19May2020-cover
19May2020-cover
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Can a cyclical switch catalyze a structural shift?

With consumer behaviors rapidly evolving in a COVID-19 world, TV advertising is under severe pressure from falling audiences, lack of sports and an increasing number of ad-free, direct-to-consumer options for video services. As we saw in the wake of the 2008/2009 recession, we may again be on the edge of witnessing the acceleration of structural shifts, underlying the inherent cyclicality of the advertising industry.

– Amit Nath

 

It will come as no surprise to readers that advertising is a cyclical industry linked to the macro economy. Generally speaking, when the economy is growing, advertising revenues are growing and when the economy is contracting, advertising revenues are contracting. The drivers of this phenomenon are somewhat intuitive, with companies predominantly advertising their products and services to stimulate demand or build awareness with potential customers. When the economy is strong, unemployment is low and the consumer is looking to spend, companies try to lure some of these dollars with advertising. This phenomenon however is a double edged sword which quickly goes into reverse when the economy is weak, unemployment rises and the consumer is saving instead of spending (i.e. companies pull back on advertising). While advertising is cyclical at a macro level, there is a major structural change that has been occurring within adverting itself for over two decades, namely the shift from offline advertising (TV, print, radio, outdoor, etc) to digital advertising (Google, Facebook, Amazon, etc). 

The shift to digital has laid waste to physical advertising mediums (print, direct mail, outdoor, etc) with their market share falling from ~70% in 2010 to less than ~25% now (2020), however TV advertising has been largely insulated from the migration and in fact has increased market share alongside the massive growth digital advertising.

Annual Growth in Advertising Revenues by Channel

Source: Magna, TVB, UBS

Somewhat counter intuitively against this robust revenue picture for TV, viewership has actually been in sharp decline since 2010. In fact overall TV viewership is down >20% (based on the broadest industry standard “P2+” which consists of “all people watching TV at any time”). In fact when one breaks down the demographics of viewership, the situation is even more frightening for TV, with 18-24 year old viewers down >60% and the highly lucrative 25-34 year band down ~50% as well. Even kids under 17 are fleeing the TV medium for alternate channels and have dropped by >50% as well.  However, TV remains popular with the older generation, with viewers 55 years and older representing >50% of all viewers, an increase from ~30% in 2008. 

While viewership may be down dramatically, old-school advertisers continue to believe it is an excellent medium to create brand awareness and also generate uplift for other advertising mediums (e.g. digital search volumes increase with more TV commercials). This dynamic may partly explain why TV has managed to increase its dollar share of the market despite ratings drastically falling. That said, one would think that this situation cannot go on forever, and eventually advertising dollars will shift with eye balls (i.e. viewership).

TV Viewership Has Fallen Sharply Particularly With Younger Audiences

Source: Nielsen

As we mentioned earlier, advertising at the macro level is cyclical, hence it is informative to look back at the last major recession we experienced and lift out any useful insights. In the aftermath of the 2008/2009 global financial crisis, total advertising revenue fell >10% and didn’t recover to pre-recession levels (2007) for nearly four years (late 2011), however both TV and digital advertising were beneficiaries, with ad buyers cutting back on traditional mediums (print, outdoor, radio, etc) and increased allocation share to TV and Digital. In fact the recession accelerated what was already an emergent trend, with traditional mediums losing 14ppts of market share from 2007 through 2011. During this period the effectiveness of digital/TV was validated, hence it is no surprise that traditional advertising never recovered and has failed to grow revenues ever since.

TV and Digital Both Gained Share in the Aftermath of the GFC

Source: Magna

As we enter a fresh global recession induced by COVID-19, there are several unique variables to consider in the context of the structural shift to digital and how it may unfold this time. Perhaps most notably, with consumers confined to homes and social distancing with their families, overall TV viewership has seen a significant reversal of trend, however the benefit has largely accrued to cable news networks with people tuning in to follow what was happening with the pandemic. Broadcast (aka free-to-air), general entertainment and kids shows have been flat on TV, while the biggest draw for advertisers to the TV medium, live sports viewers, has collapsed as sports leagues across the world are suspended in the wake of the virus.

Viewership is Still Declining for Most TV Categories Outside News

Source: Nielsen, (a) denotes UBS estimate

Cord cutting pressures usually rise during a recession with cable TV perceived as a discretionary expense. In fact this impact may be amplified during this downturn, as avid cable sports viewers may be more willing to cut the cord given the lack of content this time around. Perhaps an even more significant threat for TV advertising is the explosion of Direct-To-Consumer (DTC) Subscription Video On Demand (SVOD) services, many of which are not ad supported (e.g. Netflix, Disney+, HBO Max, Hulu, etc). These platforms drive incremental competition for consumer attention, while simultaneously leaving fewer options for ad dollars as the audience shifts.

In fact, the gap between People Using Television (PUT) for homes with SVOD services, versus homes without them, has increased during the lock-down, suggesting consumers are gaining more value from their SVOD entertainment content versus the regular cable bundle (heightening pressure to again cut the cord on ad supported cable TV).  Given the duration of the lock-down so far, this change in consumption patterns may not reverse, particularly as more content becomes available on DTC platforms.

People Using Television (PUT) in Homes with SVOD Versus Those Without Has Widened

Source: Total Day

With consumer behaviors rapidly evolving in a COVID-19 world, TV advertising is under severe pressure from falling audiences, lack of sports and increasing DTC/SVOD options for consumers with this recession potentially servicing as a catalyst for a shift.  Much like what happened to traditional advertising after the 2008/2009 recession, COVID-19 might force an acceleration of adverting dollars away from traditional mediums (this time TV) and into the long waiting arms of the digital advertising platforms. Viewers voted with their eyeballs long ago and if advertising dollars finally follow, we may be at the beginning of another structural shift induced by the inherent cyclicality of the advertising industry. 

 

 Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.