Entertainment and media execs have been bracing for a big ad pullback since the severity of the pandemic first became in March.
IPG Mediabrands’ MAGNA in late March said it anticipated full-year ad sales for all U.S. media suppliers to dip by almost 3% year-over-year when accounting for cyclical events like the election, a drop from its previously anticipated 7% year-over-year growth rate for this stat.
Morgan Stanley in a July 2020 report estimated that Google, Facebook, Twitter, and Snap’s ad revenue collectively dipped by 4% year-over-year in Q2 ‘20, which it anticipates to be the quarter where digital ad spend will be weakest in 2020.
This Q2 ‘20 ad revenue growth is a stark contrast to the 19% year-over-year growth in ad spend Google, Facebook, Twitter, and Snap experienced in the same period one year ago.
So it’s no wonder why Cowen & Co. in late March estimated that Facebook and Google could lose over $40 billion in global ad revenue in 2020 due to weakened ad spending caused by coronavirus, for example.
But the effects of weakened ad budgets will truly become clear during this next earnings season.
Just remember the Q1 earnings calls of major U.S. media companies, where a common goal emerged: Acknowledge Q1 gains while warning investors of grim expectations for Q2.
Local ad revenue at Fox TV stations grew by over 20% in Q1, thanks in part to Super Bowl and political ad revenues, but CFO Steve Tomsic warned that local advertising is expected to be down by almost 50% during Q2 against the prior year if pacing continues at current levels.
Over at Comcast, the company reported ad spend in Q1 was consistent with the prior year period, thanks to political ad revenue, but CFO Michael Cavanagh said the company expects advertising to be down “significantly” in the second quarter.
A similar theme emerged from the heavily ad-supported tech giants. YouTube and Google ad revenue both increased by double digits in Q1, but Alphabet CEO Sundar Pichai called Q1 a “tale of two quarters” and said that Q2 “will be a difficult one” for its ad business. Facebook’s Q1 ‘20 Facebook ad revenue was up 17% YoY to $17.4 billion, but CFO Dave Wehner said he “would suggest the potential for an even more severe industry contraction” when speaking of Q2.
You get the point. Q2 ad revenues will look bleak in comparison to Q1, which only captured a few weeks of the coronavirus era. Q2 is also likely to be the worst quarter of the year, in terms of ad spending pullback.
Look at results from the several Advertiser Perceptions surveys, conducted in late March and mid-April. In March, Advertiser Perceptions found that 69% of surveyed marketing and agency contacts agreed that decreased ad spending as a result of COVID-19 would have a “major impact” in Q2 ‘20, while these figures were much lower for Q3 (28%), and Q4 (11%) of this year. In April, 83% agreed the outbreak would have a “major impact” in Q2, higher than the percentage who agreed there would be a “major impact” for Q3 and Q4 2020.
Meanwhile, UBS forecasts national TV advertising revenue, excluding impacts of unusual events like M&A, would dip 21.4% year-over-year in Q2, which was significantly worse than its forecasted ad revenue dips for Q1 and the quarters in H2 2020.
Morgan Stanley in its July 2020 advertising outlook similarly predicted Q2 would be the worst quarter of 2020 in terms of TV ad revenue growth, and expects domestic cable and broadcast networks both experienced at least 20% year-over-year declines.
And S&P Global Ratings has also previously forecast overall U.S. ad spend to “decline steeply” in the second quarter and to a lesser degree in the third quarter before rebounding in Q4.
These models seem to assume that Q2 will be the quarter when lockdowns are strictest, and that subsequent quarters will see the virus and stay-at-home orders steadily abate, leading to generally increasing economic activity throughout H2 ‘20 (Magna forecasted a “V-shaped recovery for the U.S. ad market in March, for example). But pared back reopenings in states with spiking COVID-19 cases like California and Arizona may prove economic headwinds in Q3 and Q4 to be stronger than what has already been predicted for those quarters.
Still, it’s worth it for ad inventory sellers to keep in mind that not all sectors will alter ad spend equally anyways. Ad sellers predicted that travel & tourism, brick and mortar retail, and restaurants will be the categories to have the greatest negative impact against their original 2020 plan, in an April 2020 survey by the IAB.
This implies that ad sellers, like publishers, could lower prices to attract brand spend from categories that won’t slash ad budgets as heavily through the pandemic, such as pet supply brands and gaming brands, which sellers in the same April IAB survey anticipate to be some of least impacted sectors by coronavirus.