Not looking pretty

Outlook for the media and entertainment industry is especially gloomy for 2009. It will be fueled by recession, the combined effect of local and national ad weakness, a broad weakness across all major ad categories, and an increase in ad inventory, according to a forecast from Fitch Ratings, MarketingCharts reports.

On a macro basis, Fitch believes the world economy faces a severe global recession in 2009. The financial ratings firm forecasts that the contraction in output among the major advanced economies in aggregate will represent the steepest decline since World War II, at about -1%. Fitch expects real GDP in the US to decline approximately 1.2%, while inflation is forecast to be 2.7%.

Against this backdrop, Fitch said its media team is more cautious regarding the advertising environment than most major advertising forecasters, none of which currently predict advertising to be nearly as weak as 2001, the worst ad recession (on both a nominal and real basis) since 1970.

Fitch believes that economic weakness could extend well into 2010 and that the cumulative affect of this downturn could approach 2001 levels (down 6%-9% in real terms). This is because, in contrast with years leading up to 2001, advertising growth the past few years has been more restrained, with 2005 (up 3%), 2006 (up 4%), 2007 (down 1%) and 2008 (forecasted between down 1% and up 2%). This means there is a much lower peak from which to fall.

Specific Media Types

In terms of specific media types in the media and entertainment industry, Fitch has a negative outlook for newspapers, Yellow Pages, terrestrial radio, magazines, broadcasting affiliates, broadcast networks, theme parks and commercial printing firm.

On the other hand, the 2009 outlook is stable for outdoor advertising, cable TV, online, music, movie exhibitors, ad agencies, movie studios, professional publishing and educational publishing firms.

The current issuer default ratings (IDR) for Fitch-rated issuers in the media and entertainment industries are listed below:

Reasons for Negative Ad Forecast

Underpinning its negative forecast, Fitch believes the outlook for 2009 will be especially bad for the three reasons listed below.

1. Combined Effect of Local and National Weakness

The 2001 ad downturn was concentrated in national advertising, while the 2008-2010 downturn will include both local and national components. In 2001, low interest rates and the availability of credit fueled consumer home and auto purchases (and advertising) that helped insulate major ad spending categories and local economies from severe economic weakness.

Political and Olympic spending masked the local market weakness to some extent in 2008, but Fitch expects the absence of these revenue sources in 2009 will expose the depth of this weakness. In Fitch's view, there are more catalysts for deterioration rather than improvement for local advertising going into 2009.

Fitch expects this weakness in local markets will be compounded by national advertising pressures because of the impact of the credit market events that hit while many large national advertisers were planning their 2009 ad spending budgets. With advertising being one of the most easily scalable fixed costs, some major advertisers could plan to pull back on national campaigns considerably until there is more visibility in the market. Fitch is also concerned that they could pull back even more in 2009 than in the 2001 downturn because the credit crisis has raised the stakes and forced many companies to emphasize capital preservation and liquidity, not just earnings growth.

2. Broad Weakness across Major Advertising Categories

Fitch expects pressure across a wider spectrum of advertising categories in 2009 than in the past downturn. Fitch expects that five of the top 10 advertising categories - or over 40% of the ad mix - will be under meaningful pressure next year: No.1 Retail (12% of total), No.2 Automotive (12%), No.5 Financial Services (6%), No.6 General Services (6%) and No.9 Airlines, Hotels and Car Rentals (4%).

In particular, the automotive category (which can represent over 20% of a broadcast affiliate's revenue) will present big challenges. Fitch maintains the auto industry is enduring structural changes that will permanently reduce local and national auto advertising and that the supply of available advertising units will need to contract as a result.

Fitch's estimate corroborates ZenithOptimedia's most recent revised ad spend projection. The latter predicts ad spend will fall 6.2% in '09, due in part to woe in the automotive industry. The local TV ad industry, for example, relies on auto ads alone for about 25% in its income. (Zenith believes local TV will likely plummet 12% in '09.)

3. Drastic Increase in Ad Inventory

Advertising inventory has proliferated (from online and emerging mediums as well as traditional ones) since previous downturns. Owners of inventory (predominantly media companies) are likely to compete more heavily on price in this downturn to fill the vast supply of ad space available.

Advertisers now have many more options in the current environment than at any other time for maintaining a presence with consumers while trimming their budgets and scaling back high Cost Per Thousand (CPM) ad campaigns. Even healthy advertisers are likely to use this increased bargaining power to command better price terms and concessions from media companies, Fitch said.

A Borrell Associates report found that even if the economy starts moving out of recession, it is unlikely the interactive ad market — which includes banner, display and pop-up ads — will improve quickly. Local interactive media in particular are expected to slow to 8% spend in 2009 (the market grew 47% this year).

About the research: Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times.