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Economics

Economics

Introduction

By the Project for Excellence in Journalism

In a difficult year for media generally, local television stations were hardly immune. Revenue from campaign advertising failed to meet expectations and did not make up for spending cuts from other advertisers, especially automotive and home goods retailers. The potential for adding new revenue through new programs seems to have leveled off.1

Even the Olympics telecasts, which often produce additional ad revenues at least for the affiliates of the network rights holder — NBC in 2008 — failed to put earnings on an upward slope.

And as the year went on, signs of trouble grew and industry groups revised expectations downward. For the year, most expect revenue declines, despite the election. And the outlook for 2009 appears grimmer still. Reports of cutbacks began to emerge in the fourth quarter as stations braced for an expected drop in total advertising revenue far beyond normal non-election year declines.

Revenues

Over all, revenues at local television stations appeared by year’s end on a downward slope in 2008, despite the election.

As a rule, local television stations do well in election years, and less well in odd-numbered, non-election years.

For a while, 2008 appeared on track. Revenues looked as if they would grow, although less than in the two previous election cycles.

The media research firm Veronis Suhler Stevenson, in its annual communications industry forecast, projected in August 2008 that ad revenues over all for television stations in 2008 would be 5% higher than 2007.  (Even those projected earnings for 2008, $26.3 billion, were less than the $26.7 billion taken in during the previous election year, 2006).

By autumn, however, those projections seemed too high. In November, the Television Bureau of Advertising projected total local television ad revenues would decline 7% from a year earlier by the time 2008 was complete. A month later, another group, BIA Financial, a market research firm, also projected a 7% drop by year’s end, to $20.1 billion.2

Chris Rohrs, president of the Television Bureau of Advertising, whose projections are normally in line with those from Veronis Suhler Stevenson, said his group revised the forecast because of “unprecedented economic developments.”  From January though September, the group reported, actual ad revenues had already dropped 2% versus the first nine months of 2007.

Two major factors contributed the weakening ad revenues for local television stations in 2008.

In the first quarter, a 100-day strike by the Writers Guild of America shut down production of prime-time scripted network television shows. (Scripted shows are theatrical programs such as Law & Order or Lost, while reality programs such as American Idol and Survivor are mostly unscripted.) As regular viewers of these programs stopped tuning in to the reruns, local affiliate stations also felt the hit, especially for their late local news programs that followed prime time. They rely on viewers of national programs to stay tuned to the local programming that follows.

With fewer viewers, some advertisers sought discounts from stations or shifted spending to cable television.3 Many local stations already began experiencing tougher times, including, at such CBS stations as KCAL in Los Angeles and WBZ-TV in Boston, a first round of layoffs in April.4

Then came the worsening economy, which accelerated into a full-blown crisis in the last quarter of 2008. The industry’s biggest categories of advertisers are automakers and car dealerships, both acutely sensitive to the credit crisis, and as the year went on they reduced ad spending, including on local television.5

In addition, some stations began feeling the added burden of the debt taken on by their corporate owners from the purchase of properties that were arguably overvalued in the stronger economy.

Looking ahead, forecasts for 2009 project things to get even gloomier. Just how bad varies on the estimate. Some predicted that it would be the weakest non-election year since 2003, following the last recession.

Others think it could be much worse.

According to 2008 projections by Veronis Suhler Stevenson published in August, advertising revenue is expected to decline 8.3% in 2009. In November, the Television Bureau of Advertising estimated even smaller revenues for 2009, which it estimated would be 7% to 11% lower than its newly reduced expectations for 2008.

But now those may seem optimistic. In the first quarter, industry executives said local TV stations were seeing revenues down as much as 40%. And in an article foreshadowing many of the problems local television stations would face in planning their budgets for 2009, Deborah Potter, executive director of NewsLab, a journalism resource center, and a consultant to this project, suggests that profits margins have dwindled to new lows. “For publicly traded businesses accustomed to a 40 percent profit margin, 20 percent profit seems paltry — especially to Wall Street,” Potter wrote.6

Local and National Spot Advertising

The advertising slowdown was expected to cut across both categories that make up the bulk of a television station’s ad revenue: local and national spot advertising.

