Today, BIA/Kelsey released its 2009-2014 U.S. local advertising forecast. Over the past two months, lead analysts Charles Laughlin, Matt Booth, Mike Boland, Peter Krasilovsky, Rick Ducey and Mark Fratrik have grinded through the process of forecasting local ad revenues.
This applies across 12 local media sectors and includes multiple layers of traditional and interactive revenues. The process engages the analyst team in a comprehensive look at U.S. local media both near term and long term.
We expect a further decline in total local advertising this year to about $130 billion. We believe the revenue floor will be reached by the end of 2010, triggered by both cyclical (recession) and structural (the accelerated shift to online media) factors.
Top-line revenues will finally begin increasing again in 2011. And in two years, we expect a bit of an acceleration in the rate of growth, and total local media revenues will reach about $144 billion by the end of 2014.
Though not part of the five-year forecast, our analysts expect revenues to reach the previous high water mark of $155 billion by mid-to late 2015. By then, digital or interactive revenues should account for nearly 30 percent of the overall pie.
BIA/Kelsey clients can log in to the home page to access the full report, and today’s press release is available here.
The IAB and PricewaterhouseCoopers are out with their semi-annual report on the online ad market. IAB/PWC say that interactive revenues were $23.4 billion for 2008, which is up 10.6 percent from the prior year. But everyone seems to be pointing to ominous signs, since the share of second-half revenues was just 51 percent — the worst showing since 2002.
Big trends in the report: Search revenues have gone from 42 percent to 46 percent, display has gone from 35 percent to 33 percent, and lead generation-based revenues have climbed from 6 percent to 7 percent. Meanwhile, classifieds (which include Yellow Pages and auctions) have declined from 14 percent to 13 percent. More startlingly, pay for performance has really boomed, growing from 51 percent to 57 percent of all ad revenues. CPM, meanwhile, has declined from 45 percent to 39 percent.
Kelsey Executive VP Matt Booth notes the report is slightly lower on search and display than Kelsey’s own forecast (although Kelsey forecasts a decline of 8.4 percent this year across all local ad market segments). Given that, Booth is concerned that people may draw the wrong conclusions about interactive’s growth.
“The assumption is that the driver for ad spending is ROI because ‘pay for performance’ is growing and CPM is shrinking if you look at share of both formats,” says Booth. “This is somewhat misleading. The fact is, most advertisers, especially in local, don’t measure ROI; they measure immediate gratification. Getting a quick result is different than getting a good ROI. CPMs are dropping because inventory is skyrocketing, combined with weak national and brand buys.”
It’s important to keep a declining growth rate and ominous signs of slowdown in perspective, Booth adds. “It’s a time of transition and increasing fragmentation. New ad formats are emerging. Let’s remember that after 2002, the ‘minor’ ad improvement called ‘paid search’ started to grow exponentially. If you’re curious, paid search was $1.0B in 2002, $2.1B in 2003 and $3.3B in 2003. We’ll see a similar acceleration of some interactive segments over the next few years.”
Kelsey’s own assessment of the online ad market — specifically, the interactive local ad market — has made Booth more bullish then in any previous year. “In 1997, everyone expected the market to crash and begin a large-scale transition from print to Internet media,” he notes. “What people expected to transpire then is basically happening now.”
“If you think about classifieds, for example, dealers used to buy a newspaper print ad. Now, companies like AutoTrader are selling subscription ads with search views, display ads, call-tracking, lead-gen, photos, inventory collection, etc. These products span traditional ad categories like ‘search,’ ‘display,’ ‘lead-gen’ and ‘classifieds.’ Mobile certainly spans several categories,” Booth says.
“AutoTrader is going to put up slightly less than $700 million this year in top-line revenue,” notes Booth. According to Kelsey’s research, AutoTrader is receiving the majority of the auto spend transition from traditional media.
In the next 24 months, Booth believes “we’ll start seeing an acceleration of product development around local.” He’s especially impressed by efforts such as Citysearch’s to bundle local content and local advertisements to create “a new type of AdSense for local — one that distributes Citysearch’s local content and along with monetization.” Free local content along with money — it worked for Urbanspoon and it will work for others.
