TV’s Ability To Keep Ad Dollars Flowing Is Under Scrutiny

Analysis: A tepid Discovery Communications outlook on advertising is fraying nerves

TV's Ability Keep Ad Dollars Flowing

What gas is to cars, advertising is to media companies. And there’s a sense emerging that there may be less fuel in this business sector’s tank in the weeks ahead.

Concerns were crystallized Tuesday during a conference call Discovery Communications held with investors and analysts to discuss the company’s third-quarter performance, which showed the Silver Spring, Md., company relying more heavily on its international assets. In the U.S., Discovery properties mustered only a 1% increase in revenue, and the company noted ratings were sluggish during the period.

More recent trends did not sound encouraging. When it comes to so-called “scatter” advertising, or commercials purchased on an as-needed basis, “there’s no question that last month things have slowed. There’s no question on the volume side,” said David Zaslav, chief executive of the company. “There’s no question there is more scatter in the marketplace. There is no question advertisers are holding their wallets closer.”

To be sure, there’s a chance Discovery could be an outlier, of sorts. It specializes in reality and non-fiction programming, so it could be a mistake to use the company as a proxy for the fates of CBS and AMC. At the same time, it’s networks account for about 12% of U.S. viewing, according to Zaslav, so it’s performance is not to be dismissed.

Besides, Comcast sounded a similar note last month in disclosing its third-quarter performance. NBCUniversal’s cable networks – which include top-tier outlets like USA and Bravo – experienced a 4.6% decline in ad revenue, primarily because of lower ratings, the company said (NBC’s flagship broadcast outlet, in the midst of a turnaround, fared better). And Steve Burke, NBCU’s chief executive, suggested in remarks delivered to investors that large cable networks faced increasing pressure to match the growth they had mustered over the past decade.

A choppy ad market would give media executives reason to pause, particularly as the holiday season looms closer. There is already great sensitivity to the issue: Cable and broadcast networks suffered a lackluster “upfront” market – the annual session when U.S. TV outlets try to sell the bulk of their ad inventory for the coming season – earlier this year, with marketers committing fewer dollars in advance. The fact that scatter seems weak indicates those same advertisers either have not loosened their purse strings or have decided instead to put their money into other media venues, like social, mobile or streaming video.

“Domestic advertising is the key question, for Discovery and all U.S. media,” said Bernstein Research analyst Todd Juenger in a Tuesday dispatch. Already, he said, he has noticed “continued ratings weakness in October across all of TV.”

The ratings declines come as digital media gains traction with consumers. Already, Procter & Gamble, Mondelez International and Kraft have all indicated they intend to increase the allocation of ad dollars given to digital media, noted Barclays analyst Kannan Venkateshwar in an October research note.

There are signals the market could sweeten, but not by a lot. The National Retail Federation has called for a modest uptick in the amount individual consumers intend to spend during the holiday season. An NRF survey finds the average person celebrating Christmas, Kwanzaa and/or Hanukkah will spend $804.42, up just under 5% over last year’s actual $767.27. At the same time, more people intend to do the bulk of their shopping online, a practice that could cut back on impulse spending.

With Time Warner, CBS, Scripps Networks and Viacom expected to report in coming days, observers will get a better sense of what monies are available to flow into which tanks. But as media analyst Michael Nathanson cracked in a note Tuesday after Discovery posted its results: “The first of many?”