National spot advertising, which typically accounts for about 45% of station ad revenue, comes from companies that wish to advertise in wide portions of the country but for various reasons do not want to advertise on the national television networks broadcast everywhere. (Manufacturers of snow tires, for instance, do not want to reach viewers in Miami and San Diego because viewers there will never need their products, but do in places as far apart as Boise and Boston. By using national spot advertising, these advertisers can buy ads in multiple markets to reach only desired viewers and areas.)

Local spots, which generally make up about the 55% balance of ad revenue, are bought solely by advertisers in a station’s own market. For example, when a local Toyota dealer buys ad time in its local market, it is local spot advertising; when the Toyota company advertises its latest model in a number of local markets, it is a national spot advertisement.

TV Station Advertising Revenues
2003-2008 (in billions)
Year National Spot Local Spot Total
2009 (est.)
$10.4
$13.7
$24.1
2008 (est.)
11.7
14.6
26.3
2007
10.7
14.2
25.8
2006
11.6
15.0
26.7
2005
10.5
14.1
24.6
2004
11.4
14.5
25.9
2003
10.0
13.5
23.5

Source: Veronis Suhler Stevenson, 2008-2012 Communications Industry Forecast

Before the economic crisis, national spot was faring better than local. In August, Veronis Suhler Stevenson projected that revenue from local spot advertising would decrease by $400 million in 2008, or some 3%, compared with 2006, the previous election year.7 National spot revenue was projected to remain basically flat. Almost certainly those numbers are now expected to be lower.

And 2009 looks worse. In November, the Television Bureau of Advertising projected that local spot revenue would fall 4% to 8% in 2009. National spot advertising was projected to fall even further, between 11.5% and 15.5% compared with 2008.

Local Cable Advertising

In recent years, cable television has become an emerging competitor to local television spot advertising. Between 2001 and 2007, local advertising on cable grew 66% to $5.9 billion, an annual compound growth rate of 10%. By comparison, the compound annual growth rate for local spot ad revenue from 2002 to 2007 was 1.7%.8

One reason cable is gaining is cost. Local cable channels generally charge less than broadcast stations for advertising yet reach a similar geographic audience.

Growth of Local Spot vs. Local Cable Advertising
2002-2008 (Revenue in billions)
Year Broadcast Local Spot Cable Local Spot
Revenue
Growth
Revenue
Growth
2009 (est)
$13.7
-6.1%
$6.9
6.9%
2008 (est)
14.6
2.3
6.5
9.8
2007
14.2
-4.8
5.9
11.4
2006
15.0
6.6
5.2
8.1
2005
14.0
-3.0
4.9
13.3
2004
14.5
7.3
4.3
15.2
2003
13.5
3.1
3.8
2.3
2002
13.1
3.7

Source: Veronis Suhler Stevenson, 2008-2012 Communications Industry Forecast

Local cable channels still take in only about half what broadcast stations get in local spot revenue. But cable local ad revenue also seems less prone to fluctuation between odd and even years.

Analysts expect cable’s share of local advertising to continue to grow. For 2005 to 2010, Veronis Suhler Stevenson projected that cable local ad revenue would grow at a compound annual growth rate 8.8%, just under what it has done in the previous six years. Local broadcast ad revenue, by contrast, was projected to have an annual compound rate of growth of 0.2% until 2012.

Thus while local television is expected to remain dominant in local advertising, cable is yet another challenge to the older industry.

Political Advertising Levels Off

One sign of this more complicated landscape was political advertising in 2008. Even though the local television industry was disappointed with the amount of political advertising in 2008, it still got about $8 out of every $10 spent by campaigns.9

Campaigns normally buy advertising on local television because they can target their message to regions or audiences that a campaign’s polling shows are winnable or necessary to win the election.

