U.S. Communications spend will continue in 2008

Total communications spending is projected to increase 5.4% to $923.91 billion in 2008, as strong gains in the institutional and alternative media sectors offset the downward pressure of declining traditional ad spend, according to research from Veronis Suhler Stevenson.

While the deteriorating housing market, higher gas prices and a weakening job environment weigh heavily on the overall economy and the advertising sector, the institutional and consumer media sectors remain durable as businesses continue to spend on mission-critical services and consumers use entertainment media to relieve economic stress, according to the VSS Communications Industry Forecast 2008-2012.

The industry’s primary growth driver in 2008 is the institutional sector, particularly professional & business information services and education & training media. Institutional media spending is expected to increase 8.5% to $245.39 billion in 2008, according to the VSS Forecast. Total spending on communications will continue to outpace U.S. economic growth during the 2007-2012 period, increasing at a 6.2% compound annual growth rate (CAGR) compared with a 5.6% CAGR for nominal GDP. Communications will be the second-fastest growing of the 15 U.S. economic sectors during the forecast period and will exceed $1 trillion in 2010, with spending reaching $1.183 trillion in 2012, according to the VSS Forecast.

“The U.S. communications industry has proven to be resilient during difficult economic periods over the last several decades because of the diverse portfolio of spending derived from the institutional, consumer, advertising and marketing sectors,” said Jim Rutherfurd, EVP/Managing Director at VSS. “While current economic conditions are contributing to the underperformance of traditional advertising and marketing segments, various institutional, consumer and alternative media segments are outperforming GDP due to several factors. Among them are businesses demanding dynamic workflow solutions for competitive global markets, consumers taking ‘staycations’ this summer and spending on entertainment media targeted at the youth market, and brand marketers shifting to alternative media to engage hard-to-reach demographics.”

Communications Share of Disposable Income Up; Traditional Advertising Down

VSS tracking data in the first half of 2008 indicates that, similar to previous recessionary periods, consumer spending on communications as a share of disposable income is expected to increase this year. For instance, spending on videogames is projected to climb at a double-digit rate, while the movie industry experiences its strongest summer on record; moreover, home video sales and rentals increased during the first half of 2008 after declining in two of the past three years. Total consumer spending on media is expected to increase 6.1% in 2008 to $218.37 billion, according to the VSS Forecast.

While some major advertisers, particularly in the automotive and financial categories, have been slashing budgets this year, many brand marketers have not cut spending as aggressively as in past economic downturns due to heavy pressure to retain market share. At the same time, marketers have become more sophisticated, often reducing spending on a case-by-case basis while shifting dollars to alternative media that more efficiently reach target audiences, provide stronger return-on-investment metrics and generate immediate responses. In addition, the quadrennial occurrence of the presidential election and summer Olympics is softening the negative economic impacts on the advertising industry in 2008.

Meanwhile, brands are expected to continue shifting budgets from traditional to alternative advertising and marketing vehicles in 2008 and 2009, driven by fragmentation, advanced technology and more sophisticated measurement tools. Spending on alternative media will climb 21.0% to $81.67 billion in 2008, and account for 17.7% of total advertising and marketing spending, up from 6.9% in 2002, according to the VSS Forecast. By comparison, traditional advertising and marketing will inch up only 0.4% in 2008 to $378.48 billion, including a 1.8% decline in traditional advertising, despite the influx of political and Olympics advertising, as newspapers, consumer magazines and broadcast radio all post declines for the year. For many alternative media this will be the first economic slowdown in which they will be seriously tested, such as online search, digital out-of-home media, word-of-mouth marketing, videogame advertising, and social network advertising, among others. As a result of these trends, VSS projects that broadcast TV will become the largest advertising medium by year-end 2008, the first time in U.S. history that newspapers have not held that position.

2009 Could Be Tougher for Many Media Segments

Although a number of communications segments are expected to hold up well in 2008 despite recessionary conditions, 2009 will prove to be even tougher for various advertising, institutional and consumer media segments as they grapple with both cyclical downtrends and secular challenges. Among the cyclical trends will be the lagging effect of corporate profit declines and state budget shortfalls, as well as the absence of political and Olympics ad spend, while the secular impacts will include certain consumer media reaching saturation levels.
For the third consecutive year, overall time spent with media by consumers is expected to fall in 2008, declining 0.1% to 3,493 hours per person, due to media multitasking and several media platforms reaching saturation, including some that will become obsolete during the forecast period, including dial-up access, VHS, and audio cassettes. Time spent with media that have a digital component, however, is expected to climb. For example, time spent with pure-play internet will surpass recorded music as the third most used medium after television and radio. Meanwhile, time spent by institutions on select media, such as professional information, business-to-business magazines, and outsourced corporate training, will continue to rise, climbing 4.2% in 2008 to 301 hours per employee, as technological advances allow businesses to access information 24/7. As a result of the decline in consumer media usage, overall time spent with media will grow only 0.2% in 2008 to 3,713 hours per person.

