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Economics

Economics

By the Project for Excellence in Journalism

The local TV business remained healthy in 2006 but there may be the beginnings of concern as audiences continue to drop across the board.

Industry analysts predict that by the time the final numbers are in for 2006, double-digit growth in revenues will emerge. While they have been wrong before—their projections proved overly optimistic in 2005—if they hold true, it would mark a significant turnaround.

One reason for the optimism is the country’s political climate. The high number of close political campaigns for the House and Senate in 2006 translated into record political ad blitzes, exceeding all expectations.

As for the newsroom, it remains local TV’s key performer. In the latest survey, more than half the news directors reported their newsrooms were making a profit in 2005, much higher than those surveyed a year before. There was also an increase in the amount of revenue the newsroom contributes to the station.

Total Revenue

All that good news follows what turned out to be worse-than-expected final numbers for 2005. For that year, the latest for which the industry has complete data, total revenues for local TV stations were lackluster, to be charitable.

Average station revenues in 2005 fell by 8%, according to an analysis of BIA Financial data of 726 local TV stations.1 The drop was worse than the industry had become accustomed to. Historically, the average revenue for local news stations has remained pretty steady. The two years that stand out recently are 2000 and 2004 — both of which were presidential election and Olympic years.

In dollars, the declines meant the average TV station took in total revenue for 2005 of $23.7 million. That followed unusually high revenues of $25.8 million in 2004, which in turn was a 10.5% increase over 2003.

Average Station Revenue
1995 – 2005, Average Across All Stations That Produce News
pie chart sample
Design Your Own Chart
Source: BIA Media Access Pro, July 2006
Inflation adjustment is based on 2002 dollars

Those average dollar figures can be somewhat deceiving, of course. The average station is a fictional entity created for the purpose of statistical comparison. The industry in reality is dominated by the biggest cities. Indeed, the top 25 markets consistently account for more than 60% of the total, according to the BIA. Those larger stations make far more than the average.

Advertising Revenues

For 2006, analysts expect better things once all the numbers are in.

Most TV revenues still come from advertising, and the industry analysts believe that in 2006 those began to grow again, markedly.2

Veronis Suhler Stevenson, an investment firm that analyzes media companies, projected that total advertising revenue for local TV stations would rise almost 10% in 2006 (to $27 billion, up from $24.6 billion in 2005).3

TV Station Advertising Revenues
2003 – 2006, All Figures in Billions of Dollars

Year National Spot Local Spot Total
2006 (est.)
$12.1
$14.9
$27
2005
10.5
14.1
24.6
2004
11.4
14.5
25.9
2003
9.9
13.5
23.4

Source: Veronis Suhler Stevenson, 2006-2010 Industry Forecast, Pg. 244

Projections by the other major market research source for the industry, the Television Bureau of Advertising (TVB) were similarly positive. In December, its analysis of TNS Media Intelligence/CMR’s estimates for the top 100 markets indicated that local broadcast TV’s ad revenues were up 10% for the third quarter of the year compared to the same quarter in 2005. That matches Veronis Suhler’s estimated increase for the entire year. All the top advertisers increased their spending, with government and organizations leading the way.4

The year 2007 is expected to be more moderate, but not as flat as previous non-election years have been. The Television Bureau projects total TV advertising revenues to rise about 3%. Veronis Suhler projects that revenues will drop, but somewhat less than in 2005 — 4%, as opposed to 5%.

Actual Ad Revenues in 2005

The projections, however, are just that — projections. And, as we’ve seen in past years, things often turn out differently.

Consider the last year for which actual figures are available: the political off-year of 2005. Projections called for ad revenues to increase. It didn’t happen.

After reaching about $26 billion in 2004, actual total advertising revenues fell about 5%, to $24.6 billion. Both national and local advertising performed worse than expected.5 (That is almost equal, by the way, to the 8% drop in total station revenues — another sign that advertising is still the dominant source of TV revenue.)

National spot advertising spending dropped to $10.5 billion from the $11.4 billion in revenues in 2004. Local spot advertising made about $14 billion, marginally less than the $14.5 billion in 2004.6

Local Advertising: Political Windfall

One significant component of local TV advertising is political ads. They often make the difference between a good year and a great year for a local station.

Indeed, political advertising has gradually become the nearly exclusive domain of local stations. As campaigns are increasingly able to target where undecided and swing voters lived, down to their congressional districts and voter precincts, they have learned to match their targets to TV markets and to buy their ads just in those key areas.

In 2006, political advertising proved the odd-even-year adage even truer by bringing in better-than-expected revenues.

For the 2006 mid-term campaign, analysts predict that spending may match, and perhaps top, the record set in 2004 for political ad dollars. In November 2006, TNS Media Intelligence estimates that about $2 billion would be spent on the 2006 mid-terms.7 That was even more than the $1.6 billion that the research firm had predicted a few months earlier (the second figure seconded by the trade publication Ad Age). The Television Bureau had put its forecast at $1.4 billion in September 2006.8

The $2 billion mark, if estimates prove accurate, would mean that political advertising accounted for 7% of local TV ad revenue in 2006, a record number.9

A similar pattern was seen in the last election year, 2004 . Election ad spending then, estimated at $1.61 billion, accounted for 6.1% of all station revenue, based on estimates of political ad spending and total revenue (See 2005 Annual Report ).

The amount should be kept in perspective. Altogether, political revenue (including congressional, gubernatorial, and local races) is still a small — though increasing — portion of total local TV station revenue.