The spending totaled an estimated $2 billion in 2008, representing 75% to 80% of total political ad spending for all media.10 Of that, about $1.2 billion, or 60%, came from candidates. The rest of the revenue came from political parties, ad-hoc political organizations and political action committees.11

The total dollars brought in matched that of 2006, as did the share of total local television revenues that came from political ads.

Political Advertising Revenues
2000-2008
Year Local TV Political Ad Revenue Total Local Ad Revenue Political Ad Revenue as a Percentage of Total Revenue
2008 (est.) $2 billion $26.3 billion* 7.6%*
2007 $700 million $25.8 billion 2.7%
2006 $2 billion $26.7 billion 7.5%
2005 $1.6 billion $24.6 billion 6.5%
2004 $698 million $25.9 billion 2.7%
2003 $605 million $23.5 billion 2.6%

Source: Broadcasting & Cable, 2006 & 2008; TNS Media Intelligence, 2007; Television Bureau of Advertising, 2000 & 2002; Morgan Stanley Estimate, 2004; Veronis Suhler Stevenson, 2008-2012 Industry Forecast for total figures.

*This $26.3 billion figure was forecast in August, prior to the economic decline. More recent estimates from BIA Financial Network estimate that total television revenues might be as low as $20.1 billion. Using this figure as a basis, political advertising would represent 10% of all 2008 revenues.

For all that, the figures fell short of expectations for a hotly contested presidential election.

And local television stations captured a smaller share of the political spending than in previous cycles. The two sectors that increased their share in 2008 were network and cable television.

With the weakening in the larger local television ad market 2008, political ads made up a slightly larger share of total revenues than in 2006. Political spending on local television increased more than threefold since 2000.

A number of factors contributed to the fewer dollars going to local television stations in 2008. A protracted Democratic primary season, though it generated its own ad spending, reduced the general election period to five months, from eight in 2004.

General election campaign advertising is more widespread and sustained than primary advertising. During primaries, stations only tend to get political advertising for a week for two before the actual voting. The shorter general election phase — though doubtless the campaign did not feel shortened to voters — meant that John McCain and Barack Obama only began to face off against each other nationally in June.

Evan Tracey, the chief operating officer of the media research firm Campaign Media Analysis Group, a part of the ad measurement company TNS Media Intelligence, told Broadcasting & Cable in December that, “Candidates had more money than there was broadcast time to buy.”

With local television saturated, political ad buys in 2008 grew in other local media instead. Hard figures for local cable, radio, newspaper and online are hard to come by, but the Campaign Media Analysis Group estimates that 2008 political spending on these media ranged between $200 million and $400 million. Analysts at the Television Bureau of Advertising and the Campaign Media Analysis Group said local radio and local cable television were the big winners among that group. Their share of campaign advertising in 2008 grew from 1% four years earlier to 5% last year.12

For now, local television remains the most popular medium for political spending. But it is unclear whether increased spending on other local media in 2008 might portend further changes for future political spending.

In any case, according to the Television Bureau of Advertising’s vice president for marketing, Jack Poor, local television’s importance in political advertisements will continue “as long as we have the electoral college.” He explained that buying ads on local television allows campaigns to target most of their spending on the most competitive states. “[Campaigns] have gotten so good at polling that they spend 85 to 90 percent of their money in 10 to 12 states where races are 52 to 48 [percent] or closer,” he said.13

Station Revenues

What does all this mean at the level of the individual local television station? For this, the data are a year behind, from 2007, so it does not reflect the current economic downturn or the shifting of campaign spending. But numbers for revenue by station, as opposed to overall spending across the industry, does reveal that while still a highly profitable business, local television has some underlying concerns.

Average station revenues are falling, when adjusted for inflation, and the impact is being felt most severely in smaller markets.

Earnings at news-producing stations in 2007 fell by an average of 10% from 2006 to $23 million, down from $26 million, according to PEJ’s analysis of BIA Financial data of 795 local television stations. At all stations, the decline averaged 1.3%.14

Some decline was to be expected. Revenues in odd-numbered, non-election years are historically lower than even years. But the 10% decline in 2007 is matched only by that seen in 2001, when the U.S. was slipping into a recession, and represents a sign that the economy was affecting local television well before it became a full blown crisis in the fall of 2008.

