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Bullish Ad Forecast In Changing Landscape

11/24/2006 7:03 PM Eastern

This year’s battle for control of Congress produced a shift in the balance of power in Washington. Behind the political divisiveness and mudslinging of the record-breaking $2 billion 2006 political ad campaign, cable ad executives see some fundamental changes in the local advertising landscape that they hope will allow them to continue to grab market share from their rivals in 2007.

“It was a scratch-and-claw year for the first nine months of 2006,” Charter Communications senior vice president of advertising sales Jim Heneghan said.

Then came a deluge of political ads.

Political revenues beat Heneghan’s budget by 300% and by the end of the year, Charter’s ad revenues should be in the high single digits or low double digits.

John Tierney, Comcast Spotlight vice president of regional and national sales, also experienced a two-part year: “The first half of the year was rough [because] of the weakness in the overall TV spot market. But since the beginning of August we’ve seen a lot more activity and an incredible amount of political advertising.”

Tierney expects double digit growth for 2006.

Meanwhile, emerging technologies have been outperforming expectations. “The good news is that [video on demand] has not only helped secure and strengthen our linear 30-second spot business but it has brought in people like Sony, Unilever and others who aren’t traditional spot advertisers,” Rainbow Advertising Sales Corp. president and chief operating officer David Kline said. He added political ads and emerging platforms helped Cablevision Systems increase its revenues in a market and a year where broadcast revenues were down.

Those trends also help explain the generally bullish sentiments expressed by cable ad executives in Multichannel News’ second annual online survey of the local cable ad business. (See related story, page 27.)

The survey, which was conducted in October and generated 200 responses, found that the average cable ad executive believed their revenue would grow by 8.6% in 2006 and would increase by 8% in 2007, with a significant number predicting healthy double-digit growth.

In 2006, three in five (62%) executives believed ad revenues would grow by 6% or more and 24% predicted a bounce of greater than 11% in 2006. Only 9.8% believed that their ad sales would decline or see no growth this year.

Very similar predictions come in for 2007. Over half, 58.5% of respondents, believe their revenue will increase by more than 6%. Only 8.9% predict declining or stagnant sales. About one in five (20.7%) predicted sales growth of over 11%.

Most of the advertising executives said political spending — which is projected to reach $2 billion this year, topping the $1.7 billion record set 2004 — was a major factor behind their growth in 2006.

“The proliferation of political advertising in October turned this from a fair year into a very good year,” Charter division vice president of ad sales for the West-Midwest Derek Hanson said.

While the vast majority of political spending continues to flow into local broadcast stations, cable’s share is also growing. Joe Berwanger, Comcast Spotlight regional vice president in Detroit, said about the same amount of political money was spent in that market as two years ago, but that the system’s political revenue was “more than 3 times what it was in 2004.” That would put their share of political ads in the high teens or low twenties.

Jeff Basler, vice president and general manager of Comcast Spotlight in Baltimore, reported even bigger growth, estimating that its political revenue was up 10-fold since 2002. “Frankly, I don’t know how we could have digested any more spots,” he said.

Andrew Capone, National Cable Communications senior vice president of marketing and business development added that this year’s political bonanza reflects years of preparation. “We spent two years marketing political agencies, campaigns, PAC and national parties,” Capone said.

The result: cable’s share of local political spending “virtually doubled.”

Political ads, Capone and others added, are only one example of how cable is managing to expand its market share and increase revenues in categories that historically have spent little money on local cable.

Among online survey respondents, 77.2% believe local cable will gain market share in 2007 and 54.4% believe cable interconnects will grab a larger share of the pie.

In contrast, 91.9% of the respondents believe newspapers will lose market share or merely hold their own, and about four out of five believe broadcast TV, radio and outdoor advertising will either lose market share or stagnate.

A majority of respondents said Internet and wireless will be the only other media that will gain market share in 2007.

Cable’s market share has reached the point where systems are significant players in many markets. Sharon Frazier, Cox Media vice president of media sales and marketing, said Cox is now the No. 1 or No. 2 player in local advertising in 10 of its markets.

