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Survey: Growth in ’08

Political Spending, New Media Boost Business

By George Winslow -- Multichannel News, 11/18/2007 7:00:00 PM

Cable’s growing share of the political ad pie and rapidly growing new media sales are promising to boost local cable advertising back into high-single or even double-digit growth in 2008, providing a welcome recovery from a tough 2007 sales climate.

“We are already seeing a strong finish to 2007” with sales in the core non-political categories up significantly, said Comcast Spotlight vice president of advertising sales Kevin Cuddihy. “That is setting us up well for next year,” when he expects to see significant increases in political advertising and revenue from video on demand and other advanced platforms.

“I’m confident we have a good chance to return to double-digit growth” in 2008 Cuddihy added.

Many respondents to Multichannel News’s annual online survey of the local cable advertising business agreed. Over half (51%) believed their revenue would grow by more than 6% in 2008, and nearly one-fifth (19%) predicted growth of over 11% next year. In contrast, only 13% forecast declining or flat sales in 2008.

On average, the 144 respondents predicted an 8% increase in sales next year.

The respondents believe they will see slightly lower growth of 7% for interconnect sales in 2008 and a similar 8% bounce in national sales next year.

TOUGH 2007 CLIMATE

That is good news for local cable ad sales units that were buffeted by a tough 2007 sales climate, with a number of major operators reporting declined sales or sluggish growth, thanks to economic uncertainty, troubles in the domestic auto sector and a slumping housing market.

“It was a tougher market than anyone anticipated,” Cabletelevision Advertising Bureau executive vice president Chuck Thompson said.

Comcast, for example, reported that ad revenue in the first nine months of 2007 increased only 1% to $1.1 billion, thanks to a weak TV ad market and a decline in political advertising. In the 2006 election year, Comcast pulled in more than $90 million in political advertising revenue.

“On the whole, 2007 has been a challenging year because the consumer has been affected by some of the financial turmoil we saw this summer in the stock markets and credit markets and by rising prices for gas and oil,” Charter Communications senior vice president of marketing and advertising sales Jim Heneghan said. “Local ad sales are an early economic indicator, and our business has been exposed to the economic problems that have hit some important categories like automotive and real estate.”

While executives reported significant regional differences, with some local systems managing double-digit growth, such sentiments are widespread. One quarter of respondents reported that their revenue in 2007 would either decline (12%) or stay the same (13%). Over half (51%) predicted that growth would be 5% or less.

Even more pessimistic views were expressed for interconnect sales and national spot sales, with 64% of respondents predicting revenue would grow by 5% or less in 2007 in each category.

“The interconnect market has really struggled,” said Mike Miller, Cox Media regional vice president. “Arizona, California and Nevada have all been hard hit by the real problems in real estate.”

Besides trouble in the domestic auto and real estate sectors, the difficulty of replacing big 2006 political revenue also slowed growth rates. “[Last year] was cable’s first year of playing big in the political arena and replacing those numbers has been hard,” said Comcast’s Cuddihy.

David Kline, president and chief operating officer of Rainbow Advertising Sales Corp., which handles sales for the Rainbow cable networks and the Cablevision Systems, adds that the ongoing shift of dollars to online campaigns has compounded the industry’s problems.

“We are under siege from a lot of competitors online with better measurement and accountability,” Kline said. “The Internet is really the darling of the advertising community right now.”

Even so, Kline and others believe that cable continues to gain market share and that VOD and interactive-TV platforms will give them a major competitive advantage in years ahead.

Kline, for example, sees high single-digit growth in 2008 and he hopes such growth rates could continue as the advanced platforms become a major part of their revenue.

“We are not quite there yet,” in terms of interactive advertising, he said. “We will make a lot of progress in 2008 and you’ll see a real shift in 2009 and 2010.”

GAINING MARKET SHARE

About 73% of respondents predicted that cable would gain market share in 2008 and another 55% predicted that cable interconnects would expand their share of the ad pie in 2008. Only the Internet, which 84% believed would gain share, had a more bullish outlook.

In contrast, a large majority of respondents predicted that local broadcast TV, outdoor, radio and newspapers would either lose market share or remain flat.

