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US Advertising Figures for First Half and Projections for Rest of Year Shows the Slump is Still With Us -- It's Not Yet Time to Open the Spending Floodgates.  

By PHILIP M. STONE

Editors Note: One month after the analysis below was written,  3rd quarter US newspaper results were published that solidifies the thesis of the article. For a look at how the Media Business is doing financially see various stories at followthemedia.com 

While there are individual success stories in the US, Europe and Asia  showing that advertising is picking up, a close study of what is behind the US numbers indicates it is far to early elsewhere to uncork  the champagne. Hard times are still  ahead. Tight controls on costs must remain in place. 

There is one sector, however,  that could start putting the champagne on ice -- the Internet. The advertising model is beginning to make a comeback. 

But first, the bad news. The US headline figure shows advertising revenues rose 6.4% in H1. Sounds good, but it was less than Merrill Lynch had forecast for the year and today they  REDUCED their 2004 and 2005 US advertising outlook and perhaps more ominous while they maintained their their 2004 global ad growth rate of 5.5 per cent, they revised down the 2005 global growth forecast to 4.9%.  

Down, Down, Down

Another major brokerage house, Goldman Sachs, also pointed to a downward trend, saying US newspaper ad revenues in July grew by 5%, but they had grown by 5.4% in June and 5.8% in May. Goldman Sachs reported, "In light of the mixed macroeconomic data we are currently seeing, we do not see a catalyst for a near-term reacceleration in newspaper ad revenue growth." Or put into plain simple English, "It don't look good." 

Television is having a much better time, but again, if you look behind the numbers, it's not such a rosy picture, especially since this a time when the US advertising world has a lot going for it which isn't as prevalent elsewhere. For one thing, it's a US Presidential year and already  more than 350,000 television ads have aired, and that's before the campaign starts in real earnest in September! According to TNS Media Intelligence/CMR, political and issue advocacy advertising was worth a cool $400 million in H1.

And then there are the Olympic Games. Sure everyone makes good advertising money on the Olympics, but no one pays near $1 billion for television rights, including production costs,  as NBC does for the US television rights. NBC says it will make a profit on the Games which means collecting some $1 billion+ in advertising during the 17 days. No one else is going to come even close, but those figures are going to make the 2004 US television advertising overall numbers look pretty good and that growth simply will not be found elsewhere in the world. Take out the Olympics and Presidential blips and the yearly increase will be no more than 6% better than last year. 

Radio in the US saw little ad growth with local radio gaining slightly while national spot radio actually declined.

A Mixed Bag for Major US Newspapers

The most confusing picture, perhaps, is for newspapers. In the US it is a mixed bag. The New York Times, for instance, saw circulation stay stable, but advertising revenues grew only about 2% and most of that was from price increases, while the Washington Post  saw circulation decline 1.9% but ad revenues increased 3%. Within the past year 12 of the largest US newspapers have seen circulation losses. The Newspaper Association of America says Q2 advertising was 4.1% ahead revenue of last year which, given the benchmark, is NOT that good. The good news, however, is that classified advertising jumped by 6.9% which itself is a positive statement that the US economy is picking up. Within classified, recruitment ads gained more than 20% -- companies are now hiring. 

The World Association of Newspapers declared in August that  the long-awaited international advertising recovery is underway, but much of the improvement comes from the cost cutting rather than large revenue increases. The true success story is the International Herald Tribune's global ad package with the New York Times, delivering a 39% increase on 2003 revenues.

But since the ad recovery will  occur in the US first , it is to the US one must watch for signs of things to come. And the short term is not positive.

But let us not forget the good news -- the Internet. eMarketeer says Internet ad spending in the US will increase by 25% this year to $9.1 billion, and that is $1 billion more than its record high in 2000. The 2005 forecast is slated to be more than $11 billion. 

Internet Growth

When you consider those numbers represent between 3-4% of the total ad spend, according to eMarketeer, then it doesn't take much imagination, with the huge increase in broadband use,  to see the growth potential. But even here there is a warning sign. 

Leichtman Research Group reported that Q2 saw an additional 1.7 million broadband subscribers in the US bringing the total to more than 28.6 million. But the increase was the smallest net additions in the past year. In Europe, Strategy Analytics forecasts Europe will have more than 33 million broadband users by the end of the year, representing some 20% of all homes. International Data Corporation has forecast Europe will have 63 million broadband subscribers by the end of 2007 and ad revenue will improve from $4 billion in 2002 to more than $27 billion in 2007.

As we said, for the Internet perhaps its time to put the champagne on ice.

Philip M. Stone of  Stone & Associates, a partner in followthemedia.com

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