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TV's ad revenue stream faces crosscurrents

Economic effects from Japan's disasters and a weak job market have helped put the brakes on the year's strong start for media firms.

November 15, 2011|By Meg James, Los Angeles Times
  • For the first seven weeks of the season, Comcast Corp.-controlled NBC is averaging 7.3 million viewers a night  down 9% compared with a year earlier. Its ratings have been helped by its NFL broadcasts.
For the first seven weeks of the season, Comcast Corp.-controlled NBC is… (Julio Cortez, Associated…)

A year that began with a bang was interrupted by a quake, and now is ending with a whimper. Next year is projected to be better — but not for everybody.

The March earthquake and tsunami in Japan, which put a months-long halt to automobile production, combined with a moribund job market and a steady drumbeat of bad economic news to slam the brakes on television advertising sales.

Early in 2011, economists predicted that TV advertising revenue in the U.S. would increase 6% this year to an all-time high. But during the summer the TV ad market cooled considerably, with the pace of growth slowing to less than 2% for the year. TV ad revenue is expected to end the year at nearly $68 billion — still a record, but the slowdown is a reminder of TV advertising's vulnerability.

"The ad market has been slowly drifting downward over the course of the year," said Jon Swallen, senior vice president of research at Kantar Media, which monitors advertising spending. "Traditional media sectors are lagging, experiencing softness, which suggests broad-based caution on the part of advertisers."

Seismic shifts in spending continue to roil the media industry. Those changes come on top of the recession, which prompted advertisers to reduce spending. Some of the biggest ad buyers — retailers, automakers, car dealerships and home sellers — have been particularly hard hit, and few are predicting a speedy economic recovery.

Overall ad spending in the U.S. is expected to grow a meager 1.8% this year to $144 billion, Swallen said. MagnaGlobal recently cut its 2012 forecast to 2.9% growth in total ad spending, down from the nearly 5% that the agency was predicting just a few months ago.

During the first quarter of 2011, media companies that owned TV networks and prominent cable channels were riding high and assuming the recession was in the rearview mirror. Advertisers were paying 25% premiums over last year's rates to buy commercial spots that were still available. TV network chiefs figured they would reap double-digit rate increases for their commercial time when the annual television ad sales season revved up in June. The networks sell nearly 80% of their commercial time for the coming season during the "upfront" TV advertising market.

But those heady days came to an end in March when a magnitude 9 earthquake and devastating tsunami hit Japan. The quake damaged car factories, slowing production of major models from Honda Motor Co. and Toyota Motor Corp. Supply lines also were interrupted, leading to a shortage of parts. With fewer cars to ship to the lots, Japanese companies slashed their ad purchases.

"There was a slowdown in car sales and so other automakers did not advertise as aggressively," Kantar's Swallen said. "They figured they didn't need to advertise as much to meet their sales quotas."

By late summer, the Japanese car inventory had returned, and auto companies were kicking into gear their big-budget marketing plans. Then came devastating floods in Thailand.

"Now, those floods are threatening to severely curtail production from Japanese automakers because they source a lot of their parts from Thailand," Swallen said.

The sluggish economy also continues to take its toll. Spooked by the weak job market, stagnant wages and falling home values, consumers have not been spending as freely. Retailers, in particular, have been feeling the pinch.

Hollywood movie studios, traditionally heavy spenders, have been cutting back too — but for a different reason. Major studios have been releasing fewer big-budget films in recent years, so they haven't needed to spend as much on marketing. Walt Disney Co.'s studio, for example, is releasing 14 films this year, down from 19 released in 2000 and 32 released in 1995, according to box-office tracker Hollywood.com.

"It's a very complex market," said Lisa Herdman, director of national programming at RPA, a Santa Monica ad agency. "There is not one thing that is driving it, but it seems that the root of all of this can be tied back to the consumer confidence level."

Wall Street analysts have been monitoring the performance of Disney, CBS Corp., Viacom Inc. and other large media companies, searching for worrisome trends.

Lower ratings for TV programs have become a concern, said Doug Creutz, media analyst at Cowen & Co. Although networks are commanding higher rates for their commercial time compared with last year, ad revenue is shaping up to be flat or down because programs are drawing smaller audiences.

For the first seven weeks of the TV season, Comcast Corp.-controlled NBC is averaging 7.3 million viewers a night — down 9% compared with a year earlier. Several new NBC shows have bombed, and once-trusty veterans, including "Law & Order: SVU" and "The Biggest Loser," have bled more than 1 million viewers.

"Without football, NBC's ratings would be approaching basic cable channel levels," Creutz said.

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