“The key for our future growth is diversifying our products and going after different categories,” such as political, which became Cox’s sixth largest category this year and accounted for 6% of its overall revenues, she said.

Among the various categories, survey respondents were most bullish on their prospects for increasing telecommunications revenue (64.3% say revenue will rise in 2007), retail (60%), financial (55.4%) and auto (46.1%). There were only three revenue categories — political advertising, insurance and real estate and automotive — that over 10% of the respondents felt would decline in 2007.

Still, many worried about their ability to make up for the lack of political revenue in 2007. “All the political advertising was great this year, but come Nov. 8 there will be a hangover,” NCC’s Capone said. “It will be challenging to replace that money in 2007.”

Car Trouble

Sales executives also continue to have difficulties with the auto sector, which is typically local cable’s largest ad category. While foreign automakers increased their advertising at double-digit levels, many executives reported domestic auto was flat or down in a number of markets for 2006.

And cable success in grabbing market share could trigger deep discounts or price wars.

In Las Vegas, for example, media companies will be scrambling to replace some $20 million in political advertising, Cox Media Las Vegas vice president and general manager John Dalrymple said.

“In the next few weeks the broadcasters are going to realize that the political advertising is gone and that they don’t have much revenue on the books for the next three or four months,” he said. “There is a danger that they will start deep discounting and that this will affect the market’s overall growth.”

To overcome those hurdles in 2007, ad sales units are drawing on a variety of tactics, ranging from traditional promotions and sales incentives to emerging media, such as on-demand sponsorship.

Emerging media platforms are a particularly hot topic, given the hype over Internet advertising and widespread worries about the impact of DVRs on the traditional spot advertising.

Focus on New Platforms

About 82.2% of respondents said emerging platforms — interactive TV, VOD and hyper-targeting — would be very important or important in their 2007 sales efforts. About 47.8% are now selling some form of on-demand sponsorship, up from 33% last year. Over half (50.9%) have a specific Web site to generate revenue, and about 20.4% use technology such as Adtag or Adcopy to hyper-target specific locals.

Cox Las Vegas, for example, will launch interactive ads in December and will add an online listing product for homes and a linear real estate TV channel in February 2006 to complement their existing VOD sales efforts. “Technology will be very important for us in what is a hypercompetitive market,” he said.

RASCO’s Kline agreed. He said Cablevision already has one of the most advanced advertising sales platforms in cable, with VOD sponsorship opportunities, ITV and classified or sponsored Web sites available throughout its footprint.

That allows the operator to sell clients 30-second spots that direct viewers to specific channels or long-form sponsored VOD programming. Sponsors of interactive ads can also collect concrete leads from viewers who click on their spots and ask for additional information. Cablevision is currently providing 5,000 to 8,000 customer leads per month to hundreds of auto dealers who list their products on the operator’s auto channel.

While these revenues are relatively small, Kline credited them with “bolstering our overall spot business” and having “an importance far beyond their size.”

Comcast has also been extremely aggressive rolling out new advertising platforms. Besides the long-form VOD sponsorship opportunities that have long been available on Comcast Searchlight, the operator is rolling out “Classifieds on Demand” designed to pull auto, real estate and in some cases employment ad money from print. In addition, the MSO is beefing up its sales efforts for Comcast.net and other online properties.

Lynne Simon, the general sales manager of Comcast Spotlight in San Francisco, said the system launched an automotive Classifieds on Demand service in September, with 1,700 listings from 14 dealers. “In the first month we had over 60,000 views.”

New Media Key in ’07

New media revenue also remained relatively small at Comcast, but the company is accounting for significant growth in some systems. In Baltimore, Comcast’s Basler noted that on-demand sponsorship revenue grew tenfold in 2006 and he hopes that will triple in 2007.

“They will be a key driver to our 2007 growth,” Basler said. While emerging platforms will account for only 5% of overall revenue, they could represent 75% of the system’s incremental growth in 2007.

David Porter, Cox Media vice president of marketing and new media, said Cox first launched VOD sponsorship efforts in 2002 and have since been expanded to 12 markets. They also began offering interactive ads in 2003 in Phoenix and have expanded those to San Diego. A third as yet unnamed market will follow in early 2007.

