September 21, 2019

According to Vincent Létang, EVP Global Market Intelligence and author of the report: “The US ad market had a great first half thanks to a strong economic environment as well as media innovation and a dynamic technology vertical. Digital media ad sales matured, as expected, but continued to grow close to +20% yoy, while editorial media performed better than expected thanks a recovery of radio, and OOH in full swing. We forecast an 11th year of growth in 2020 as record political spending will generate an all-time high of $5.5 billion in incremental ad revenue and mitigate the effect of the expected economic slowdown”

2019: MAGNA RAISES FULL YEAR GROWTH FORECAST FOLLOWING STRONGER-EXPECTED FIRST HALF

  •     Strong Ad Market in First Half. Based on its analysis of US media owner’s financial reports, MAGNA finds that net advertising revenues (NAR) grew strongly in the first half of 2019: +7.6% vs 1H18, across all media, accelerating further on an already strong market in 2018. MAGNA therefore increased its full year 2019 growth forecast to +6.3% (excluding cyclical) from +5.1% in the previous (June) forecast update.
  •     The main driver behind the first half advertising demand was a stronger-than-expected economic environment, with GDP growing by +2.6% and personal consumption (NPCE: the best precursor to advertising spending according to MAGNA’s historical statistical models) growing by +4%, as consumers shrugged off the threat of a trade war and continued to spend their growing income. This strong economic environment contributed to increased spend from several key verticals, including finance, retail, and travel.
  •     Marketing innovation remains the other key driver to ad spend growth, with “Direct-to-Consumer” (DTC) brands (Wayfair, Peloton, Homelight, just to mention the three largest spenders year to date) growing their collective all-media spend by +30%, and their national TV spend by +50% in the first half. For years DTC brands were online-only start-ups in retail or services, spending 100% of their small marketing budgets on digital media, but many of them have reached the scale where national mass media (TV, radio, OOH) becomes a relevant part of the mix. The national TV spend of DTC brands has grown to the point where the top 35 spenders in that group collectively account for half the combined spend of the five major technology players (Facebook, Amazon, Apple, Netflix, Google – FAANGs) (i.e. approx. $350 million in the first half). Meanwhile three of the five FAANGs paused in their own TV growth in the first half following a +40% growth in 2018.
  •     Direct Digital Media (search, social media) ad sales grew by +19% to $47 billion in the first half. Google and Facebook continued to show strong growth and other social media players saw stronger growth in the second quarter. However, total digital direct media advertising sales growth has started to slow down noticeably, as anticipated by MAGNA. Search ad revenues grew by an estimated +16% in the first half, to $29 billion, compared to a consistent growth rate of +22% across 2018. Social media ad revenues grew by +31% to $16 billion as the slowdown started earlier and appears to be more gradual: growth was +40% in 1Q18, slowing down gradually to +30% in 4Q18.
  • Total Editorial Media Advertising Sales (TV, digital video, publishing, audio, OOH) were stable in the first half (+0.2% to $61 billion). It was their best performance in years, following a decline in 2018 (-1.5%) and 2017 (-2.4%). 2Q (+0.6%) was the first growth quarters in three years. That resilient performance from editorial media channels was driven by strong demand addressed to digital video (+25%), OOH (+7%) and audio media (+2%), and the stability of national TV (0%), offsetting the continued struggles of local TV (-5% excluding cyclical effect) and publishing (-12%).
  • Radio advertising sales grew slightly in 2Q19 for the third consecutive quarter (+0.7%), mostly thanks to network radio (+6%) while local radio ad sales were flat. Broadcast radio finally stabilized following 20 consecutive quarters in the red (between 2013 and mid-2018) as the largest media owner iHeart Media recently emerged from Chapter 11 Bankruptcy re-organization. Adding to the acceleration in digital audio formats and digital ad sales (+12% to $1.5 billion), the overall audio media sector recovered by +2.4% to $7.8 billion in the first half, after stagnating in both 2017 and 2018. MAGNA recently published a special report on take-off podcasting: as a quarter of all Americans are now listening to podcasts weekly, more and more major consumer brands are taking notice and starting to include podcasts in their audio campaigns. National brand’s ad dollars, adding to the core podcast users (DTC and direct response), will help increase ad sales by +27% in 2020 to $850 million.
  •     Linear national television ad sales were stable in the first half at $22bn, excluding the impact digital ad sales and the impact of cyclical events. Total advertising sales were up +1.1% including digital advertising sales, as Hulu’s momentum continued from 2018 – where advertising sales grew by +45% – and into the first half of 2019. The finance (+9%), technology (+7%) and retail (+23%) verticals were the most dynamic, while DTC brands increased national advertising budgets by an impressive +50%. MAGNA expects advertising sales to slow down in the second half, resulting in a slight decrease (-1%) on a full year basis. Revenues will grow again in 2020 thanks a double-digit CPM inflation and the summer Olympics (+1%).
  •     Out of home advertising sales gained nearly +7% in the first half of 2019 to $4.6bn. Growth peaked in the second quarter at +7.7%, the fastest growth in a decade. Excluding the -4% decline in cinema ad revenues the growth of other OOH segments was in fact closer to +8% in the first half, with solid increases for the billboard and transit segments. Again, OOH benefits from the technology/entertainment verticals, driven by innovation and competition, increasing its ad budgets in editorial media. Amazon (+130% in 2Q), Disney (+25%), Apple (+22%) showed the largest growth rates year to date, while DTC brands (Bonobos, Casper, Keeps, Brooklinen, Bark Box, etc.) are increasingly using the medium too. Revenue derived from digital OOH units grew by +25% in the first half, driven by the constant growth in connected screens inventory, as exemplified by Outfront installing approx. 1,300 digital displays in New York’s subway system the first half of the year. MAGNA now expects that total OOH advertising sales will increase by +5.2% for full year 2019 and +3.2% in 2020.

