Present Tense, Future Less Cloudy

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For many, 2005’s cable ad sales business will long be remembered as a rocky one. The market was buffeted by hurricanes that devastated local economies in the Gulf Coast, spikes in gas prices, slumping domestic auto sales, a sluggish stock market and turmoil in the Middle East. Those factors helped produce the stormiest ad market since the Sept. 11 terrorist attacks.

“This year defied all of the patterns [in advertising spending I’ve seen] in my career,” says Jack Olson, senior vice president of media services who heads ad sales efforts at the Adelphia Communications Corp. “The highs and lows from one market to another were more extreme than usual and the patterns from month to month and quarter to quarter were very volatile. Auto spending has not followed any previous trend.”

“It’s been a strange year,” Time Warner Cable Media Sales president Larry Fischer says. He points to woes in the auto sector, the inability of operators to capture much of the political ad pie and economic uncertainty as factors hurting local cable advertising growth of late. Even so, his unit, which oversees ad sales for Time Warner, will be up “in high single digits or low double digits” this year.

“The headline for the year is: 'I’d rather be in cable,’” Fischer argues. “Among the local media, cable is the top performer. We’re gaining market share and the others are losing it.”

Those sentiments reflect the views of many of the 250 plus cable ad sales executives who took Multichannel News’s first annual “Local Cable Ad Sales Survey.”

The survey, which was posted online for two weeks in October, asked cable sales executives about a number of key issues facing the industry. It covered a wide range of topics, including ad revenue projections, shifts in the market share for various local media, the importance of newer media such as video on demand and the strength of various industry sector ad categories.

To flesh out data from the survey, follow-up interviews were also conducted with nearly four dozen top MSO executives.

Many of the respondents believed that the cable ad sales under their purview would grow by 6% or more in 2005, with more than 31% of the respondents predicting they would end the year with double-digit growth.

Fewer than one in ten (8.7%) believed they would end 2005 with about the same revenues as 2004. Only 3.2% predicted a decline in revenues.

It remains to be seen whether operators will fulfill some of the predications made earlier this year for 2005, and how big a bounce they will have over 2004. Citing data from Kagan Research LLC, the Cabletelevision Advertising Bureau says local cable advertising grew about 13% in 2004 to about $4.3 billion. Kagan had predicted a 15% bounce for 2005 to nearly $5 billion in local cable sales.

“Cable can take comfort in the fact that we seen modest growth in a down market,” says Greg Schaefer, president of National Cable Communications, a cable rep firm that works with many MSOs.

One of the factors driving down ad revenue from the auto sector was heavy national ad spending to promote employee discount programs over the summer. That reduced the local spending made by dealers in the run-up to the new model year.

The discount programs left many dealers with fewer cars to sell, reducing the need for further advertising and hurting fourth-quarter results.

Schaefer and most other sales executives argue that cable’s growth is particularly gratifying given the problems faced by the broadcast stations, radio outlets and newspapers.

“The pullback in media spending [in the later part of this year] has been the worst since 9/11,” says Charter Communications Inc. senior vice president of marketing and advertising sales Jim Heneghan. He expects Charter’s 2005 sales growth to be flat. “But as I’ve told my bosses, when demand comes back, we’ll come back even stronger against broadcast and newspapers, who are continuing the lose audiences and circulation.”

GAINS AGAINST RIVALS

Most cable sales executives agree with Heneghan. A hefty 83.8% of the respondents to the survey believe local cable will continue to gain market share over the competition in 2006 and another 66.6% believe cable interconnects will also expand their share.

In sharp contrast, over half of the survey respondents (52.2%) believed that newspapers would lose market share in 2006, and another 38.2% believed that papers, which typically pull in the largest share of local ad revenue, would remain flat.

Four out of five (81.7%) cable ad sales executives also believe that local broadcast TV would either remain flat or lose market share in 2006 and 88.3% predicted that radio would either remain stable or lose a portion of the ad pie.

Only the Internet, which is still a relatively small part of the local ad pie, seemed to be picking up steam, with 79.9% of the respondents predicting it would gain market share.

2006 REVENUE FORECASTS

Most were also bullish about revenue growth in 2006. Over 65.5% of all cable ad executives surveyed believed their sales would grow by 6% or more, and 37.2% predicted that their revenues should bounce by 11% or more.

But those results are likely to vary widely market to market. After Hurricane Rita hit Sept. 23, Don Smith, an account executive at Time Warner Cable Media Sales in Beaumont, Texas, says, “Our cell phones began ringing with cancellations. That’s all we got for the next two weeks,” turning “a very good year [into] a very disappointing one.” He also expects the first half of 2006 to be down.

Hurricanes also wreaked havoc on Cable One Inc.’s Gulf Coast operations, which was the MSO’s biggest money maker, says company vice president of advertising sales Mike Bowker. While things have recovered much faster than expected, he expects the storm damage to continue to hurt sales in early 2006.

A very different story can be found in some East Coast markets. Recovery from hurricane damage in 2004 has actually fueled growth in Florida, boosting ad sales by “strong double digits” in the Tampa Bay and Central Florida systems of Bright House Networks, according to Anne Ragsdale, group vice president of ad sales for the Florida group.

Major political races in New York and New Jersey and a strong economy helped produce double digit growth for Cablevision Systems Corp., says David Kline, president and chief operating officer for Rainbow Advertising Sales Corp., which handles sales for the operator and Rainbow’s networks.

Kline expects their double-digit growth to continue into 2006, even though there is “a lot of uncertainty among advertisers.”