Cox is also going after real estate dollars with GoScout Homes, which includes a linear channel and online listings, said Cox’s Frazier.

That will be important in markets like the Gulf Coast, where Cox is seeing a large growth in real estate advertising and is hoping to pull ad dollars away from newspapers that have dominated the classified business, said Doris Young, vice president and general manager of Cox Media for the Gulf Coast. Her system will launch GoScout Homes in March 2007.

Interactive platforms are particularly attractive to advertisers worried about the impact of DVRs and new media on the 30-second spot. “All of the newer platforms will enhance or extend the value of the 30-second spot,” NCC senior vice president of new media sales Matt Timothy said.

Typically, operators bundle spots with VOD or Internet buys, using the popularity of linear TV to drive people to on demand or online sites. “It puts the 30-second spot on steroids,” he said.

Small Market, Big Growth

Such technology isn’t available in a number of smaller markets but many continue to perform well. Rich Streett, Cable One Advertising regional ad sales manager for Arizona, said in early November that the company was up 18% over last year and that it should achieve double-digit growth in 2007, even without political ads, because of the market’s overall growth and a continuing shift of dollars away from print to cable.

“Our biggest strength is promotional events,” Streett said. “That is something other media can’t offer.”

Of the respondents, 43.8% noted that promotions would help them increase revenue in 2007.

Cheryl Carlson, regional sales manager for Cable One Advertising in Fargo, N.D., also reports double-digit growth in 2006 and hopes for similar double-digit growth in 2007. While it is difficult for a 119th-ranked market to get the attention of national advertisers, she said that “we’ve made some inroads nationally” and that the auto sector has proved surprisingly strong, becoming its No. 1 category.

Consolidation Effects

Consolidation is also affecting some smaller and mid-sized markets. Prior to Suddenlink Communications’ acquisition of Cox and Charter cable systems that boosted its subscriber count to about 1.3 million, the operator outsourced its ad sales. But now Suddenlink is revamping its inherited sales operations and using them to increase overall revenue.

Kevin Stephens, Suddenlink senior vice president of commercial and advertising operations, said the cable operator is handling most of its sales in-house and has reorganized its efforts to make business services and ad sales part of the same unit.

Since both divisions serve many of the same clients, Stephens believes coordinating their operations will increase revenue from ad sales, high-speed data and other products.

Brent Skinner, vice president of advertising for Suddenlink’s central division, added that the company has centralized back office operations so sales executives can spend more time scouting prospects and closing deals. Skinner and Stephens expect high single-digit growth for 2006 and 2007.

“We will continue to reap the benefits of the decline of radio and newspapers, and in certain markets we already tend to dominate the TV ad scene,” Stephens said.

Life After, Adelphia

Dramatic changes are also in the works in some of the markets affected by the sale of Adelphia Communications and system swaps between Comcast and Time Warner Cable.

Comcast’s Tierney said the swaps have strengthened the company’s clusters in major markets and allowed it to improve the efficiency of some operations. “It’s made our very large presence in the top 25 DMAs even more attractive to national advertisers.”

The West Palm Beach, Fla., operations Comcast acquired from Adelphia have managed to perform extremely well, with sales growing 20% in 2005 and 2006, despite the limited resources available while Adelphia was in bankruptcy, said Ian Dennett, general sales manager for Comcast Spotlight in the market.

Comcast’s additional resources have allowed the system to hire more staff, he added. The rollout of on demand and other advanced products in late 2007 or early 2008 will be very important for its future growth.

“Taking care of basics,” as Dennett puts it, with proper training, sales incentives, research and back office support remains the top priority at most systems.

According to the survey, 44.8% of all respondents felt that training would help them improve revenue in 2007. Many cited better hardware and software for sales automation (40.6%), research (27.1%) and back-office personnel (29.2%) as factors that would boost ad sales next year.

Bennett Griffin, president of Griffin Media Research, which provides research and tools for cable sales operations, said a number of MSOs are turning to better research and training to help sell deeper into their inventory of insertable networks.