Even when compared with the previous non-election year of 2005, the average revenues in 2007 were down, by about 4%.

In fact, when examining revenues adjusted for inflation, average station earnings peaked in 2000 and have trended downward ever since. While stations are still profitable, a gradual lessening of revenues gives us some clear indication of the structural trend in local television news. It is an industry that is hardly immune to the pressures of the information revolution, even if it has not yet been hit as hard as some others.

When 1995 and 2007 are compared using constant dollars, revenue declined 21%. The erosion of a fifth of station revenues over a 12-year period raises questions about the long-term health of local television stations.

Average Station Revenue
1995-2007
Design Your Own Chart

Source: BIAfn MediaAccess Pro

Average station revenue is of limited use for making assessments of the economic picture at individual stations but is valuable in tracking industry and marketwide economic patterns.

For instance, another explanation for the long-term decline in average station revenue is that more stations have gotten into the business of producing news since the mid-1990s.

Mark Fratrik, the vice president of the BIA Financial Network, believes that the addition of newscasts at Fox affiliates in the 1990s and at CW and MyNetworkTV affiliates in recent years has been driving average revenues down since many of these stations have smaller audiences and bring in less money than affiliates of the three biggest networks.

For example, PEJ determined that 795 English-language, commercial local television stations produced news in 2007, compared with 714 stations in 2006.

And these smaller stations may be particularly vulnerable to the economic downturn. The 2007 data reveal that small-market stations have had the steepest revenue declines.

Stations in the smallest markets have historically had deeper revenue declines in down years. From 2006 to 2007, revenues at stations in the smallest markets (the 151st- largest and those even smaller) absorbed, on average, a 21% decline, compared with an average of a 6% decline at stations in the top 25 markets.

The average small-market station generated just $4 million in revenue in 2007, less than a fifth of the industry average.

Meanwhile, stations in the top 25 markets averaged revenues of $77 million in 2007, more than three times that of the industry average. Because they reach more viewers, they are able to continue to charge a higher rate to advertisers.

The next bracket, 26 to 50, made $24 million on average, a million dollars above the average for all stations.15

Average Station Revenue by Market Size Grouping, 2007
In millions
Market Grouping Average Revenue
1-25
$77
26-50
24
51-100
13
101-150
7
151+
4

Source: BIAfn MediaAccess Pro

Average Station Revenue, Markets 1-50
1996-2007
Design Your Own Chart

Source: BIAfn MediaAccess Pro

Average Station Revenue, Markets 51+
1996-2007
Design Your Own Chart

Source: BIAfn MediaAccess Pro

Newsroom Economics

How important is news in the economics of local television?

In general, the answer is that it continues to be very important.

For most stations, certainly those affiliated with one of the major networks, newscasts generate the lion’s share of a station’s revenue. On average, each station made about 45% of its revenue from news broadcasts, according to a 2007 survey of news directors by the Radio-Television News Directors Association.16

This is higher than the 42% year before, but within the same range as responses in recent years.17

News as a Share of All Station Revenues, 2007
Year
Percentage
2007
45
2006
42
2005
44.9
2004
42.8
2003
46.1
2002
39.7

Source: RTNDA/Hofstra University Survey
Based on survey responses of news directors

More than half (55%) of all news directors surveyed said their stations were making a profit. Although this figure decreased slightly from the previous year, it does not indicate a clear downward trend, as differences in levels of profitability measured have been small year-over-year since 2003.

Slightly fewer news directors reported in the 2007 survey that their stations are making a profit, and more reported losses than they did the previous year.

Local TV News Profitability
1996-2007
Design Your Own Chart

Source: RTNDA/Hofstra University Survey
Based on survey responses of news directors

Stations affiliated with the four big networks — ABC, CBS, Fox and NBC — were more likely to report making a profit than non-affiliated ones. Fully 59% of news directors at affiliated stations reported profitability, compared with 37% of the independents.

