Hoping for a Second-Half Comeback

A combination of economic trends, rising competition from the Internet and the absence of big political advertising budgets could bring cable’s local advertising segment something it hasn’t seen in a long time: a down year.

Through the first half of 2007, local advertising revenue reported by five multiple-system operators that represent most of the cable industry’s local-sales take was down 1.3%, to $978 million, as systems struggled to match their 2006 sales levels. The most telling indicator: Comcast, cable’s largest local advertising provider, recorded a 1.8% drop in advertising revenue, to $712 million for the first half of 2007 from $725 million a year earlier.

The No. 3 operator, Charter Communications, reported a 3.8% decline in ad revenue for the second quarter, to $76 million. (The operator average results exclude Time Warner Cable, because its acquisition of properties from Adelphia Communications and Comcast obscure direct year-to-year comparisons.)

Smaller cable companies are feeling the pinch, too. Mediacom Communications, which led MSOs in 2006 with a string of four consecutive double-digit revenue gains in quarterly advertising revenue, said its second-quarter 2007 ad revenue “were essentially flat year-over-year, with continued weakness in national and local advertising sales.”

No immediate relief appears to be looming. Even Insight Communications, which led the second-quarter operator group with an 8.4% crease in advertising revenue, expects a difficult second half of the year. “We’re walking into a tough quarter right now,” said Insight senior vice president Kevin Dowell, who heads the company’s advertising sales unit, Insight Media.

The culprits, according to cable advertising executives, include a soft national spot market — the placement of local cable commercials by large national or regional advertisers — and in particular the erosion of political advertising on the scale the industry enjoyed in the 2006 election year. Political budgets will return in a big way next year, but for now, cable companies are having difficulty replacing a political spot market for cable that the industry rep firm National Cable Communications estimated at $250 million in 2006.

Also affecting the ad-sales sector is a severe downturn in revenue from home-related advertisers, who’ve pulled back budgets as the mortgage lending crisis has rippled across the home-improvement economy, hurting property values and sapping consumer spending.

“We’ve gotten slaughtered on real estate, hardware and home improvement,” said Insight’s Dowell. The same is true for the retail furniture segment, said Kevin Cuddihy, vice president of sales for Comcast Spotlight. In turn, that has spilled over to affect spending in the automotive segment — cable’s largest source of local advertising revenue.

“I’ve seen a significant decline in revenue across furniture. But furniture is also tied to homes, and clearly we’ve seen that the homes are tied to the auto economy, so it’s been a tough year,” said Cuddihy.

Comcast isn’t the only operator grappling with a downturn in the furniture category, which ranks either second or third as a revenue contributor for most cable ad sales groups, according to Jim Birschbach, an industry consultant who also heads the job-placement service mediarecruiter.com. “When the housing market goes south, the furniture industry suffers,” Birschbach said. “And along with that goes appliances.”

Even so, there are some scattered bright spots. Insight Media achieved its second-quarter advertising revenue gains partly because of a race for governor in Kentucky, but also because of an uptick in spending in the medical and restaurant categories, said Dowell. Comcast Spotlight has seen encouraging signs from the restaurant and local-entertainment categories, Cuddihy said, and despite troubles in the domestic automotive segment, he said revenue from foreign auto dealers are rising. The health-care category in particular is generating strong increases for local cable advertising, according to Birschbach, as hospitals and cosmetic enhancement clinics become more aggressive in advertising their services.

Still, a downturn at any level in local cable advertising revenue is unusual for a segment that produces roughly 5% of total cable-industry revenue and has steadily churned out significant gains year after year. In 2006, for example, Comcast’s advertising revenue rose 20.8%, to $1.54 billion, from 2005.

The local cable sector has plenty of company as it contends with a difficult sales environment. TNS Media Intelligence in September reported that U.S. advertising spending overall slipped 0.3% in the first half of the year, to $72.6 billion. TNS said the top 50 advertisers have cut spending by 2.2% in the first six months.

Although TNS doesn’t track the local cable advertising market, the closest proxy it does follow, spot TV, saw a 5.4% decrease in ad revenue over the first half of 2007, to slightly less than $7.3 billion. The national basic-cable networks fared better, with a 2.8% rise, to $8.38 billion.

Ironically, the sluggish market for local cable ad-sales growth is coming at the same time that viewership levels for advertising-supported cable channels are at an all-time high. The Cabletelevision Advertising Bureau reported that ad-supported cable networks attracted 63% of total U.S. TV viewing during the summer, a record level that reflects rising popularity of original programs on basic cable networks.

To combat a flat ad-spending market, cable advertising organizations are turning to advanced technologies they hope will encourage advertisers to spend more money to target viewers with new levels of precision. Also, local cable operators are integrating Web sites and video-on-demand platforms into their ad-sales pitches as a way to tap into growing enthusiasm for interactive advertising.

Insight Media’s Dowell said a Web site Insight has established in concert with the online portal HealthiNation.com has helped to increase billings from local health care providers.

Comcast, too, thinks over time advanced advertising will help propel sales increases. “The numbers are still small, but we tripled our revenue this year. We should be able to double that advanced advertising revenue again next year, and see those kinds of increases for years to come,” said Cuddihy.

In the meantime, there’s good news and bad news from the current economic conditions affecting local cable advertising. “The good news is that most [local cable ad] markets are increasing their share of ad spending,” said Birschbach. “The bad news is that the market overall is suffering.”