2020: RECORD POLITICAL SPEND WILL MITIGATE THE IMPACT OF ECONOMIC LANDING

  •       For 2020, MAGNA forecasts an 11th consecutive year of growth as an all-time-high in political ad spend, generating almost $6 billion in incremental ad revenues, will mitigate the impact of the expected economic slowdown.
  •        Following the strong first half, the better-than-expected demand addressed to editorial media and robust pricing coming out of the TV upfronts for the 2019-2020 broadcast season, MAGNA has increased its 2020 growth forecast to +6.2%, from +5.8% in June, including cyclical revenues (elections and Olympics).
  •         Having monitored the connection between the economic environment and advertising spending for 70 years, MAGNA firmly believes it remains the main driver behind the fluctuations of advertising spending. Macro-economists (e.g. Philadelphia Fed’s Survey of Professional Forecasters) expect the US economy to slow down from the very strong growth of 2018-2019, but they are not forecasting a recession, despite the nervousness of some investors looking at the threat of trade wars and international tensions.
  •         GDP is forecast to slow down only mildly from +2.3% in 2019 to +1.9% in 2020, but the good news for the media sector is that Personal Consumption – according to MAGNA research, the economic indicator best correlated with advertising spend historically and most responsible for the 2018-2019 heights – is expected to remain very strong next year (growing by more than +4% just like in 2018 in 2019).
  •     Nevertheless, MAGNA is expecting the economic slowdown might take a toll on the spending in several key verticals (e.g. automotive, retail, finance), but fortunately, 2020 is the strongest year in the four-year cycle of events that typically drive extra ad spend and incremental ad revenues.
  •     MAGNA expects the 2020 Presidential cycle to generate an all-time high in terms of political spend, which is bound to boost the revenues of local TV (who is and will remain the #1 channel for political campaign) while political strategists are ramping up their usage of social (almost $400 million in 2018 cycle), digital video and search.
  •     By contrast, the Olympic factor 2020 may not grow against the previous events due to the general decline in audience affecting sports too (recent Olympic games, summer or winter, showed a pattern of -30% in ratings against previous events) and the problematic time zone this year (Tokyo). However, the rise in CPMs should help stabilize the overall spending and the event will still provide approx. $800 million in incremental ad revenue for national TV in 2020. Together, the cyclical events of 2020 will therefore bring a record $6.5 billion of incremental advertising revenue to US media owners in 2020, compared to just $4.8bn in 2016, going a long way mitigating the effect of the economic slowdown in the short term.
  •         Excluding cyclical factors, all-media revenue growth will slow down next year: +3.8% compared to +6.3% this year. Editorial Media ad sales will be stable (-2.5% but +1% with cyclical revenues) while Direct Digital Media (search and social) will grow by +12%.

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