Booth adds that “a new category — ‘E-Mail, Presence and Reputation Management’ (EPRM) — will emerge this year in local. This EPRM segment will grow to $3.1B by 2013. Helping businesses manage their communication and Internet presence will fast become the next interactive growth driver.”
One day after R.H. Donnelley released its 2008 results showing a sharp drop in ad sales, Idearc followed suit today with annual results that also reflect a very tough Yellow Pages environment in the United States. The big news in the release is the acknowledgment of the possibility that Idearc may seek bankruptcy protection. From the earnings release:
Idearc has evaluated various options for restructuring its capitalization and debt service obligations to alleviate these covenant issues and to create a capital structure that will permit the Company to remain a going concern. Idearc and its advisors have considered various alternatives to strengthen its balance sheet and financial risk profile. Among these alternatives, the Company is currently considering a restructuring through a “pre-packaged,” “pre-negotiated,” or similar plan of reorganization under federal bankruptcy laws. Idearc and its advisors continue to work with representatives of holders of both the senior secured facilities and the senior unsecured notes in this regard. If the Company is unable to achieve a “pre-packaged,” “pre-negotiated,” or similar plan of reorganization, it would likely be necessary that the Company file for reorganization under federal bankruptcy laws in any event.
Yesterday, RHD revealed it has retained Lazard to help it explore ways to improve its capital structure. There was no specific mention of bankruptcy in RHD’s announcement or on its earnings call. RHD executives did not take questions during the call. Idearc did not conduct an earnings call or webcast.
Idearc generated GAAP revenues of US$2.97 billion in 2008, a decline of 6.8 percent for the year. This translates into a 7.9 percent print decline to US$2.67 billion, and a modest 5.3 percent increase in online revenue to US$300 million.
As with RHD, the picture is more stark when looking at ad sales, which reflect the value of all revenues sold during the year, some of which may not be booked until the following year due to the amortization accounting method. Ad sales showed an overall decline of 9.8 percent to US$2.74 billion, with print dropping 11.4 percent to US$2.44 billion. Online sales were the same US$300 million based on this method.
“Idearc’s fourth quarter financial results are disappointing as we expected,” said Idearc CEO Scott W. Klein in the earnings release. “We are making progress on our transformational and cost-cutting initiatives. However, the unprecedented economic challenges this nation is facing are creating never-before-seen obstacles for our clients and, as a result, for us as well.”
Despite the results, Idearc is continuing to invest in advertising and promotion. Earlier this week, TM Advertising won the account to develop ad campaigns for two Idearc brands — Superpages and Verizon Yellow Pages. AdWeek estimates the budget for the campaigns at between US$30 million and US$35 million.
The news this week from Idearc and RHD has led to more predictably tough coverage of the industry in the financial press, like this write-up in Barron’s.
The Kelsey Report will release its detailed Global Directional Media forecast to its clients next week, which will give our take on how print and online directory revenues will fare over the coming five years.
Earlier this week I went to hear an economist offer his take on the current economy and how soon it would recover. Long story short, I believe the speaker, who had outstanding credentials, was overly optimistic. (I really believe he may have been on vacation on some secluded island for the past year.) In fact, his views were the most positive I have heard or read in the past six months or so. However, he did say a couple of things that I agreed with. One was that television and radio have combined their news and entertainment divisions so that a prime objective of news is now to be entertaining … that is to attract viewers and listeners. Therefore, he said, the media has good reason to say the sky is falling: It brings people in.
Recently, Sharon Begley wrote a column in Newsweek titled “Why Pundits Get Things Wrong.” She quoted a study by a research psychologist at Stanford University who concluded that there was no way to predict the accuracy of anyone’s forecasts. There was no relation to whether the forecaster was a Ph.D., an economist, a political scientist or a journalist or had any other credentials, affiliations or fame. What works for the media, she wrote, are “bold, decisive assertions that make better sound bites; bombast, swagger and certainty make for better TV.”
For more than a dozen years, The Kelsey Group has been predicting the future of the industries we cover. We take the best information we have at the time, talk to industry participants, weigh their views with our own perspectives and make forecasts of the future. We do the best we can to help our clients and the businesses we serve.