CBS stations had the best year, just as the network did in entertainment programming. Just 7% of CBS station news directors said they showed a loss in 2007, and 62.2% said their stations turned a profit. Fox stations also tended to thrive with news. Six in 10 Fox station news directors said they made a profit in 2007, while 15% said they showed a loss. But the previous year, no Fox station news directors reported a loss, and 70% said they were making a profit. This represents a 10 percentage point drop from 2006 to 2007, and while it may reflect nothing more than a blip, it is worth watching.

NBC stations were similar to Fox affiliates. In all, 59.2% of NBC-affiliated stations reported profits.  ABC stations had the toughest year: 53.8% reported profits, a four percentage point decrease from the previous year.

Footnotes

1.Our assessment here is based on a revised projection by the Television Bureau of Advertising, the industry trade association, which indicates a more severe downturn for the industry in 2009.

2. BIA Advisory Service,  “Television Industry Projected to Post -7% Growth in 2008; Station Transactions Lowest Level Since 2004,” BIA Press Release, December 18, 2008

3. Johnny Diaz, “Strike took viewers from late local news,” Boston Globe, February 29, 2008.
Rich Kirchen, “Writers strike impacts Milwaukee TV news,” Business Journal of Milwaukee, April 4, 2008. David Hatfield, “Writers strike hurts Nielsen ratings for local TV news,” Inside Tucson Business, January 16, 2008.

4. Deborah Potter, “The Perfect Storm,” RTNDA Communicator Magazine, May-June 2008. Online at: http://www.newslab.org/articles/broadcasteconomy.htm.

5. Brian Steinberg, “Local TV Stations Anticipate Severe Downturn in ’09,” Advertising Age, November 11, 2008

6. Deborah Potter, “The Perfect Storm,” RTNDA Communicator Magazine, May-June 2008. Online at: http://www.newslab.org/articles/broadcasteconomy.htm

7. Deborah Potter, “The Perfect Storm,” RTNDA Communicator Magazine, May-June 2008. Online at: http://www.newslab.org/articles/broadcasteconomy.htm

8. Veronis Suhler Stevenson, “Communications Industry Forecast 2007-2011”

9. Clare Atkinson, “2008 Political Ads Worth $2.5 Billion to $2.7 Billion,” Broadcasting & Cable, December 2, 2008

10. Clare Atkinson, “2008 Political Ads Worth $2.5 Billion to $2.7 Billion,” Broadcasting & Cable, December 2, 2008

11. Jack Poor, vice president of the Television Bureau of Advertising, interview with PEJ, December 1, 2008

12. Jack Poor, vice president of Television Bureau of Advertising, interview with PEJ, December 1, 2008.

13. Jack Poor, vice president of Television Bureau of Advertising, interview with PEJ, December 1, 2008.

14. The Project uses BIA Financial Network’s database to calculate station revenue; the last full year for which data are available is 2007. Since there are hundreds of local television stations in the U.S., the report (like previous ones) short-lists those that have news directors (to see if they produce local news) and are commercial and viable. Spanish-language stations are not included. The exact tally of stations cannot be the same every year since stations constantly change ownership or shut down or both, and news divisions are not permanent features of local stations and may be added or removed.

15. According to Nielsen Media Research, there are 210 designated market areas in the United States. Each of these markets “identifies an exclusive geographic area of counties in which the home-market television stations hold a dominance of total hours viewed.” See Nielsen Media Research Web site, http://www.nielsenmedia.com.

16. The RTNDA Survey is annual survey of news directors. The latest survey was released in October 2008. It was conducted by Robert Papper of Hofstra University (formerly at Ball State University) in the last quarter of 2007. In all, 1,647 news local television station news directors took part. An additional 300 interviews were conducted in July and August 2008. A copy may be found in the October 2008 issue of the RTNDA Communicator.

17. Robert Papper, “News, Staffing and Profitability Survey,” RTNDA Communicator October 2008, p. 24