“There has been a very positive improvement in the inventory management of selling second- and third-tier networks,” Griffin said. This is important because operators can easily run out of inventory in top-tier networks like ESPN.

Training is also high on the list of priorities, particularly as systems hire specialists for specific categories or roll out new media platforms. Comcast’s Berwanger said the Detroit system saw double-digit growth in 2006 and hopes to continue that growth if political ad revenue is factored out of the equation.

Key to the system’s plans will be adding and training new staff members. The system is hiring specialists for its VOD and other new media products. Staffers who want to handle automotive accounts or want to sell on-demand sponsorships must also take training classes from “Comcast University.”

“They won’t be able to sell VOD or auto unless they take the class and are certified,” Berwanger said. “It is a major initiative for us that we think will pay off with increased market share and revenues.”

Charter’s Heneghan agreed. “Both 2005 and 2006 were challenging years,” he said. “As we face more challenges in 2007, the recruitment and retention of great personnel has to be our No. 1 priority.”

The Changing Advertising Landscape
Cable ad executives believe that cable, Internet and wireless phone should gain market share next year while more traditional media — broadcast TV, radio and newspapers — will continue to lose share. More than half identified local economic conditions as the most difficult or second biggest challenge they faced in 2007. Telecommunications, retail, financial and auto topped the list of the sectors most likely to grow in 2007.
Source: Annual online survey of cable advertising executives conducted in October 2006 by Multichannel News. See page 27 for details on how the survey was conducted.
Most Challenging Issues Facing Sales Executives
Rank their biggest challenges in growing profit margins. (% Respondents ranking each item No. 1 or No. 2)
Local or regional economic conditions 50.4%
Need to sell more channels more aggressively 30.1%
National economic conditions 25.7%
Competition from local TV stations 24.8%
Competition from local radio stations 16.8%
Wireless competition 15.9%
Online competition 15.0%
Need for a larger sales team 13.3%
Other 8.0%
Advertising Market Share by Media in 2007
“Do you expect each of the following sectors to gain or lose share in your local market for 2007?” (% Respondents)
Gain No Change Lose
Local Cable 77.2% 16.7% 6.1%
Internet 88.5% 8.8% 2.7%
Wireless 55.6% 39.1% 5.5%
Cable Interconnect 54.4% 42.0% 3.6%
Local Broadcast TV 29.7% 45.1% 25.2%
Outdoor 22.2% 65.8% 12.0%
Radio 11.6% 51.8% 36.6%
Newspapers 8.1% 42.3% 49.6%
Plans For Improving Sales Efforts
“In which areas do you expect your company to increase resources for you and your staff in 2007?” Respondents checked all that applied. (% Respondents)
Training of sales staff 44.8%
Promotions (campaigns and/or materials) 43.8%
Upgrade of hardware/software for sales automation 40.6%
Upgrade of hardware/software to enhance ad targeting 31.3%
Back-office personnel 29.2%
Research 27.1%
Advertising Sales Growth By Industry
“Do you expect your company’s revenue to increase, decrease, or stay the same in each of the following sectors for 2007?” (% Respondents)
Increase Stay the Same Decrease
Telecommunications 64.3% 33.7% 2.0%
Retail 60.0% 34.0% 6.0%
Financial 55.4% 40.6% 4.0%
Automotive 46.1% 41.2% 12.7%
Media & Advertising 42.4% 52.5% 5.1%
Insurance & Real Estate 39.4% 49.5% 11.1%
Restaurants 37.3% 58.8% 3.9%
Government & Politicians 37.0% 40.0% 23.0%
Medicine/Proprietary Remedies 35.3% 63.7% 1.0%
Beverages 22.8% 72.2% 5.0%
Top Ad Sales Sectors
“Which one industry sector do you expect to be the strongest revenue generator for your company in 2007?” (% Respondents)
Automotive 48.1%
Telecommunications 26.5%
Media & Advertising 7.1%
Medicine/Proprietary Remedies 6.1%
Retail 5.1%
Government & Politicians 3.1%
Restaurants 2.0%
Beverages 1.0%
Insurance & Real Estate 1.0%
Financial --

September