Across the media landscape, advertising is disappearing, one more casualty of the global economic shutdown. New technology wont be a savior; this is an equal-opportunity problem across print, TV, digital, radio, and outdoor advertising. Advertisers are quickly slashing or pulling budgets, canceling or reducing campaigns, zapping billions in ad dollars from media income statements, and endangering the future of media businesses regardless of form.
The reason is simple: Even the most prominent ad buyers lack reasons, and often the means, to buy ads. Global travel is on hold; for airlines, hoteliers, cruise lines, casino operators, and car-rental firms, there are no products to promote. With auto factories shut, there is little need to push cars. With movie theaters closed, there are no film trailers. And aside from grocery stores, pharmacies, and large box-store chains, most retailers are shuttered. Meanwhile, many of the small and medium-size businesses that buy online ads are struggling to stay solvent.
In terms of comparable periods, history wont be much help. When the Spanish Flu hit in 1918, the first commercial TV broadcast was still more than two decades away. During the financial crisis, digital advertising was still in its infancy. J.P. Morgan analyst Doug Anmuth notes that in 2008, digital advertising was roughly 12% of the overall ad budget, so share gains helped to offset some of the overall weakness. Now, he says, digital advertising is 55% of overall budgets.
The digital business has changed so much in 12 years, says David Cohen, president of the Interactive Advertising Bureau, or IAB, an online-ad industry trade group. Its very hard to draw any clear connections between then and now.
The industry is grasping for clues. Ad agency Magna now sees linear-TV spending dropping 12% in 2020, including a 20% drop in the first half, with a more modest 2.5% decline in the second half. The firm sees a relatively quick bounceback, with overall ad spending up 4% next year, when optimists are counting on a flood of delayed events like the Olympics to bring advertisers back into the fold.
IAB surveyed nearly 400 ad buyers about the state of the industry, and the results are grim. Nearly three-quarters of those surveyed say the current ad downturn will be worse than the financial crisis in 2008. About a quarter of those surveyed by IAB have pulled all of their advertising through the second quarter. Another 46% are reducing their ad spend for the same period. Some of the respondents expect conditions to improve at least a little in the second half.
Digital spend for the March-to-June period will be down 33%, according to the IAB survey. Traditional media spend is expected to be off 39%.
Investors arent waiting around for the actual numbers. Theyve already punished ad-supported businesses. Barrons analyzed more than two dozen publicly traded companies: digital media sites, ad agencies, publishers, radio broadcasters, TV businesses, and cable operators. Through this past Thursdays close, the average stock in the group was down 46% from the markets Feb. 19 peak, about twice the decline of the S&P 500 index. Nearly a third of the companies in the group have fallen by more than half.
Heres how the shutdown is affecting specific ad sectors:
Digital Advertising Michael Levine, an analyst with Pivotal Research, is particularly worried about how the shutdown is affecting small businesses, which he estimates account for 40% to 45% of Facebooks (ticker: FB) revenue and 50% to 55% of Googles revenue. If the economy is locked down as long as two months, he thinks the failure rate of small businesses could be as high as 30%.
Both Facebook and Twitter (TWTR) have already warned that they will take a hit from the downturn. Alphabets Google (GOOGL) no doubt is seeing the same effects, but so far hasnt discussed the matter.
Facebooks disclosure was on the vague side. The social network said in a blog post that it has seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of Covid-19. Traffic isnt an issueFacebook has seen record use almost every day, but it isnt monetizing much of the growth on platforms like Messenger and WhatsApp.
Twitter has been more specific and could serve as a guidepost for everyone else. After originally forecasting first-quarter revenue of $825 million to $885 million, or growth of 10.5% year over year, the company now sees revenue being down slightly. Like Facebook, Twitter has seen a spike in traffic, but the extra traffic is doing nothing to help revenue.
If we assume that Twitter suffered its entire revenue miss in the month of March, that would suggest ad volumes at Twitter are running close to 30% below what they were before the virus, not far off the numbers in IABs report.
