The advertising market is expected to continue to be lukewarm at best in the second quarter, as declining ratings are expected to continue to drive down overall ad revenue.
Most of the top content companies are expected to release calendar second-quarter results in the next few weeks. In two separate reports, MoffettNathanson senior research analyst Michael Nathanson and Evercore ISI Group media analysts Vijay Jayant and David Joyce agreed that the ad market would continue to be tepid for broadcasters and cable networks alike. In the past, cable networks were able to offset ad-sales declines with strong affiliate-fee increases, but that gap is narrowing, the analysts said.
Overall, Nathanson predicted that national ad spend will be down between 2% and 3% in the second quarter, what he called the weakest growth in a non-recessionary quarter for the sector.
DOWN 8% IN KEY DEMO
Last year’s lower upfront base and tepid scatter markets are contributing factors, Nathanson said in a research note, but the steep decline in TV ratings is the main culprits. Aggregate C3 primetime ratings in the coveted 18-49 year-old demographic were down 8% in the second quarter, according to Nathanson, with broadcasters dipping 4% and cable networks declining 9%.
While the analysts may differ slightly on their predictions — Joyce and Jayant estimated that Viacom’s domestic revenue would fall 7.2%, while Nathanson foresaw an 8% decline — they agreed that compelling content is what is separating the winners from the losers. And for both broadcasters and cable channels, that means event programming and sports.
For some networks, tough comparisons to the prior year will hurt growth — for example, NBC had the Winter Olympics in second-quarter 2014, and ESPN had the FIFA men’s World Cup at the same time last year.
Others will benefit from event sports and entertainment programming to differing degrees. Joyce and Jayant predicted that Fox would get a boost from some FIFA Women’s World Cup matches in the second quarter, but not enough to offset greater overall ratings declines. AMC, which aired the much-awaited finale of Mad Men during the calendar second quarter, should see a 17.9% increase in ad sales, the two analysts believe.
Viacom, which has been plagued by ratings declines across the board, should expect domestic ad revenue to dip 7.2%.
While in the past, networks were able to fall back on rising affiliate fees and retransmission-consent revenue to offset ad-sales declines — 2014, when affiliate-fee revenue surpassed ad revenue in overall dollars for the first time, was a watershed year for the sector — that growth is beginning to level off.
Affiliate-fee growth is expected to continue, Nathanson added, but overall revenue from affiliate fees will decline as pay TV subscribers fall.
“We believe that the next wave of negative revisions for the sector could manifest itself in a slowdown in affiliate fees,” Nathanson said.
In a June note to clients, Nathanson said affiliate-fee revenue, which has risen at a double-digit clip for the past five years, will climb 9% in 2015 and by 2018 will increase an average of 7%.
Retransmission-consent fees, he wrote, which have grown an average of 67% between 2010 and 2015, will rise just 16% between 2015 and 2020.
Nathanson didn’t factor in the impact of over-the-top services on affiliate-fee revenue, but OTT is also expected to have a small impact on ratings declines.
Jayant and Joyce think Dish Network’s Sling TV OTT service could have as many as 250,000 customers, while CBS All Access (the broadcast network’s OTT offering) could have as many as 300,000 subscribers. Standalone online offering HBO Now could have about 400,000 customers, according to Joyce and Jayant, but again isn’t expected to make much of an impact on ratings.
The analysts said OTT offerings over the past two years have allowed cord-cutters and cord-shavers to be partly responsible for fully-distributed cable networks in losing between 3% and 5% of their distribution.
Traditional viewing has declined: the top 25 cable networks saw viewership dip about 10% season to date, on par with the 7% decline in 2014).
But there’s evidence that people aren’t watching less — they are watching more, at different times.
“Perhaps stabilization is the new up, until, of course, better measurement on multiple screens is available and accepted,” the analysts wrote.
And it’s not just different screens. More and more viewers are watching programming when it is most convenient for them and when longer viewing windows are considered ratings rise dramatically.
RISE IN C7 SALES METRIC
Broadcaster CBS has been a big proponent of moving to a live-plus-seven-day (C7) measurement window, counting viewership up to seven days after a show originally airs. Joyce and Jayant predicted that CBS, which already sells about 30% of its ad inventory in C7, will increase that to more than 50% of its inventory this year.
The numbers appear to back up the practice. According to the analysts, ratings can in some cases more than double in C7 compared to live plus same day ratings in the coveted Adult 18-49 year-old age demographic. For example, TNT’s Rizzoli & Isles drama series normally gets a 0.6 live-plus-same-day rating, but its C7 rating is 1.3 — a 117% increase.
Other shows, such as A&E’s Duck Dynasty (0.9, 1.7 for an 89% increase) and Discovery Channel’s Deadliest Catch (1, 1.6, 60%), see healthy increases as well.
This is not just a cable phenomenon: according to Jayant and Joyce, a June 25 episode of Fox’s Wayward Pines saw ratings in the 18-49 demo double to 2.4 in C7, compared to 1.2 for live plus same day. CBS’s Under the Dome saw a 69% increase between C7 (2.2) and live plus same day (1.3) on June 25.