“In a period of tight budgets, we’ve been selling the idea that it is smarter to spend on cable,” CAB’s Thompson said. “While broadcast ratings are going down and newspaper circulation is dropping, cable’s audience continues to grow.”

But the slumping local TV sector has put pressure on pricing, a number of executives noted.

“In Baltimore and Washington, the national business dried up and that has really hurt the broadcasters” forcing many to heavily discount their packages in 2007, said Mike Wall, regional vice president for Maryland and Virginia at Comcast Spotlight. Even so, the seven designated market areas in his region will grow about 4% overall in the core non-political segments.

Next year, Wall and others expect political spending and the Olympics to alleviate some of those pricing pressures. “When you have hundreds of millions of dollars in political money being spent nationwide and potentially tens of millions poured into some DMAs [designated market areas] that will tighten up the markets and pricing will go up,” he said.

Cable executives are also counting on getting a much larger portion of the political ad spend in 2008. “Cable has been doubling its political revenue in every cycle,” National Cable Communications senior vice president of marketing and business development Andrew Capone said.

He estimates that cable’s political advertising take hit about $250 million in 2006 and said “doubling it in 2008 could be a stretch but not out of the question. If the total political spend is $3 billion, it is not out of the question that we could get to $500 million.”

Capone and other executives stressed the importance of a healthy economy if the industry is to see robust growth in 2008.

“In 2007, I got more share of a pie that did not grow,” said Charter’s Heneghan. “The problem is that the pie needs to grow. For us to the get to the next level, we need advertisers to do well and people to have jobs.”

'NEW CATEGORIES’

Growth will also require operators to focus on “developing new categories because domestic auto and categories tied to real estate will continue to struggle,” said Comcast’s Wall. “Furniture is a top-five category for us in many markets and [because of the slumping housing market] we are way down in furniture spending this year.”

Wall also argues that “advanced platforms [like VOD and broadband] will be critical to cable’s performance in 2008. They differentiate us from our competition in broadcast and create stickiness. If we sell our clients on the value of on demand advertising and long form VOD sponsorship they are going to be much more likely to maintain a spot schedule with us if their budgets are tight.”

At the moment, revenue for these platforms is small but rapidly growing. Comcast’s Cuddihy said that their advanced platform sales for VOD and Internet advertising increased by 225% in 2007 and he is hoping to double it again in 2008.

“As we come off the increase in political spending, the question for 2009 and 2010 is how fast the digital products can develop,” Cuddihy said. “That will be the key to maintaining the growth we’ll see in 2008.”

The growing emphasis on VOD and the Internet was evident once again in this year’s survey. About 76% said that emerging media — interactive, TV, and hyper targeting — are “very important” or “important” in their negotiations. Another 8% said those products will be important in the near future.

Two-fifths of all respondents (60%) are now selling on-demand ad platforms, up from 33% two years ago in the 2005 survey; 56% now have Web products designed to boost ad revenue, up only slightly from 53% in the 2005 survey.

Kevin Dowell, senior vice president of Insight Media, also expects stronger growth in 2008 from political, new platforms and rapidly growing categories such as health and travel.

Dowell acknowledged that revenue from newer platforms is still relatively small and that TV faces more competition from the Internet.

“There is no question that the Internet has taken a piece of the pie and is poised for strong growth in 2008,” he said.

To help counter that, Insight and other operators are putting more emphasis on the Web.

Connie Joiner, general manager of Insight Media in Lexington Kentucky, said it is expanding its Web offerings to supplement existing VOD and spot sales and is about to launch shoppingthebluegrass.com for home improvement advertisers.

“Having a package of products is important for our future,” she said. “Spot is still where you start selling but whenever possible we try to bundle a couple of different products together.”

“Having our own bundle, a kind of triple play [of local spot, VOD and Web] advertising inventory, is a key competitive advantage,” Charter’s Heneghan added. “If we don’t use the potential of our digital platform to further differentiate ourselves [from other media], shame on us.”

That will be particularly important as telcos begin to ramp up their local sales efforts and deploy more interactive and on-demand features.

For the moment, telcos are primarily focused on deploying video service and have not made a major push in the local advertising arena.

