The past year’s surge in advertising spending is the beginning of a five-year trend that will fuel a “significant turnaround” in spending on programming by the television industry in coming years, according to a new study.
Media investment bank Veronis Suhler said in its annual forecast on the communications industry that the restructuring of U.S. industry over the past decade, which caused a cutback in spending on advertising, is over. In the near future companies will be spending more on advertising to promote their brands, it predicted.
Last year advertising on broadcast networks and TV stations rose 9.8%, the biggest increase in a decade, the report said. And while that has been well documented, most analysts had expected the growth to slow sharply once the economy slowed. Veronis Suhler’s report argues the increase in advertising spending was a structural change, however.
“There is strong evidence that advertising in 1994 has entered a new phase in which it will grow faster than gross domestic product for a number of years,” Veronis said. It predicts that advertising spending will grow 5.7% a year between 1994 and 1999, compared with a growth rate of only 3.1% in the five years leading up to 1994.
That will help finance an increase in spending on entertainment programming, which has been rising by only 0.5% annually in the past five years, the report said. In that time the networks cut back spending on entertainment programs relying more on magazine programs and daytime talkers that are cheaper.
But the glut of such programs have reduced the audiences for these programs and, faced with rising competition from cable networks, the networks “will begin to move away from those formats in the coming years,” Veronis predicted. Last year, the networks increased their spending on entertainment programs by 3.4%, the biggest increase since 1988. The study forecasts the networks will increase their spending by 4.1% this year and grow at an annual rate of 5.3% over the next five years.
The network spending growth paled in comparison with entertainment spending growth in television as a whole, which was 7% last year. TV stations increased their spending 8.5% and cable networks boosted their spending 9.3%.
Networks still account for the biggest single chunk of program spending although last year for the first time more money was spent on individual station programming than on network programming, Veronis found. It said TV stations spent $2.1 billion while another $1.7 billion was spent through barter syndication deals, making a total of $3.8 billion compared to $3.7 billion for networks.
This is unlikely to signal a permanent shift, however. Gene Jankowski, a managing director at Veronis Suhler, said “it will ebb and flow over the next five years” depending on the strength of shows going into syndication.
The report said the growth prospects for the syndication market will be affected by several “countervailing trends.” Veronis noted that there will be fewer program hours available for syndication as a result of the elimination of the Prime Time Access Rule, although it adds that stations may be willing “to spend more for good programs to fill those hours not programmed by a network.”
As a result it predicted that “spending growth on programming will hold up reasonably well” for the next two or three years, but begin to decline after that as “the reduction in the number of program hours available will begin to impact growth. “It forecast that the average growth rate for cash syndication will rise 5.9% for the next five years, more than twice the 2.8% growth of the last five years, while barter syndication will follow the same trend.
Spending by cable networks on programs will slow slightly from last year’s level, Veronis predicted. It estimated the cable networks spent $2.6 billion on entertainment programs last year, up 9.3% on the previous year. The growth came both from pay cable and basic cable networks.
And it predicted by increasing competition from direct broadcast satellite networks would ensure that cable networks kept program spending growing. It predicted annual growth of 9.4% a year over the next five years.
Veronis also predicted the communications industry will grow faster than the rest of the economy in the next five years and will move up the ranks of U.S. industries from No. 9 to No. 4 on the strength of “end-user” or customer spending and ad growth.