The acquisition of The Kelsey Group by BIA resulted in the combination of TKG’s strength in directional media, including all things interactive, with BIA’s strong position in television, radio and newspapers. The benefit of the merger became clear yesterday when the newly formed BIA Advisory Services released a forecast that my colleague Neal Polachek described as “an expanded and more comprehensive view of the U.S. local media sector (by widening our unique understanding) of local media by adding six categories to our forecast.”
It is a little bit unnerving to be offering a new forecast in this difficult economy. Some of the headlines about our forecast said “local ad markets shrinking,” or used terms like “declining” or “downward spiral.” Unfortunately, BIA and TKG analysts do envision local advertising revenues declining from $155.3 billion in 2008 to $144.4 billion in 2013, a negative 1.4 percent CAGR. What is notable, at least to me, is that most of that decline comes from the primarily directional media of newspaper classified advertising and print Yellow Pages. The growth is all in the equally directional Internet Yellow Pages, local search and other interactive digital advertising. There’s just not much share change in traditional direct mail, television, radio, out of home, cable or magazine advertising.
As Harry A. Jessell put it so well in today’s TVNewsday, “the newfangled competition will come, but nobody is in a better position to rule the local online world than TV stations. They have the content, the business contacts and an unmatched ability to promote.” Broadcasters should know that that was the mantra of newspapers 15 years ago. Recognition is the easy part; the hard part is following through and actually making the changes that will help you to compete.
Last fall, a report from Sequoia Capital was widely circulated, strongly suggesting that companies sit on their capital and wait out what was sure to be a very slow and painful period. Now it’s gotten worse.
For the past several weeks, other analyst reports have been circulating. They suggest that we’ve entered a period of “deleveraging,” when debt ratios are eating parasitically into capital. This has led to deflation, and has made it all but impossible to spend, and to achieve growth.
For our BIA/Kelsey community of local media companies, the implications could be very significant. But what do the trends really mean? Is the government’s stimulus program, which is attempting to “jump-start” the economy by flooding in new dollars, going to make a difference? Should we bother going to work between the years 2009 and 2016?
We asked BIA Financial Analyst Omar Wardak to give his view on what is really important in the current environment. First, we can’t run away from the tide of bad news, says Wardak. “Bank lending has decreased dramatically, which has led to widespread deflation, decreases in investment and spending. Banks are simply not putting enough money into the economy.”
Media companies have definitely felt this in every aspect of their operations, notes Wardak — especially those that have recently acquired other properties at relatively high values. Their advertising revenues are falling short, and their debt ratio is beyond what they can sustain. That’s why we’ve seen a wave of newspaper and broadcast companies go bankrupt in the past several months, while several others are teetering. Yellow Pages companies are almost there as well.
But things are rosier than they might appear. What hasn’t been really appreciated, says Wardak, is that the money supply (as measured by M1) is now equal to the deposit base in banks. “This may imply that deleveraging is fundamentally over from a banking perspective, which would be great news. This might be the first signs of a bottom. Essentially the current debt in the market is the amount of debt that should be out in the market.”
So now the rest is all about psychology. People and companies have got to be convinced that they can safely spend. “The only way to address the issue is to jump-start the cycle,” says Wardak, “and the government has been very active in resuscitating the economy.”
Looking forward, Wardak notes that major challenges remain. If lending gets back to normal, “we might face high levels of inflation. But luckily, inflation has always been a friend to media companies. Inflation helps to induce ad spending and allows media companies to repay their debt with cheaper dollars.”
To be sure, media companies — essentially any company that gathers users for the sale of advertising — have their work cut out for them. And we say that without even taking into account the technologically oriented shifts in usage and spending that are occurring. Major sectors, such as finance, automotive, real estate and retail, are not in a position to spend on marketing.
But when the market begins to recover, and new markets emerge, media companies across every channel — Internet, broadcast, broadband, news and directional — will benefit while helping local businesses reach new customers.
We’ve just announced the lineup for our Marketplaces 2009 conference, which is March 16-18 at the historic (and excellent) Century Plaza in L.A. We hope you find it as compelling as we do. It is probably a “must attend” event by any standards.
