It’s not the end of the world, but the coming year will be tough for local broadcasters. The companies just racked up record political advertising in 2012. The NBC clan of stations enjoyed phenomenal ratings on the quadrennial summer games. And the broadcasters’ largest category of advertising – autos – grew at outsized rates as auto sales took off.
So, local TV is rolling off a peak. At least it is not falling off a cliff — that is, as long as the economy continues to expand.
Everyone knows political advertising spending shrinks to de minimis levels in an odd-digit year. Most investors focus on what is going on with the core of advertisers who continue to advertise every year. I am guessing core spot TV advertising will grow about 2.4% in 2013. In my scenario, because of the drop off in political, total spot TV advertising would fall close to 10%, which you can see in the table with my top-down calculations. With an offset from what are known as retransmission consent fees, I show a scenario for a 6.0% decline in local TV station revenue from spot TV and from retransmission fees.
Now, how did I come up with these numbers? Keep reading.
If the economy remains resilient, I look for broadcasters’ core business to hold up. Among the core advertisers, I expect:
- Auto advertising should slow to more normal growth rates;
- Telecom companies probably return to competitive advertising;
- Other categories average out to growth rates slower than the expansion of nominal GDP.
Spending by auto makers and dealers is the linchpin for local broadcasters. The group probably represented over 20% of spot television revenues in 2012. Unit sales of cars and light trucks rose about 14% in 2012, based on figures from J.D. Power & Associates. Most broadcasters recorded advertising spending growth in excess of the unit growth as the ad spending in 2011 was dampened by the impacts of the Tohoku earthquake and tsunami on the Japanese automakers.
In 2013, JD Power & Associates forecasts an increase of around 4% for retail unit sales of cars and light trucks. I would assume that dealers will spend about the same amount per vehicle as in 2012. On top of that, it seems likely that local television stations will keep roughly the same market share of total advertising spending by auto dealers. On that basis, dealer spending with local television stations would gain by the same amount as the volume increase, about 4%. As can be seen in the table with the latest data from the dealers’ association, the amount spent per vehicle in 2007 was lower, which I think was a function of robust unit sales. Auto makers are also important buyers of local time, but I expect the dealer behavior may be a good indication of how others in the supply chain will spend on television.
The JD Power forecast did not take into account economic impacts from the Congressional budget battle and fiscal tightening.
Were there a slowdown in sales, I think the initial impact would be a short-term increase in auto advertising. If vehicle sales were to downshift suddenly, the existing supply would take longer to clear, so dealers would increase advertising in the short-term so they are not left with an oversupply of vehicles. Auto makers would step up incentives to manage inventory instead of immediately cutting production. Following a burst of marketing, advertising spend would be cut drastically over the course of the year. In 2009, dealer advertising spend dropped 29%, data from the National Automobile Dealers Association show, though local television did a little better by picking up share. This time around, I think television is not likely to pick up share because local television already has a high, 20% of dealer advertising dollars.
The Telecommunications segment is the second largest advertising category for broadcasters. Through June 2012, the Television Bureau of Advertising reported that telephone and cable companies had been slashing their local television advertising spend. Competition is the key driver of advertising spending among telephone, cable and mobile operators. For example, when Verizon Communications Inc. (VZ) was building its fiber-to-the-home infrastructure, the many local launches led to substantial local advertising. But currently, competition for pay television and internet customers appears moderate to me.
Beyond competition among wired operators is the possibility of consumers foregoing pay television for other video providers. Cable operators may want to use marketing to combat “cord-cutting” but traditional television advertising does not reach those who move off the grid, so this form of competition would not benefit television advertising spend, I think.
Within wireless, I expect competition for Sprint customers in advance of Softbank’s proposed acquisition. AT&T Inc. (T) began touting its push-to-talk feature, a feature in which Sprint’s Nextel unit was once dominant. This could lead to local-level advertising as AT&T looks for local pockets of push-to-talk customers, who tend to be small businesses. Sprint should spend more trying to defend its customer base and to demonstrate to the Federal Communications Commission that it is being operated independently of Softbank pending the merger application.
If the FCC approves Sprint’s acquisition, Sprint would spend more at the national level, I think, but local broadcasters could expect to get some boost, too. However, Softbank’s application to buy Sprint was filed at the beginning of December, which means the FCC could take at least another five months cogitating. Also, the FCC routinely takes longer than its deadlines indicate.
My bottom line on the top line for Communication-category local television advertising is that it will be higher in 2013. I am guessing an increase of 5%.
The remainder of the categories in the top 10 of local television advertisers are much harder to assess. For the most part, competition within these segments takes place at the local level, and the decisions to place advertising will be made in or close to those markets. Still, in the case of schools, I believe that their advertising is likely to decline generally. Schools came on strong during the recession because higher unemployment made more people look at new schooling as a way to gain new skills. And in the case of legal services, advertising grew throughout the recession as people faced bankruptcy, lay-offs and other disruptions requiring legal help. Legal services advertising is likely to stabilize at the higher levels, I expect.