The comments from Twitter and Facebook indicate that Alphabet, Snap (SNAP), and Pinterest (PINS) will face similar issues. The vanishing market for local advertising is a particular problem for Yelp (YELP), the online recommendation engine.
Shares of Facebook and Alphabet have held up better than much of the ad-supported industry. As Barrons wrote in a recent Tech Trader column, both companies have piles of cash and little debt. They arent insulated from the downturn, but the businesses will survive in the coming months, and will be in a strong position to thrive when conditions normalize.
Basic Cable Theres a triple-whammy of issues for ad-supported broadcast and cable networks such as those owned by AMC Networks (AMCX), whose shares are down 40% from the markets peak; ViacomCBS (VIAC), down 64%; and Discovery (DISCA), down 39%. As noted, advertising dollars are drying up, viewership of subscription services is spiking, and the lack of sports programming could set the stage for an acceleration in the long-running cord-cutting trend.
The Giants The largest U.S. media businesses Comcast (CMCSA), AT&T (T), and Walt Disney (DIS)have actually held up better than most other ad-dependent businesses. All three are likely to survive the crisis more or less intact, but there are trouble spots. The three media giants have basic cable networks that will be hurt as advertisers slash budgets. AT&T, which owns TBS and TNT, and Disney, which owns ESPN, are struggling without professional and collegiate sports. Comcast, with Peacock, and AT&T, with HBO Max, are readying the launch of new streaming services under far different circumstances than they had imagined. Comcast, in particular, was counting on its 2020 Olympics broadcast to serve as a springboard for the Peacock launch. Meanwhile, Comcast, parent of NBCUniversal, and Disney are stuck with shuttered theme parks that could stay closed for months, meaning zero revenue despite ongoing costs.
But Comcast and AT&T have a crown jewel: massive broadband networks, which have become lifelines for the countrys homebound population. And Disney has one of the worlds best brands. A quarantine should also be a boon for the companys new Disney+ streaming service. AT&Ts shares, down 25%, are buoyed by the stocks better-than-7% dividend yield, although the company has suspended its aggressive stock-buyback plan.
Newspapers The falloff in advertising adds new pressure to the beleaguered newspaper group. Shares of the New York Times (NYT) have tumbled 27% in the latest slide, which makes it the strongest performer of the print media stocks. News Corp (NWSA)owner of Dow Jones, the publisher of Barrons and The Wall Street Journalis down 43%, magazine publisher Meredith (MDP) is off 66%, and Gannett (GCI), which has announced job cuts at more than 100 newspapers across the country, is down 85%.
Radio and TV Stations The sudden disappearance of commutes is a problem for the already-troubled radio sector. Shares of iHeart Media (IHRT), which recently returned to the public market after emerging from bankruptcy, are down 69% from the markets peak. Cumulus Media (CMLS), which owns the sports-programming business Westwood One, is also off 69%.
Outdoor Billboards are built for a steady stream of drivers on the roads, another model that has been decimated by the suspension of commutes. Both Clear Channel Outdoor Holdings (CCO), off 77%, and Outfront Media (OUT), down 65%, have pulled their guidance and taken steps to cut costs and shore up their balance sheets.
Avoiding Ads Altogether The best performing stocks in the media universe, not surprisingly, are those with no significant exposure to ads. Netflix (NFLX) is down just 4% from the February peak. The company has never sold advertising, and it is likely to emerge from the crisis with more subscribers.
Pure-play broadband providers like Charter Communications (CHTR) and Altice USA (ATUS) could also be winners. And the arrival this year of new gaming consolesthe PlayStation 5 from Sony (SNE) and Xbox Series X from Microsoft (MSFT)comes at an opportune time, with many people probably still stuck at home and hungry for entertainment.
This will be a defining moment in how consumers spend their time with media, and what technologies they use, says eMarketer analyst Jasmine Enberg. And some of those changes will be long-lasting.
Write to Eric J. Savitz at eric.savitz@barrons.com
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Advertising Is Getting Crushed by Covid-19. Why Facebook, Google Cant Save the Industry. - Barron's
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