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Stock Strategist Industry Reports

Advertising Spending Outlook for Media

U.S. ad dollars will continue to migrate to the Internet.

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If our U.S. advertising predictions are on target, cable television ad dollars will close the gap with broadcast television, and ad spending on Internet search will be on par with newspapers by 2013.

To guide our explicit cash-flow forecasts for the media companies in our coverage universe, we forecast ad spending within each media industry. Our views on individual industries are influenced by the competitive positioning on both an absolute and relative basis.

Our estimates for individual companies within these sectors may vary from our top-level outlook as some firms have better competitive positions than others. For example, we think  Google's (GOOG) (wide moat) top-line growth will exceed  Yahoo's (YHOO) (narrow moat). When evaluating individual companies, we also consider more bullish and bearish scenarios than our base-case assumptions.

The following table shows our projections for the key ad categories within our media coverage universe. The recession has clearly impacted ad spending in 2008 and 2009 across the board. It is worth noting here that several third-party firms aggregate and publish industry ad sales and there can be differences in historical sales data. Also, given our coverage universe, industries left out of our projections include magazines, direct mail, yellow pages, and other miscellaneous forms of advertising.

Broadcast Television
The four national networks (ABC, CBS, NBC, and FOX) and local affiliate television stations are included in this category. While traditional network television still enjoys a significant share of U.S. ad budgets, we think challenges lie ahead. Network television has been gradually losing audience share to cable networks for the past decade and we think this trend will continue, especially as cable networks continue to increase their investment in producing original content.

Cable Networks
Historically, broadcast television generates more ad revenue per audience member and unit of air time than cable networks during the key primetime hours. However, this gap has been narrowing in recent years and we think cable will become an increasingly desirable advertising platform in the future due to its low cost relative to broadcast television and its ability to attract niche audiences. Looking beyond our explicit five-year forecast, we also think technological innovations could allow advertising on cable to become more interactive (and thus more trackable).

Internet Search
We have bullish outlook for online search as it is targeted (the consumer is telling you what she wants) and it is trackable as it provides more robust data on audience reach, with click-through rates and sales conversions allowing marketers to more accurately gauge effectiveness and return on investment. We believe companies will continue to allocate more of their ad budget to search over the next five years. We also think the industry will benefit as more searches are done through mobile devices.


Internet Display
Relative to online search, we have a less bullish outlook for online display advertising. Our major concern is that there is a glut of online ad inventory. We include several subcategories such as banner ads, classifieds, video, and other catch-all niches in this category. In theory, there is a limitless supply of inventory for advertisers to choose from, so we think there will be downward pressure on pricing, which will offset the higher volume and keep advertising growth in the midsingle digits.

Outdoor Advertising
We think the outdoor industry will rebound after a rough 2009. We view this industry as an effective way to achieve brand awareness and it is the cheapest medium per consumer impression. One of the secular trends favoring this industry is that each year people spend more time commuting to work and we'd expect this trend to continue. There are strict laws restricting the construction of new billboards in the U.S., which limits supply.

The challenges facing this industry are well documented and we don't see a silver bullet to reverse the current trends. The current recession has pushed recent ad numbers into a freefall; however, given the structural challenges facing the industry we think declines in ad dollars is likely to continue, but eventually at a less severe rate.

Radio Broadcasting
Like newspapers, the radio broadcasting industry has been hit with both cyclical and secular head winds. Once the cyclical head winds abate, we think the industry will face gradual sales declines as advances in technology have created heavy competition for listeners. The audience measurement is archaic and attempts to implement the PPM in a fragmented industry have continuously hit roadblocks. In spite of these challenges, we don't think the industry will completely evaporate as radio does have a wide reach and it remains a cheap way for local advertisers to reach consumers.

Stocks to Watch

 Disney (DIS) (5 stars)
About half of Disney's operating profit comes from its cable networks, which garner a majority of their sales from affiliate fees. We expect both ESPN and Disney Channel to maintain a dominant position in cable television over the next decade. While its theme parks and studio entertainment results have taken a hit during this recession, we don't think Disney's brand power has eroded. The strength of these brands allows the company to exploit its characters and franchises through box office and home video sales, theme park attendance, and merchandising.

 Viacom (VIA.B) (4 stars)
We think the shares of this cable network conglomerate are undervalued. The company's flagship network is Nickelodeon, which not only draws the largest audience for kids (ages 2 to 11), but also has been the number-one-rated basic cable network for more than a decade. Viacom also owns other valuable cable networks such as MTV, BET, and Spike.

 New York Times (NYT) (2 stars)
We're concerned about the publisher's declining ad revenue and its substantial debt burden. Advertisers and readers simply have too many other choices, especially given the vast array of options available to them on the Internet. We expected continued pressure on advertising, which contributes about 60% of revenue. Even when business ad spending eventually recovers, we think the Times company will be unable to recapture the level of cash flow prior to 2008.

 CBS Corp. (CBS) (2 stars)
CBS is heavily exposed to industries we think are in secular decline as reflected in our ad spending outlook: broadcast television (usually about two-thirds of operating profits) and radio broadcasting.

Michael Corty does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.