Beyond the category-specific challenges are more general challenges. All advertisers are finding alternatives to marketing on local television. Part of the reason is that internet platforms have made it easier to market local products and services online, especially on Google and Facebook while hundreds of internet marketing firms have sprung up to help.
Ratings are also an important issue for advertisers when they are deciding where to put marketing dollars. Pew Research Center Project for Excellence in Journalism published data on viewership of local television news in key timeslots, and concluded the averages were showing some stabilization in 2011, the last year covered by the data. News is a key product for local stations that represented over 45% of local television station revenues in 2010, according Radio Television Digital News Association surveys.
When I drilled into the Pew-published Nielsen numbers, though, the trend through 2011 seemed downward sloping, though with upward blips. The largest upward blip was in May 2011 when Osama bin Laden was killed, an event that I believe benefits all news. Local news would simply focus on the local men and women who serve, and the significance for local security. Late local news also had its best May showing in 2011.
The data also showed some ratings impact from the political cycle, I believe. The year following the 2008 presidential election showed a steep fall in total viewers across morning, evening and late news. Although 2010 was not a presidential year, the interest generated by the Tea Party probably supported interest in the local news product: in the July sweeps period, total viewership edged up for morning, evening and late news, and also increased slightly in late news in the November sweeps period.
So, local television faces a secular challenge separate from the course of the economy. Assessing the size of the secular ratings challenge requires some judgment calls. I would focus on evening and late news because both of those have viewership that is a multiple of local morning news. In late news, average viewership declined at a compounded rate of 1.8% per year from 2008 to 2011 in the July sweeps and 3.5% per year in the November sweeps. In evening news, average viewership declined at a compounded rate of 1.9% per year from 2008 to 2011 in the July sweeps and 3.8% per year in the November sweeps. The best ratings results were in evening news May sweeps, where average viewership declined at a compounded rate of only 0.3% per year from 2008 to 2011.
On the whole, it looks to me like total viewership of local news will shrink in the 1% to 2% annual range on average with less deterioration during election years. Under those conditions local television could have the ability to raise prices enough to offset the impact of audience erosion, I believe.
As a result of advertisers seeking alternatives and the rating pressures, I am guessing that the average increase in the remaining advertising categories would only be about 1% in 2013. This would encompass categories that are likely to continue to cut local TV spend, an example of which are movie studios that are trying to reach a younger audience than that reached by local TV. There are other categories that are likely to grow because local competition may be pushing small companies to increase advertising spending faster. I am guessing that the sum of all these stronger and weaker categories comes out to my number.
During a political year, politicians end up absorbing some advertising inventory that other advertisers wanted to buy. This crowding-out effect is the reason that simply deducting political advertising from the total advertising is not the right way to focus on the underlying trend of advertising for local TV. However, my estimate of the 2012 base stems from first half 2012 spending reported by Television Bureau of Advertising scaled up to account for the normal weighting of advertising to the second half. As with any estimation procedure, this is inexact, but it avoids the problem of accounting for crowding out.
There is even core political advertising.
Advocacy advertising goes on each year, but is quite volatile. In 2009, $664 million was spent on advocacy, according to Campaign Media Analysis Group. The range in other years from 2008 to 2011 was around $200 million to $400 million. I believe the 2009 bounty was mainly driven by the debate all year on extending health insurance coverage to more people.
Advocacy will stir in 2013, though. The Newtown massacre and the push for gun control legislation should drive advertising spending on both sides of the issue. The need for tax revenues to improve the U.S. fiscal picture also could lead to corporate advocacy advertising to protect tax loopholes. As a consequence, I think advocacy could be $400 million, which would be slightly above the amount spent in 2008 when T. Boone Pickens was spending on his energy independence proposals. I have not included a separate amount for ballot initiatives, though there probably would be some spending.
As for campaign advertising, there will be little in 2013. There are only two gubernatorial races. One of those is Chris Christie’s race for re-election in New Jersey. Given that Newark mayor Cory Booker reportedly has decided to run for Senate instead of governor, the 2013 New Jersey gubernatorial race does not look like a winner for local TV stations. In Virginia, both Democrats and Republicans will be nominating new blood for governor in 2013, so there is more prospect for an advertising uplift. Currently, there are no ballot initiatives scheduled.
Olympics advertising is another factor that will lead to a decline in spot television advertising in 2013. The Games were a strong draw, with ratings exceeding expectations. The amount of local spot advertising sold with the Games is an amalgam of the local stations owned by NBCUniversal and all its affiliates. I found a fairly stable relationship between the number of households in a company’s NBC portfolio and the amount of Olympic revenue reported. Extending that relationship across all the NBC affiliates among the 25 largest broadcasting companies gave me an estimate of the total.