Though Verizon is aggressively deploying FiOS TV in Cablevision’s footprint, RASCO’s Kline said, “They are not affecting us. They really don’t have much of a local presence. For advertisers we are the only one with a great sales force and a large very attractive subscriber base.”

“We put [the telcos’] market share at under 1%,” added CAB’s Thompson. He stressed that CAB is “always keeping an eye on the competitive landscape” and continues to support a number of initiatives to boost cable’s advantage versus existing and emerging competitors.

Next year, CAB will continue to fund some major research projects to highlight cable’s value to advertisers and it has set up an Advanced Video Exposition effort to promote interactive TV advertising. “That will be something we will be publicizing heavily early next year,” Thompson said.

David Porter, vice president of marketing and new media at Cox Media, also stressed the importance of industry-wide initiatives. He argued that in the next 18 months cable industry efforts, particularly CableLabs’ Canoe project — a broad initiative that will provide a set of standards to let advertisers place and track ITV spots — will make it easier for advertisers to deploy interactive TV or VOD campaigns across several cable operators.

“These platforms have been very successful, but advertisers are going to be much more interested when they can really have scale to reach a large footprint,” Potter said.

EXPANDING PLATFORMS

In the meantime, a number of operators continue to expand the footprint of their advanced platforms. Potter noted that Cox has rolled out its interactive TV and video-on-demand advertising offerings to about 2.5 million subscribers. Cox will also begin testing a dynamic insertion ad system in Orange County in early 2008 as part of their video-on-demand trial with ABC and NBC. Other markets will follow.

Some systems are also reporting significant traffic to their new ad platforms. “We expect to have well over 1 million views [of VOD content] on the searchlight platform in 2007,” said Greg Bennett, vice president and general manager of Comcast Spotlight in Seattle. “We project next year to reach over 2 million. When you begin to aggregate all of those categories, it becomes a very valuable destination for advertisers.”

Local executives also see advanced platforms as a way for systems to strengthen ties to advertisers in struggling categories such as domestic auto or real estate.

Sharon Frazier, vice president of media sales at marketing at Cox Media, said that online offerings, such as Cox’s www.goscouthomes.com, have helped them see healthy growth in the home sector, which includes everything from furniture and real estate to home improvement, despite a slumping housing market.

“The tough real estate market has affected everyone in our market” said Holly Caps, general manager of sales in Arizona at Cox Media, which will probably see low single-digit growth in 2007. “But we’ve been able to counter that somewhat with www.goscouthomes.com and we are looking to do the same with www.goscoutautos.com” when it launches.

Cox expects to have the auto Web site available in seven markets by the end of this year, Frazier said.

Adam Hamblett, Cox Media vice president and general manager in New England, stressed the importance of using on demand and other newer platforms to attract money for categories that haven’t traditionally spent a lot of money on spot cable.

“VOD allows plastic surgeons or hospitals who have not been spot advertisers an opportunity to explain their procedures in a way you can’t do in a 30-second spot,” he said. “These alternative platforms aren’t a pipe dream anymore. They are an integral part of our growth. We have a tool box that is much fuller than our competition and that gives us a lot more opportunities.”

SMALL BUT STABLE

As usual, executives reported marked regional differences in local ad sales.

Cheryl Carlson, regional sales manager for CableOne Advertising, noted that smaller markets like Fargo, N.D., “have been stable. We are in the conservative Midwest and don’t see the highs and lows of some other markets.”

Carlson expects CableOne’s double-digit growth of 2007 to continue into 2008. “Being a political year, broadcasters are going to run out of avails and that is going to be very good for cable,” she said.

This year was also a good one for Lexington, Ky., according to Gene Hardy, a local sales manager at Insight Media.

“We’ve had consistent growth by going out after non-traditional categories that we haven’t tapped in the past,” he said. That has brought in new revenue in the government and medical sectors.

Likewise, growth in the mid-sized and smaller markets served by Suddenlink Communications remained healthy in 2007, according to Kevin Stephens, senior vice president of commercial and advertising operations.

“We were in the upper quadrant of the MSOs [multiple-system operators] with positive growth in 2007 even without the political spending we had in 2006,” Stephens said. “Because our markets are smaller, they tend not to have as many swings up and down and we get more from local than national, which has been more volatile.”

