U.S. Ad Market Woes Mount

November 28, 2007
By Georg Szalai

NEW YORK Media and entertainment investors are growing increasingly worried about the outlook for the industry heading into next year, with the U.S. advertising market a key concern amid talk of a recession and several downgrades of ad spending forecasts.

Add in fears that underlying U.S. ad growth in 2008 will be anemic, and shares of advertising and media conglomerates are near 52-week lows as the year grinds to a close.

Goldman Sachs analyst Anthony Noto, who downgraded the entertainment sector to a "cautious" rating in September, followed with a report Tuesday that said there have been numerous company and macro-economic data points since then that "increase our conviction in our view."

Noto believes "that there will be a larger-than-expected slowdown in 2008 than what is reflected in current financial estimates" for many media and entertainment companies.

Analysts also cite other investor concerns besides ad sluggishness: a slowing home video market, tumultuous credit and equity markets that reduce the chances of big buyouts, and continued worries that technology giants like Google are eating media companies' lunch in the digital age.

"The biggest problem is slowly eroding expectations," said Lawrence Haverty, portfolio manager at Gamco Investors.

Shares of Time Warner on Tuesday closed up 2 percent at $16.62 after going as low as $16.17 intraday, below a recently set 52-week low of $16.27. Shares of Disney finished up at $31.72 after setting a new low of $30.68 intraday. News Corp. voting shares and CBS Corp. Class B shares also edged up, closing only slightly more than $1 above their recent 52-week lows. WPP Group, the world's largest ad and marketing agency conglomerate, saw its stock close at $60.11. Its 52-week low stands at $59.01. Fellow ad giants Omnicom Group and Interpublic Group saw their shares finish at $46.67 and $9.16, respectively, near their year lows of $45.82 and $8.69. (Click here for related story: "What Ad Stocks Say About the Economy.")

It is with this bearish background that major media and entertainment industry executives will appear in New York next week at the annual UBS Global Media & Communications Conference, where investors will look for guidance on the outlook for the ad market.

As always, attendees will closely follow the traditional ad spending projections by Bob Coen, director of forecasting at media agency Universal McCann, and ZenithOptimedia CEO Steve King. They will provide the latest estimates for 2007 and an early stab at 2008 after already having reduced their projections for the current year a few times.

Most have predicted a nice uptick in U.S. ad spending in 2008, thanks to the Beijing Olympics and the U.S. presidential elections. But some warn that a possible recession and oil prices of $100 or more could lead marketers to cut back on some underlying ad spending after the sluggish housing market already has hurt real estate advertising.

"The Olympics and election in 2008 will put a bit of a floor under advertising spending, but there will likely be a notable reduction anyway, especially from banks and mortgage providers on local TV," said Hal Vogel, longtime industry analyst and president of Vogel Capital Management. "Ad spending overall will be up only slightly and will be close to flat in real terms."

According to Vogel, the only truly bright spot is that the dollar is "so weak that ads for foreign products could be up quite a bit."

Citing the slump in the U.S. housing market and the recent credit crunch, ZenithOptimedia has downgraded its 2007 forecast for U.S. ad expenditure gains from 3.3 percent to 2.5 percent. At last year's UBS conference, King originally predicted a 4.1 percent increase for 2007, and his latest forecast may sink further next week.

Even more bearish, Coen said this summer that U.S. ad spending likely would only rise 3.1 percent this year, down from his original forecast of 4.8 percent.

Next year's U.S. ad growth should be more solid, Coen said this summer in his first forecast for 2008. U.S. ad spending would reach $305 billion, up 5 percent from his 2007 forecast, he said. Market watchers are waiting for his latest 2008 estimate next week.

All major prognosticators agree that growth in overseas ad spending will continue to exceed the U.S. rate of expansion, as it has done since 2003.

Total U.S. advertising expenditures for first-half 2007 slipped 0.3 percent year-over-year to $72.6 billion, TNS Media Intelligence, a provider of strategic advertising and marketing information, said. "For the first time since 2001, media advertising expenditures have declined for two consecutive quarters," said TNS president and CEO Steven Fredericks. He predicted more trouble in the back half of the year.

The Internet, which continues its strong growth trajectory, and in-cinema advertising are two of the few bright spots.

According to the Interactive Advertising Bureau, online ad spending for first-half 2007 reached nearly $10 billion, a record and a 27 percent increase compared with first-half 2006.

Radio, meanwhile, has come under increased pressure in recent months. The Radio Advertising Bureau reported revenue for first-half 2007 was unchanged at about $10.4 billion, thanks to healthy growth in such areas as concerts/ theaters/movies ads (plus 11 percent).

However, radio advertising declined 1 percent year-over-year each in July and August before slumping 7 percent in September.

Wachovia analyst Marcy Ryvicker recently predicted a 1.7 percent radio ad decline for 2007 as "media advertisers are moving dollars from 'old media' to the Internet."