The Television Bureau of Advertising has not reported figures for political spending in 2012. I made an estimate of the final figure by adding $1 billion to the total spent in 2008, a 76% increase that reflects spending unleashed by the Super Political Action Committees (Super PACs) that were not active in 2008.
Retransmission fees will make up for some of the ad drop.
The impact of the decline in advertising revenue will be softened to an extent by the growth of retransmission consent fees. Retransmission consent fees are fees that cable and satellite operators pay for the right to carry a station’s signal.
The leaders in retransmission consent fees, I believe, are Sinclair Broadcast Group Inc. (SBGI), Nexstar Broadcasting Group Inc. (NXST) and LIN Media (TVL). Nexstar is the only one that currently reports retransmission consent fees, which were 13% of revenue in 2011. Based on LIN Media discussion at the UBS media conference in December, I believe LIN Media’s retransmission consent fees also are about 13% of total revenues. Gannett Co. Inc. (GCI) and Belo Corp (BLC) were in the 9% to 10% range of revenues for 2011. NBCUniversal has not yet demanded much “retrans” from cable systems because of its ownership by Comcast Corp (CMCSA) so I think its local stations get less than an average proportion of their total revenue from retransmission fees. The average across the industry is probably around 11% in 2012, I think.
Retransmission consent fees probably will grow at double digit rates in 2013. A forecast by SNL Kagan showed a step up of 28% in 2013. The size of the forecast increase is large, but when the broadcasters obtain new contracts, they have gotten huge gains. For example, Nexstar Broadcasting renewed most of its multi-year retransmission consent agreement by the end of 2011. Retransmission consent fees rose 63% in the first nine months of 2012. Nexstar Broadcasting has told analysts that 2013 will be a year in which retransmission consent fees grow based mainly on escalators in contracts. This implies high single-digit increases at Nexstar Broadcasting, I think. But industry-wide growth will be fueled by CBS Corp (CBS), Gannett and others that have renewed contracts this year. Gannett expects growth of over 40% in 2013.
Once retransmission consent revenues are added in — assuming the SNL Kagan “retrans” growth rate is correct — broadcast revenues would decline about 6.0%. This calculation ignores internet revenues, but these remain a very small part of the revenue pie. The impact of growing online revenue would be very small, and reliable industry data are hard to find.
If revenues fall by a range of 6%, operating income would fall double-digit percentages, I expect.
Most of the costs in the television station business are fixed. The main cost that is variable in the short-term is the commission paid to local salespeople and to national rep firms. Some other costs can be cut, but effecting changes to station cost structures takes time.
“Reverse retrans” is a growing expense for stations.
Because the affiliates of the networks are getting money from pay TV operators, the networks are demanding compensation for their programming from affiliates. Networks like to call these fees reverse retrans. The networks cannot start charging reverse retrans until affiliation agreements expire, so the impact is spread over several years. Already, though, both Sinclair Broadcasting and Nexstar were hit with tough bargaining by Fox Broadcasting. CBS seeks roughly half of the retrans the affiliates get, demands the affiliates are resisting. Reverse retrans will increase industry-wide expenses in 2013, but the amounts will be less than what the affiliates gain in their own round-robin with the pay television distributors, I believe.
Will political come roaring back in 2014? Optimists would argue that a deeply divided nation bodes well for the broadcasters. Without a presidential election, though, political spending will look more like 2010 – also a divisive political year – than 2012. That is, industry revenues would remain below the records set in 2012, I think.
Incentive auctions are not a 2013 event.
The spectrum that broadcasters occupy has some of the best characteristics for delivering data. Incentive auctions are an attempt by the Federal Communications Commission to reclaim spectrum from the broadcasters and redistribute the spectrum to others to use for mobile broadband.
Essentially, the FCC would arrange a set of auctions that would pay some of the broadcasters to either leave broadcasting or to move their channels by sharing space with another broadcaster. When asked, all the publicly-quoted broadcasting companies have said they have no intention of exiting broadcasting. But the FCC’s auction proposal allows broadcasters to stay in business while still getting a payment for the spectrum they occupy if the broadcaster decides to share spectrum with another broadcaster.
I think many broadcasters would want to test the demand for their spectrum to see if the value exceeds the present value of the cash flows management feels it can produce. There are many broadcasters that have little economic value because they are independents with tiny audiences. Broadcasters may have other reasons to stay on the air, of course, if they feel they are serving a social or spiritual function.
With the option to have both an ongoing business and a payment for part of the current spectrum, more broadcasters could be enticed into participating. It would make sense for broadcasters to seek payment for some of their spectrum if they are not making much money on the less used portion of spectrum. The digital side channels offered by broadcasters have few viewers and probably add very little economic value. If it appears demand for spectrum will be strong, broadcasters who make productive use of only part of their spectrum will want to know how much money they might get, I expect. Sharing spectrum creates its own problems and costs that would have to be weighed.
The success or failure of the auctions will come down to price. The incentive auction issues will brew in 2013, but the FCC does not expect to mount auctions until 2014.
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