Next year, he expects the Olympics and political to further boost their sales, in part because it will reduce inventory on broadcast stations and strengthen pricing, particularly in the summer, when broadcasters often respond to smaller audiences with heavy discounts.

Stephens also sees strong growth in newer categories like medical and Hispanic.

“We have a significant footprint in Texas and we are just at the tip of the iceberg in terms of that market,” he said.

To boost its Hispanic ad revenue, Suddenlink plans to increase the number of insertable Spanish-language networks in 2008.

Overall, he expects sales growth to range from high single digits to low double digits in 2008.

Like many systems around the country the Cox system in Omaha, Neb. has been buffeted by problems in the domestic auto and real estate market, said Phil Higgins, vice president and general manager of Cox Media in Omaha.

But Higgins believes that Cox will continue to gain market share and return to double-digit growth in 2008, in part because video on demand and online classified sites will help the cable operator take advertising dollars away from its competitors.

“We are very optimistic about 2008,” he said.

The Cox systems in New Orleans also expect strong growth.

Marc Leunissen, general manager of Cox Media in New Orleans, said that repopulation efforts have gone slower than expected, as the market has fallen from the 43rd-largest designated market area before Hurricane Katrina to 54th today. Cable penetration has also fallen from 77% to 67%.

But the advertising market continues to rebound, thanks to hefty spending from home builders, appliance retailers, home improvement and auto sectors. “Over 250,000 cars needed to be replaced in the wake of the storm,” he said.

PRE-KATRINA LEVELS

By the end of 2007, that will boost revenue to a little more than 90% of pre-Katrina levels.

Leunissen admits that the big question in 2008 will be whether auto dealers continue their high level of advertising.

But Leunissen also expects next year to be strong, thanks to demand for spots on their regional sports network Cox Sports Television and growth in such sectors as home improvement, education and health.

In Chicago, Comcast Spotlight actually posted more growth in 2007 than it did in 2006, said Peter Heisinger, the vice president and general manager of Spotlight in that city. That is a notably different experience than most systems, which had a much better year in the 2006 election cycle, he said.

“It [2007] has been a strange year,” he admitted. “Automotive and real estate have done well while they’ve been struggling in most other markets.”

As a result, their overall growth, will end up in the mid single digits, with interconnect revenue growing in low single digits but local sales growing in the “low to mid-teen” range, Heisinger said.

Next year should be even stronger, with mid-single-digit to high- single-digit growth, Heisinger predicted. “Although domestic auto is having a tough time, we have strong relationships with many influential dealers,” he said. “They are open to the advanced media. They climbed on board and now we are seeing demand from the second and third tier dealers.”

HEALTHY IN SEATTLE

Another healthy market has been Seattle, thanks to a strong regional economy and the growing importance of advanced ad platforms, said Bennett at Comcast Spotlight.

While the hangover from a slumping housing market could hurt the real estate category and domestic auto could struggle, Bennett said that newer platforms should help soften the impact and he expects even stronger growth in 2008.

Comcast’s VOD auto products are now averaging about 40,000 views per month, with as many as 70,000 views per month and its Northwest Living on-demand product, which includes the home improvement category affected by the housing market, is averaging 38,000 to 39,000 views a month, with some months hitting 69,000.

“Those have been very successful products,” he said.

Comcast has also launched www.vodrealestate.com, which allows real estate agents to easily place their own ads. Those spots can be paid for by credit card and are available for seven days on the VOD platform. “It is a very compelling way of putting your home for sale on TV,” Bennett said.

Comcast’s Boston operations have also seen strong growth in the mid-single-digit to high-single-digit range, said Jay Frogameni, director of sales for Boston with the North Central Division of Comcast Spotlight.

In Boston, the key to growth has been better management of accounts and reorganizing the sales staff so that account executives are responsible for specific ZIP codes, Frogameni said.

Despite trouble in the auto sector, Boston saw double-digit growth in the sector in 2007 because account executives have been more aggressive in pursuing every possible client. “There isn’t a dealer we haven’t spoken with,” Frogameni said.

That success highlights the importance of good old-fashioned spot sales, many sales executives say.

Frogameni expects high single-digit with a possibility of achieving double-digit growth in 2008 even though political isn’t likely to have much of an impact.

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