June 9, 2014 – TMT: The Advertising Revolution Will NOT Be Televised

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TMT: The Advertising Revolution Will NOT Be Televised

Since the 2010 recovery, US TV ad spending, adjusted for Olympic/campaign bumps in 2010 and 2012, has been decelerating. The price of a primetime spot has steadily declined, offset by increasing the per hour load of ads and by growth in TV households. At the same time, Nielsen reports that TV watching has slowly risen, despite big increases in time spent on the internet. We doubt that these numbers accurately reflect active TV watching, and in particular, the attention paid to the ads, as Nielsen does not adequately address ambient viewing or 2nd screen ad skipping. Even with this over counting, the trend for prime time viewing is unmistakable – audiences and ratings are down dramatically over the past several years. It is in this environment that TV network operators presented their “Upfronts” to advertisers this past month, and against which their demands for a reacceleration in CPMs will be evaluated. The sharp increase in advertiser spending on online social and video ads – TWTR ad sales are up 125% YoY, FB 82% and GOOG 20% – reflects the changing attitudes of big advertisers, like MC, MDLZ and VZ, who have reportedly shifted money from their TV budgets to buy online. Surveys support the idea that buyers will shift budgets from TV to pay for internet ads, yet analysts and network execs repeat the mantra that television is a uniquely valuable venue for advertisers and that network ad revenues will continue to grow. We are skeptical, reminded of similar assertions about newspaper advertising ahead of that industry’s 2007-2009 crash.

US TV ad spending is decelerating. TV ad sales were up 3% in 2013, decelerating from 6% growth in the prior year and 4% growth in 2011, the previous non-olympic/election year. This increase played out in spite of falling prices for primetime ad spots, which were down more than 1% YoY and off more than 12% since 2009. The falling rates have been offset by increases in the number of ads shown each hour, up 6-8% (depending on the type of network) in the same 5 years, and by a growing number of TV households. The increasing advertising load has the unfortunate side effect of potentially alienating viewers who have other options, and of raising the likelihood that ads will be ignored or skipped.

Active TV viewing is likely in decline. According to Nielsen, US per capita TV viewing has risen by nearly 6 hours per month since 2010, to more than 170 hrs/month or 5:30 per day. This is despite monthly internet video viewing more than doubling over that same time to nearly 20 hrs/person, led by NFLX which alone accounts for more than 10 hrs/person. Nielsen’s estimates that the median American spends nearly half of their non-working, waking hours actively watching TV are not credible. With TV counts up to 3+ per household, and myriad distractions, it has grown increasingly likely that users assumed to be watching because the TV is on are not actually paying attention. Moreover, the quality of attention is particularly suspect for commercials – DVR users routinely fast forward through ads, while live viewers use the increasingly ample breaks to peruse alternative media online.

Broadcast TV audiences continue to decline. Nielsen’s Broadcast Primetime C3 metric (inc. 3 days of DVR/on-demand viewing) for the Fall season was down -9% YoY and, over the last decade, the C3 ratings have fallen more than 41%. This has seriously eroded the major selling point for broadcast TV as the only medium able to reach a 10%+ swath of Americans at the same time. 10 years ago, 8 different weekly series averaged better than 20M viewers a week. Today, only sports and one-time events can hit that mark. Broadcasters complain that growing use of DVRs makes the C7 metric, which would increase primetime ratings by ~3%, more appropriate, but buyers, given that 35% of ads are time sensitive and the propensity for time shifted viewers to skip ads, have resisted. Only GroupM, representing a pool of advertisers, has agreed to C7 and then, in exchange for a sharp discount on pricing.

Streaming is already >10% of US video viewing and growing prodigiously. NFLX delivers nearly 1.8B streaming hours/month in the US. Assuming each stream is watched by an average of 1.5 people, spread over the 262M Americans living in HDTV equipped households, NFLX is alone accounting for 10 hours of monthly viewing per person. YouTube, which streams more than 1.2B hrs/mo in the US, likely has fewer viewers per stream, but still counts for at least another 5 hrs/mo per person. Add in Amazon, Hulu and other smaller streamers, and total US online video viewing likely exceeds 20 hrs/mo, tops 10% of total video consumption, and is growing at a better than 40% annual rate. With big investments in high quality original programming and with access to online content getting much easier, the pressure on channelized TV will get worse and the temptation for advertisers to shift their budgets toward the Internet will grow. It will also raise the stakes in negotiating for new content, raising costs for networks even as online content shrinks their audience.

Networks still demanding higher CPMs at upfronts. During the recent upfronts, where TV networks traditionally pre-sell the majority of their ad time for the coming season, media companies have taken a hard line, asking for price increases despite the bad news on viewership. Big buyers appear to be taking a similarly hard line, and reporting from the contemporaneous “new-front” presentations  by streaming purveyors suggest that online video ads – with the advantages of precise targeting, assured viewing, and post-impression tracking – are being considered a viable alternative to traditional TV spots. Indeed, recent surveys of agencies and advertisers echo the idea that new online spending will be funded by cuts in the TV budget. This strengthens the hand of buyers, and raises the odds of disappointment for broadcast and ad driven cable nets, conditions that will only get worse in future seasons.

Trends favor online ad platforms over traditional media stocks. The combination of deteriorating audience size and quality, improving online alternatives for advertisers, higher content costs, and possible consolidation amongst TV distributers could prove toxic for TV network owners. TV ad revenues have held up admirably to date despite these trends, leading many media execs and analysts to assert “TV exceptionalism” and downplay the threat of online video, but the same bravado was evident in the Newspaper business ahead of that industry’s downfall. We believe that the impact on TV ad revenues has been delayed not avoided, and that the signs of acceptance of online video amongst the big agencies and buyers are ominous. Given historically rich relative valuations for media companies, we are bearish for names like CBS, FOXA, CMCSA, DIS, TWX, and VIA. Conversely, we see considerable runway for the prodigious ad sales growth at online platforms like GOOG, FB, TWTR, and others to continue.

For our full research notes, please visit our published research site.

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