Last year in Seattle, we had 500 attendees, and it was pretty great. This time, with a full year of our Marketplaces research program under our belts, we’ve added a lot of twists and turns, and some exciting formats, including keynotes, in-depth “duo” discussions, focused panels, a Leads Summit, a Mobile Verticals SuperForum and a “Parade of Verticals.”
Every speaker has been handpicked by us — “no empty suits,” OK? And then there is the great networking that is the hallmark of all our shows.
Try this out for size (in alpha):
Keynoters: Jay Berman, MySpace; Jay Herratti, Citysearch; Chris LaSala, Google; and Chris Spanos, AOL
In-Depth Duos: Dan McCarthy, NCI, with Chip Perry, AutoTrader; Rob Curley with Chris Jennewein, Greenspun Media; Matthew Berk, Marchex, with Larry Fitzgibbon, Demand Media
Leads Summit: Kevin Laws, Vast.com; Tom Mohr, ResponseLogix; and Anna Zornosa, Dealix (Cobalt)
Parade of Verticals: Dan Hobin, G5 Search Marketing; Mike Rutz, Angie’s List; John Triplett, A.H. Belo; and Tony Wills, Allmenus.com
The Mobile Verticals SuperForum: Walt Doyle, Where.com; Tom Kenney, Verve Wireless; and Dinesh Moorjani, IAC (with more to be announced).
Great Featured Speakers: Peter Adams, Matchpoint; Frank Bell, IT Strategists; Craig Donato, Oodle; Emad Fanous, YellowBot; Adam Leff, BogoPod; Michael Oschmann, 123people; Rob Paterson, Friday Holdings; and Andrei Uglar, Weblocal.ca/Transcontinental Media
Here’s the URL to sign up. There are special rates through the 18th (i.e., this Saturday).
New CEO Scott Klein presented Idearc Media’s first-half results and previewed his plans for reorganizing and reenergizing the company. The main theme of the presentation was a “Journey of Transformation,” which is truly what Idearc needs based on the results of Klein’s eight-week evaluation of the organization and its second-quarter results released today.
Financially, the organization continued its decline in revenues, reporting multi-product revenues of $1.53 billion for the first six months of 2008, a 5.1 percent decrease compared with the same period in 2007. Year-to-date Internet revenues reached $148 million, a 5 percent increase. While online revenues increased, one analyst pointed out that the 2008 goal was pegged at 20 percent, making the 5 percent gain less than optimal — especially compared with AT&T’s second-quarter online gain of 40.2 percent. Other peers also posted strong online results, including Yell Group, which saw a 27.1 percent first-quarter 2009 growth rate for Yell.com, and PagesJaunes, which reported growth of 21.6 percent for its Internet business during the first half of the year.
Klein’s plan of action calls for streamlining the Idearc organization, which will include reorganizing the sales force for better span of control, improving sales training, streamlining pricing approaches, centralizing operations and reducing the workforce (excluding sales reps) by 20 percent. Some announced moves include closing sales offices, walking away from selected expansion markets and abandoning the Solutions At Home magazine product.
“It is clear that we have not made the leap from operating as a division of Verizon to being a stand alone public company. You will see us catch up quickly. … We are also changing Idearc’s management structure and focus. By centralizing and restructuring, we can eliminate complexity, maximize efficiency, and become easier to do business with. While the changes we have made, and will continue to make, will take some time to be fully realized, I am confident we will succeed.”
Each year the forecast measures the size of the local search industry and applies the most current analysis of trends to project growth of key segments. These have included the transition of revenues to digital ad products at both search engines and online directories. This year we have expanded the forecast globally and sized the search, display, classifieds and other relevant interactive ad products by market.
While most of the data are reserved for TKG subscribers, there are some takeaways in the publicly available high level figures. Here are a few:
On the online side:
The global advertising market will grow from US$605billion in 2007 to US$707 billion in 2012, a 2.7 percent CAGR.
Over that time period, global interactive advertising will grow from US$45 billion to US$147 billion, a CAGR of 23.4 percent.
At year-end 2007, the interactive ad market constituted 7.4 percent of the global ad market, up from 6.1 percent at year-end 2006.