Institutional & Alternative Media Drive 2002-2007 Results

Driven by strong gains in institutional, alternative and consumer media, total communications spending rose at a CAGR of 6.1% from 2002 to 2007, according to the VSS Forecast. The institutional sector, including business, education and government spending on media, information and related services, was the fastest-growing in 2007 as well as during the 2002-2007 period, increasing 9.5% to $226.11 billion in 2007, and expanding at a CAGR of 9.3% from 2002 to 2007. Marketing services, including segments such as direct marketing, promotions and branded entertainment, was the largest communications sector at $231.75 billion, a 5.8% growth rate over 2006, and a CAGR of 5.9% from 2002 to 2007. Consumer spending on communications, such as internet access, consumer books and videogames, rose 5.7% in 2007 to $205.87 billion, and climbed at a 5.0% CAGR over the five-year period. Advertising was the slowest growing sector in 2007 and in the 2002-2007 period, inching up only 1.6% in 2007 to $212.56 billion, hampered by a 2.1% decline in traditional advertising (see the charts/analysis below for more details on the different sectors and segments).

Three media exceeded $100 billion in 2007, including cable & satellite television, professional & business information services and direct marketing. Eight media segments exhibited double-digit gains during the 2002-2007 period, led by the nascent word-of-mouth marketing segment at 49.8% growth, followed by outsourced custom publishing, pure-play internet & mobile services, branded entertainment, professional & business information services, public relations, out-of-home media and cable & satellite television.

Institutional Sector Will Be Fastest Growing in 2007-2012 Period

VSS projects total spending on communications will climb at a 6.2% CAGR from 2007 to 2012, reaching $1.183 trillion in 2012. Institutional media spending is expected to remain the fastest-growing communications sector over the next five years, as well as becoming the largest sector, producing a CAGR of 8.6% to $341.06 billion in 2012 (see the growth and forecast analysis below). Marketing services will fall to the second largest communications sector in 2012, reaching $307.30 billion, climbing at a CAGR of 5.8% from 2007 to 2012. VSS forecasts that consumer media spending will post a similar CAGR of 5.8% from 2007-2012, reaching $272.41 billion, while overall advertising spending will be the slowest growing sector with a 4.3% CAGR, climbing to $262.61 billion. As a result of the rapid growth in institutional media, combined with slow advertising growth, institutional media’s share of communications will rise to 28.8% in 2012, up from 22.3% in 2002, while advertising’s share will fall more than four percentage points to 22.2% in 2012 from 26.3% in 2002.

Traditional ad spending, in particular, will continue to struggle during the forecast period, remaining essentially flat from 2007 to 2012, despite three years of Olympics and political ad spend. Its share of overall advertising and marketing spending will drop 16 points in 10 years to 31.5% in 2012, compared with a 47.1% share in 2002. Alternative media will continue to spur growth in advertising and marketing during the forecast period, posting a 17.6% CAGR from 2007 to 2012. Alternative media will account for 26.7% of total advertising and marketing expenditures in 2012, up from 6.9% in 2002.

VSS projects that six segments will continue to exhibit double-digit gains over the next five years, including word-of-mouth marketing, pure-play internet & mobile services, branded entertainment, out-of-home media, outsourced custom publishing and professional & business information services. Only newspapers will exhibit a decline during the forecast period, falling at a 2.4% CAGR. Professional & business information services will exceed $200 billion by year-end 2012, becoming larger than one of the 15 major economic sectors tracked by the Bureau of Economic Analysis – Agriculture, Forestry & Fishing. Cable & satellite television, direct marketing and entertainment media will be three other communications segments that exceed $100 billion in 2012. Time spent with media by consumers and businesses, meanwhile, will rise 0.3% to 3,773 hours per person in 2012, driven by gains in consumer and institutional media usage of digital platforms.

See the charts, below

VSS COMMUNICATIONS INDUSTRY SECTORS

Source: VSS, PQ Media

VSS COMMUNICATIONS INDUSTRY SEGMENTS

Source: VSS, PQ Media