Political Ad Revenues
2000 – 2006

Year Local TV Politcal Ad Revenue Total Local TV Revenue Politcal as a Percentage of Total Revenue
2006 (est.)
$2 billion
$27 billion
7.4%
2005
$1.6 billion
$26.1 billion
6.1%
2004
$69.8 million
$24 billion
2.9%
2003
$60.5 million
$25.8 billion
2.3%

Source: Broadcasting & Cable, 2006; Veronis Suhler Stevenson Industry Forecasts; TV Bureau of Advertising, 2000 & 2002; Morgan Stanley Estimate, 2004

What about the future?

The Television Bureau of Advertising (TVB) projects that in 2008 total spot advertising will grow 10% over 2007, driven largely by political advertising.

Even 2007, which would typically see some decline in ad spending, “will not decrease dramatically,” according to the BIA Financial analyst Mark Fratrik, as candidates try to establish their presence in early-primary and swing states like Ohio, New Hampshire and South Carolina.10

Who spends all this money? Senate campaigns, such as those in Ohio, Pennsylvania and Maryland, accounted for about 14% of the total $44 million as of September 2006. The rest was mostly spent on House races and on governors’ races. Some states stand out. According to a TNS release in September 2006, $160 million had been spent on TV ads in California alone, and that total was expected to triple once final figures were in. Other states with large spending include Virginia, Michigan, and Florida.

Political ad dollars, though, carry with them some caution.

If, in the future, both traditional and political advertisers begin to reduce spending on local broadcast TV, it is bound to have an adverse impact on the industry. To gain a more regular revenue stream, analysts suggest, the industry should look to new avenues like demanding retransmission consent money from cable or taking advantage of trends like delivering content to cell phones.

Local Cable Advertising

In the last decade or so, local advertisers have also had another option for their ads — local cable news channels (see 24-Hour News). Those outlets are attracting advertisers with their lower rates, an ability to reach similar markets and the added advantage that many regional cable systems can carry the same advertisement to different markets at once.

According to Veronis Suhler Stevenson, local cable advertising grew at an annual compound rate of 8.2% from 2000 to 2005. For 2005-2010, it is projected to grow at a rate of 13%. By comparison, local spot ad revenue for local broadcast stations grew only 0.8% from 2000 to 2005, and is expected have an annual compound rate of growth of 2.5% until 2009.

Thus, while not huge, local cable is becoming a relatively larger competitor for local TV news ad dollars.

Growth of Local Spot vs. Local Cable Advertising
2002 – 2008, Percentage Growth

Year Local Spot Local Cable
2008 (est.)
6.3%
14.5%
2006 (est.)
5.8
14.2
2004
7.3
13.3
2002
7
2.3

Source: Veronis Suhler Stevenson, 2006-2010 Industry Forecast

Newsroom Economics

How much does the newsroom contribute to a station’s revenue? According to a survey of news directors, a pretty substantial amount, and growing. The latest Radio-Television News Directors Association (RTNDA) and Ball State University survey, released in October 2006, indicated that the revenue made from news increased in 2005 compared with the previous year.11

According to the news directors surveyed, 44.9% of TV station revenue came from the news department in 2005. That is an increase of two percentage points from 42.8% in 2004. What’s more, the increase was felt across markets and affiliations.12

Percentage of TV Station Revenue Produced by News
2002-2005, All Stations

Year Average Percentage
2005
44.9%
2004
42.8%
2003
46.1%
2002
39.7%

Source: RTNDA/Ball State Universitys
Note: Based on survey responses of news directors

How well were newsrooms doing on their own? When asked whether their newscasts were making a profit, news directors were much more positive than a year earlier, and more in line with 2002 and 2003.

More than half, 57.4%, said they made profits in 2005. Only 10% said they had shown a loss, while 8% said they had broken even.13

That was a big improvement over 2004, when only 44.5% of the news directors reported that they earned a profit. That was down almost 14 percentage points from the 58.4% of the year before.14

News professionals say those numbers need to be taken with some caution. It is not clear how much news directors know about their station’s finances; some industry experts say not that much. But the trends over time outline some interesting patterns.

Local TV News Profitability
All Stations, 1996 – 2005
pie chart sample
Design Your Own Chart
Source: RTNDA/Ball State University Surveys
Based on survey responses of news directors

The biggest switch was in those reporting profit versus breaking even. In 2004, nearly a quarter of all respondents reported breaking even. That was higher than in any other year for which we have data. In 2005, the number saying they broke even fell back to 8.1%.

The differences in profitability between the network affiliates are also striking, but not as great as a year earlier. More news directors affiliated with Fox reported profits (65.2% of them), than with any other group. On the other end were CBS affiliates, with 58.9% reporting profits. ABC affiliates fell in the middle at 61.4%, but also saw the biggest jump from 2004, when only 44% reported profits.

Fox-affiliated stations were the best performers in 2005 (see also Cable TV Audience). For the past three years, about two-thirds of all news directors affiliated with Fox have said they have been making a profit. And even more significantly, in 2005 none of them said they were showing a loss.15

A number of the Fox affiliates were in the news in 2006 for adding new newscasts or adding to existing ones, at various parts of the day. There were press reports of additional newscasts in cities like Chicago, where a 10 p.m. newscast is planned for release in 2007; Philadelphia, where an 11 a.m. newscast began and an evening newscast is planned; and Boston, also preparing to launch a 10 p.m. newscast and planning a morning one for 2007 (see Audience).16