By 2012 the interactive share of global ad spend will reach 21 percent.
In 2007 the global directional media industry grew 3.6 percent to US$33 billion.
On the print and Internet Yellow Pages side:
Print directories declined 0.6 percent for the year to US$27.5 billion.
TKG’s long-term outlook for print directories has softened considerably since last year’s forecast. TKG expects print revenues to decline globally at a CAGR of 1.4 percent from 2007 to 2012, totaling US$25.6 billion in 2012.
The outlook for print varies considerably by market. In the Nordic markets, for example, the migration from print to online is well under way, while in Canada, print revenues are expected to continue growing for the forecast period, albeit at a modest rate.
Internet Yellow Pages totaled US$3.7 billion in 2007, a 28 percent increase, and local search reached US$2.1 billion, up 34 percent for the year.
By 2012 TKG expects IYP and local search combined to total US$15.8 billion, or 38 percent of global directional media revenues.
Nearly 100 executives in The Kelsey Group community participated in a half-day session that we hosted in London titled Local Online Media. The panel I moderated was “The Financial Future of Directories and Local Search in Europe.” The panelists were Paul Gooden, equity analyst, ABN AMRO, and Paul Kuipers, director, media and telecom corporate finance, BNP Paribas. (As an investment banker, Paul has been involved in the KKR acquisition of PagesJaunes, the sale of TPI to Yell, as well as the Infote and European Directories transactions.)
I didn’t expect either the analyst or the banker to be all doom and gloom about the business, but I did not expect them to be as upbeat as they were either. Both felt the stock market has overreacted to a few pieces of negative information about Yellow Pages. They also believed that following the challenges of the debt market, we will see a resumption in Yellow Pages consolidation.
My colleagues Matt Booth and Charles Laughlin started the day with a number of slides from our new Annual Forecast “2007-2012: Outlook for Directional and Interactive Advertising.” One of the most important slides to our European audience is the following:
The Kelsey Group believes the total directional advertising (print and Internet Yellow Pages and local search) in Europe will grow from US$10.8 billion in 2007 to US$14.2 billion in 2012. Note that the print decline is a CAGR of only 1.2 percent, which is more than made up for in the very strong growth of both Internet Yellow Pages and local search. The obvious question is what companies will take this revenue?
In an executive interview at our London event, Andrew Day, CEO of Truvo (formerly World Directories), put it best: “Publishers need to see the new media upside as greater than the print media downside. Anyone who doesn’t believe that will fail.” In Europe, the urgency for action is even more imperative than in other parts of the world because Google’s share of the search market exceeds 90 percent.
The closing session discussed some of the themes of the day and came back again to the belief by the local search and Yellow Pages executives about the future of the business. From the audience Cornel Riklin, CEO of European Directories, asked what the industry can do to improve its perception among both advertisers and consumers. We will discuss this on Monday.
The Kelsey Group has generated considerable attention (and some confusion) in the media and on the blogosphere from a statement that appeared in an Advisory issued by our Marketplaces program on Jan. 4 offering picks and predictions for 2008 (each TKG research practice issued a similar document).
The statement in question reads as follows (referring to newspapers and Yellow Pages):
“In 2008 we think there will be a dramatic falloff in print usage due to two factors: Online has gotten ‘good enough,’ and users have grown fluent with online search. The falloff in 2008 could even reach 10 percent, compared with the 2 percent to 3 percent we’ve seen in years past.”
Several points are needed to put this statement in perspective.
This and all the predictions issued in January by The Kelsey Group’s analysts were meant to be directional in nature. In hindsight, we should have anticipated that using specific numbers to illustrate a conceptual view could be misconstrued as a firm projection.
In truth, the numbers included in the predictions Advisory were meant only to illustrate our sense of things and should not be interpreted as a Kelsey Group forecast. In addition, the figures cited relate to Yellow Pages and newspapers combined, rather than to each individually, which has further clouded the waters.
The Kelsey Group is in the process of updating its annual revenue and usage forecast for global Yellow Pages and local search, which will project out five years. This document will be released to TKG clients in mid-first quarter, at which time our forecast figures will be subject to debate and scrutiny.
