Media's Advertising Rebound: Real Growth or Just Climbing Out of a Hole?

Some analysts are reversing their downbeat media forecasts from earlier in the year on the likelihood that 2010 advertising revenues and earnings will surprise on the upside. But it is a little too early to break out the champagne.

New ad campaigns from beleaguered auto manufacturers such as General Motors and Toyota, and optimistic comments by media companies such as CBS are among the factors that prompted Morgan Stanley this week to double its 2010 growth projection for overall U.S. media advertising to 4.2 percent — above Wall Street consensus. Growth estimates for most media sectors have been raised an average of three to five percent, although individual company performance is expected to vary widely.

A deeper look at the bullish report from analyst Benjamin Swinburne reveals lots of variables.

Overall growth in 2010 will be driven by Internet ad sales rising 14 percent after declining two percent this year. Traditional media advertising will struggle to grow only two percent next year after declining 17.2 percent  in 2009. A total $154 billion in US ad spending in 2010 just gets us back to 2000 levels.

Local TV station ad revenues in 2010 could grow 8.5 percent on  political spending and stronger auto advertising. That restores about one-third  of this year’s 25 percent decline in local TV ad sales. Next year’s anticipated $71 billion in all local advertising sales roughly equates to 1996 spending levels.

However, the anticipated national and local turnaround partly hinges on improved auto advertising in 2010 . Any  degree of growth will look good in comparison to this year’s industry collapse and it will come from fewer surviving dealers and manufacturers. Following a Cash for Clunkers-related blip in ad spending this summer,  Swinburne expects auto advertising to decline through year’s end. The extent to which auto spending grows in 2010 is a wild card as the largest ad category for traditional media.  Auto advertising accounted for only 13 percent of local TV station revenues the first half of 2009, compared to 20 percent in 2008.

Even five percent growth expected for broadcast and cable networks in 2010, partly driven by the Olympic Games telecasts, depends heavily on consistent gains in auto ad spending that may not materialize.

That uncertainty heightens the importance of another growth catalyst Swinburne cites. It is the improving revenues from paid content subscriptions as well as broadcast retransmission fees, the latter of  which should more than triple by 2012.

The retransmission fees paid by cable, satellite and telco operators to broadcasters for the right to carry their signals is a much-needed second revenue stream.  Although broadcasters deliver 40 to 45 percent of television audience they only garner about five percent of  TV content fees (most of which go to cable and on-demand services).

Broadcasters’ pursuit of paid content is being complicated by intensified competition from online distributors such as Google’s YouTube and Hulu.com, which is co-owned by NBC, Fox and ABC. It may take broadcasters years to generate enough new program fees to significantly offset lost advertising revenues.

Still, if Swinburne is right, ad-supported media appears to be moving, albeit slowly and unevenly, in the right direction. And he is not alone. Interpublic research unit Magna Global says it now expects US advertising in 2010 to fall about one percent less, or half as much as previously forecast , to $159 billion.

But other analysts aren’t sure the gradual ad recovery is anything more than a modest climb back from the depths of the recession. ZenithOptimedia this week further downgraded its global and domestic advertising forecast and predicted only modest upturn in 2010. Worldwide ad revenues will reach $444.8 billion this year, down from last year’s $493.9 billion. It will rise less than one percent to $446.9 billion in 2010 and then only four percent to $465.9 billion in 2011.

North American ad revenues will fall 13 percent this year to $157.1 billion and fall another four percent to $150.8 billion in 2010 before increasing less than one percent to $152.06 billion in 2011.