketers to allocate money towhat we define as media. This is a critical supplement to the notion that new categories ofmarketers drive growth in advertising. 3,000.0 New Platform Ad Revenues ($ 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, IABWe 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 cableadvertising 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 wesaw 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 andeBay – to advertise for the first time.When we look to years ahead, mobile media may prove to be that next major platform, but onlyto the extent that “mobile endemics” emerge at scale. That is to say, new categories ofmarketers – at the brand level – whose underlying businesses are dependent upon mobility willneed to arrive before mobile marketing becomes a large media platform in its own right. During2012, Mobile will likely add $240 million in advertising, and the medium’s total of $884 millionwill likely be dominated by those marketers who are endemic to the medium. - 14 - Brian Wieser 212-514-4682 Pivotal Research Group
  15. 15. PIVOTAL Pivotal Research GroupCompanies 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 42.76Scripps Networks Interactive, Inc. SNI N/R 38.89 AMC Networks, Inc. AMCX N/R 35.20Discovery 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 23.29Clear Channel Outdoor Holdings CCO N/R 10.83 National Cinemedia, Inc. NCMI N/R 12.52 - 15 - Brian Wieser 212-514-4682 Pivotal Research Group
  16. 16. PIVOTAL Pivotal Research GroupAppendix: Important DisclosuresAnalyst CertificationI, Brian W. Wieser, hereby certify that the views expressed in this research report accurately reflect mypersonal views about the subject company and their securities. I further certify that I have not receivedand will not receive direct or indirect compensation related to specific recommendations or viewscontained in this research report.Legal DisclaimersPivotal Research Group LLC is an independent equity research company and is neither a broker dealernor offers investment banking services. Pivotal Research Group LLC is not a market maker for anysecurities, does not hold any securities positions, and does not seek compensation for investmentbanking services. The analyst preparing this report does not own any securities of the subject companyand does not receive any compensation directly or indirectly from investment banking services.Stock RatingsPivotal 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 followingcriteria: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 DistributionPivotal Research LLC currently provides research coverage of 10 companies, of which 90% are ratedBUY, 10% are rated HOLD, and 0% are rated SELL. Our company does not offer investment bankingservices. This data is accurate as-of November 8, 2011.Price Chart and Target Price HistoryOther DisclaimersInformation contained in this report has been prepared from sources that are believed to be reliable andaccurate but are not guaranteed by us and do not represent a complete summary or statement of allavailable data. Additional information is available upon request. Furthermore, information and opinionsexpressed are subject to change without notice and we are under no obligation to inform you of suchchange.This report is has been prepared solely for our institutional clients. Ratings and target prices do not takeinto account the particular investment objectives, financial and/or tax situation, or needs of individualinvestors. Investment decisions should take into account all available information, not just that which iscontained in this report. Furthermore, nothing contained in this report should be considered an offer orsolicitation by Pivotal Research Group LLC to buy or sell any securities or other financial instruments. - 16 - Brian Wieser 212-514-4682 Pivotal Research Group
  17. 17. PIVOTAL Pivotal Research GroupPast performance is not indicative of future performance and estimates of future performance containedin this report are based on assumptions that may not be realized.Material in this report, except that which is supplied by third parties, is Copyright ©2011, by PivotalResearch LLC. All rights reserved. No portion may be reproduced, sold, or redistributed in any formwithout express written consent of Pivotal Research Group LLC.Commission Sharing ArrangementsPivotal Research Group LLC has commission sharing arrangements (CSA) with numerous broker-dealers. Please contact Jeff Shelton at 212-514-4681 for further information. Additional Information Available Upon Request - 17 - Brian Wieser 212-514-4682 Pivotal Research Group

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