Ad Nauseum

Flat revenues and declining ratings mean a gloomy 2005

The average sale price of a 30-second prime time TV commercial is flat. And that doesn't bode well for the entire advertising market.

That's the conclusion of Morgan Stanley's team of media analysts in a new forecast. The group predicts bad times next year for both broadcast networks and stations. They see cable's strong growth as slowing, though moving faster than broadcasters'. Local cable is holding fast.

"The broadcast-network market is weaker than we expected nine months ago," said analyst Richard Bilotti during a briefing to clients last week. "The station business is ever so slightly better for 2004." That's because political spending is even heavier than anyone expected. But next year isn't looking promising since the economy remains slow.

As for the upfront market, the annual TV ad bazaar, Bilotti is unimpressed.

Broadcast networks gloated that they've held ground, despite buyers' threats early in the selling season to steer $1 billion to cable networks. Networks have crowed about getting the cost per thousand viewers (CPM) up 6%-7% from 2003. Further, they secured commitments this year that roughly equaled last year's, around $9.3 billion.

That's better than the $8.8 billion Bilotti had expected, but he's focused more on the price per commercial. He says networks drove volume by selling even more inventory upfront than they did in 2003. And the increase in CPMs is generally matched by a 7% decline in average ratings.

"Revenue per spot is flat in prime time across the industry, with the exception of CBS," Bilotti says. "That doesn't lend itself well to an explosive recovery in 2005."

Most networks scaled back their ratings expectations for the upcoming season. ABC and Fox did not; they're betting heavily that they can reverse their decline in the Nielsens. "They're betting on a bounce back," he says. "If they're wrong, that's a lot of make-goods."

Where does cable stand?

Cable scored big gains in market share during the upfront, jumping from $5.3 billion to $6.1 billion. In large part, it's because ad buyers were trying to use cable to leverage broadcast networks' prices down. Bilotti expects cable networks to sacrifice that share gain in the scatter market, since they will have more inventory available than broadcasters, diluting cable's pricing.

But the most static will come from radio stations.

Michael Russell, Morgan Stanley's radio and newspaper analyst, recently issued a report titled "The Internet Ate My Recovery," arguing that local Web advertising is starting to crunch radio stations much as it did newspapers three years ago. That exacerbates an ad market already weakened by struggling local economies and the steep slide of advertising from national companies.

Russell says the real problem spot is Viacom's Infinity radio division, which expects sales to drop 1%-2% this year.

When a big player has such a morose view of its own business, Russell says, "it influences investor perception of radio space."

Advertising Forecast
Change from previous year
2003 2004e 2005e
E = estimated
Source: Morgan Stanley
Cable networks, national +17%+11%+8%
Broadcast stations+1%+8%-1%
Cable, local +7%+6%+7%
Broadcast networks +4%+7%+2%
Syndication +6%+5%+4%
All TV+6%+8%+3%
Newspapers +2%+4%+5%
Magazines +5%+6%+6%
All media+6%+4%+5%