MSOs Ratchet Up Marketing Budgets

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Cable operators are turning up the heat in the marketing wars with direct-broadcast satellite, with MSOs increasing their ad spending by more than 35% over the past five years and showing no signs of slowing up.

According to a research report by Sanford Bernstein & Co. cable and satellite analyst Craig Moffett, total ad spending across all media for the six largest cable operators has grown at a compound annual rate of 35% over the past five years and by 36% in 2004.

While most MSOs do not break out ad spending in their financial reports, Moffett compiled advertising data from each of the MSOs using data from the Stradegy advertising data tracking database of industry researcher TNS Media Intelligence.

SETTING THE PACE

Leading the pack are Comcast Corp. and Cablevision Systems Corp., which increased their ad spending by 56% and 76%, respectively, in 2004. That trend is continuing — in the first quarter of this year, Comcast's ad spend increased by 35% and Cablevision's by 72%.

In the meantime, DBS, which has been one of the more aggressive advertisers, has experienced a slowdown in its ad spending — the total advertising spend for EchoStar Communications Corp. and DirecTV Group Inc. grew 5% annually over the past five years and by just 2% in 2004.

That decline was largely due to a decrease in ad spending by EchoStar. According to Moffet's report, DirecTV increased its advertising spend in that time frame by 16.5%, while EchoStar's decreased by 26.1%.

That trend continued into the first quarter of 2005, with DirecTV up 20% — largely because of the launch of its “Rethink TV” national ad campaign. DirecTV's network-television ad spending more than tripled in the first quarter, from $7.9 million in 2004 to $26.8 million in 2005. Conversely, EchoStar's ad spending in the first quarter was relatively flat.

BEYOND CROSS-CHANNEL

The push to spend more advertising dollars is a new one for cable, which has traditionally relied on individual channels like Home Box Office to sell the benefits of a cable subscription to potential customers.

And while cable has regularly advertised on its own systems — mainly through cross-channel avails on various cable networks — that was largely viewed as preaching to the choir.

“It was the channels — not the operators — who did the heavy lifting in ad spending,” Moffett wrote.

While Moffett added that using unsold local ad inventory on cable channels to promote new services to existing subscribers has undoubtedly helped drive up average revenue per subscriber and served to reduce churn, increasingly cable operators are focusing on nonsubscribers, many of whom are satellite customers.

That is perhaps most evident with Comcast, which has said in recent months that it is zeroing in on the 19.5 million subscribers within its footprint that don't subscriber to any cable services.

Comcast has increased spot TV advertising by 44% from $76.2 million to $109.5 million between 2003 and 2004. Newspaper advertising also increased 44% in that time frame, from $46.2 million to $75.6 million.

Cablevision, which rolled out its own Optimum Voice voice-over-Internet protocol product last year, upped its spending on spot-TV advertising by 77.4%, from $10.6 million to $18.8 million between 2003 and 2004. Spending on newspaper ads more than doubled in that period, from $3.9 million to $8.98 million.

TIME WARNER GETS IN GAME

Even Time Warner Cable is beginning to reverse its past trend of cautious advertising outlays. While the No. 2 MSO's ad outlay has been relatively flat for the past few years (it was up 1.1% between 2003 and 2004), it ticked up 13.4% in the first quarter of this year to $23.7 million.

That seems to coincide with Time Warner Cable's introduction of a voice product and appears to be part of chairman and CEO Glenn Britt's initiative to improve marketing.

Speaking at an investment conference in late 2003 — about the time the MSO was gearing up for its telephony rollout — Britt said 2005 was the year to “step on the marketing accelerator.”

Increased ad spending also seems to have a direct relationship to basic-subscriber additions.

Cox Communications Inc. increased its marketing spend by about 10% during the first quarter, the same period where it added about 42,000 new basic susbcribers.

Most of that spending was geared toward new customer acquisitions, said Cox senior vice president of marketing Joe Rooney.

“The opportunity to win back satellite customers is terrific, but we're not going to do that by running cross-channel [spots],” Rooney said. “We have to buy spot broadcast and get better at targeted marketing in order to win back customers from satellite and RBOC.”

Rooney added that Cox increased its total marketing spend 31% in 2004. At the same time, revenue-generating units were up 10%.

MINIMAL MARGIN IMPACT

While cable has significantly stepped up its advertising initiatives, the increased expense has had little negative impact on operating margins.

According to Moffett, even though Comcast increased its ad spend in 2004 by $86 million, its operating cash-flow margins expanded by 240 basis points. Had the MSO kept ad spending flat, those margins would have grown by another 40 basis points.

At Cablevision, which boosted ad spend by $14 million in 2004, operating cash flow margins rose by 250 basis points. Those margins also would have expanded by another 40 basis points had ad spending been flat.

“One simple explanation for why the cable industry is increasing its advertising spending is that, simply, they can,” Moffett wrote. “Expanding margins across the rest of the cable business — driven largely by improving mix from the growth of high margin services like [high-speed data] and local advertising — have more than offset any increase in ad spending as a percent of revenues.”

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