During phone interviews, sales general managers and senior sales executives at Comcast Corp. reported healthy growth for systems in Baltimore (up about 13% even though the overall market was down), Philadelphia (up about 8%), Pittsburg (cable up 7%, despite a drop in broadcast TV sales), Denver (mid-single-digital growth for cable even though the overall TV ad market is flat or declining), Salt Lake City (double-digit growth) and Chicago (14% growth for the interconnect).

In sharp contrast, interconnects in Southern California for San Diego and Los Angeles have struggled. “Overall TV spending has been down by 10% or more for the San Diego and Los Angeles DMAs,” notes Mike Miller, regional vice president of ad sales for Cox Communication Inc. ad-sales unit Cox Media. “While we’ve been able to grow our business, it has not grown the way it has in the past.”

EMERGING TECHNOLOGIES

To rekindle growth in 2006, a number of MSOs — particularly Comcast, Time Warner and Cox — are banking on emerging technologies as VOD, interactive TV and hyper-targeted local ads using Adtag or Adcopy.

Nearly two fifths (39.3%) of all respondents note that their company currently sells local VOD ads, with another 33.5% expecting to start selling them in the near future. About one third (32.8%) are already selling hyper-targeted ads, with another 26.9% expecting to launch those services in the near future. More than half (53.6%) have a Web site designed to generate ad revenue.

That has made emerging media an increasingly important part of the sales pitch. Nearly three quarters (73.6%) of all respondents to the survey rated emerging media as very important or important in their negotiations.

In some cases, these efforts are already paying off. In Pittsburg, Comcast’s sales team has brought in about 10 sponsors in 2005 for VOD product, pulling about $1 million in revenues.

In Chicago, the ability to offer hyper-targeted ads helped the Comcast bring in new clients like Dodge, which used the technology to sell different brands in different zones of the city, notes Marc LeSage, director of sales for Comcast Spotlight’s Chicago interconnect.

“Having a triple play [of spot ads, VOD sponsorship and hyper-targeted ad plays] will be key to driving our growth in 2006,” says LeSage.

Experiments with interactive ads can also be found in a number of other markets. Cox has been offering interactive ads since 2003 in Arizona, a program that currently attracts about 12 sponsors a month. Charter sells interactive ads on its Riverside system, and Time Warner offers the technology in several systems, including Rochester, N.Y., where customers can even order a Papa John’s pizza with their remote controls.

Finding new ways to entice advertisers will be particularly important in 2006, as many cable sales operations work to reduce their dependence on the auto sector.

“Automotive will continue to be a very important focus for us in 2006,” says Sonja Farrand, senior vice president of advertising sales division at Mediacom Communications Corp. But Farrand stresses that her team will also be “expanding into some newer categories by targeting newspaper advertisers. A ton of retail dollars are being spent in newspapers even though they are losing readers.”

“Newspapers remain our largest competitor in terms of share of dollars they get,” says Kevin Dowell, senior vice president of Insight Media Advertising. “We have to find a way to get our hands on that money.”

Newer technologies will also play a role in attracting newspaper money. Comcast’s Denver system, for example, has set up a Web site and VOD offering that will allow home builders to showcase their offerings. “We see it as an important initiative to get money that has been going to newspapers,” says Kurt Kennedy, Comcast Spotlight vice president and general manager for Colorado and Wyoming.

Cablevision and a number of other operators also have rolled out VOD products for national and local auto advertisers, efforts that could help boost auto revenues in 2006.

But a number of executives worry that newer technologies like VOD might hurt their traditional spot business. In Connecticut and Rhode Island, where the Cox sales unit saw double-digit growth in 2005, Cox Media New England vice president and general manager Adam Hamblett is bullish on VOD but worried that it could cannibalize their existing spot revenues.

“We are not pitching the VOD product to auto dealers,” he says. “We don’t want to get into a shifting game. We want to go slow and use it to bring in new money.”

For at least the next few years, finding better ways to sell more spots will remain the key to success, many believe.

DIGGING DEEPER

For example, Rick Steele, vice president of sales, Great Lake Area for Adelphia Media Services, notes for that the company’s Buffalo, N.Y., operation bumped up revenues for the first 10 months of 2005 by 28%. He attributes that to their strategy of focusing on convincing auto dealers and other larger advertisers to increase their budgets. “When we looked at it we realized we were leaving money on the table,” he says.

Operators are also trying to do a better job of exploiting their existing inventory and expanding number of insertable networks. “We’ve been adding channels like crazy,” says Kelly Enright regional vice president of advertising sales at the operator Bresnan Communications. “Selling deeper into our inventory and doing a better job of packaging the networks has become a key focus.”

Most executives interviewed for this article are already inserting local ads on over 40 networks, with the number set to grow in 2006.

To improve the sales process, many operators are also investing heavily in training, research and hardware. “A number of operators are commissioning specialized research on categories like furniture where they want to increase sales,” says Bennett Griffin, president of Griffin Media Research, which offers research and tools to use its data to develop sales presentations.

Because operators tend to get 80% of their revenues from just 10 networks, Court TV, offers research and training designed to operators sell deeper into their inventories, a program that has dramatically boosted local ad revenues and sellout rates for the channel.

While promotions and contests have long been a key part of the partnership between operators and networks, some channels are also developing strategies designed to help operators target specific categories. Fox Cable Networks, for example, is developing a program for Speed Channel designed to bring in auto sponsors for its NASCAR and auto-themed programming.

On the high-speed data side, ESPN is currently talking to operators about partnerships for its ESPN360 broadband offering. One option might be for that a certain percentage of banner ads might be local.

“Partnerships with programmers have become even more important,” says Walter Oden, vice president of business development, affiliate sales and marketing for A&E Television Networks. With VOD, interactivity, the Internet and their spot business, “the operators have so many balls to juggle.”

How well operators manage that juggling act over the next year may very well determine just how well they recover from a stormy 2005.

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