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The following is a summary of Scotia Capital's "The Three R's: Recession, Renewal, and Recovery" Report.
Advertising Revenue
Key Influencers
Regulations
Advertising Market
TV Outlook
Specialty TV
Advertising Environment
Advertising Revenue
Scotia Capital predicts that revenues in the Canadian advertising market will drop 6.0% this year, but will grow by 2.9% in 2010 and 4.4% in 2011.
Key Influencers
There are five key themes influencing the media sector:
1. Generation Y Emerging
It is expected that the demographic changes that Canada is undergoing are likely to have the most significant impact on the media industry. Given the differences in the media habits and consumption of a younger demographic, they are having a profound impact on the advertising strategies undertaken by companies.
As baby boomers leave their peak spending years, this once-lucrative demographic for advertisers is expected to significantly decrease its share of the Canadian population.
The new and unique demographic: Generation Y (currently aged 13 to 30) has had a significant impact on the media landscape as advertisers have begun to shift their attention to address this emerging group, which already represents roughly 27% of the Canadian population.
2. Technology Drives Power Shift to the Consumer
Scotia Capital believes that technological advances have led to the rise of alternative methods to distribute content, which has resulted in a shift in power to the consumer with respect to when, where, and how content is delivered. The adoption of new technologies represents the single biggest trend affecting the media industry in Canada.
They anticipate that the next five years will see a growing number of Canadian homes adopt PVRs, as cable and satellite providers move their subscriber base from analog to digital TV.
3. Media Options Abound
There is a clear trend amongst broadcasters to develop more focused content that tries to connect with select audiences in a more direct manner, thus driving higher advertiser interest. As audiences become more fragmented with the increase of alternative media, advertisers want to most effectively capture maximum value out of their audiences.
The trend of audience fragmentation is here to stay as audiences today are offered a plethora of media options to choose from. This is shown by the fact that the number of Canadian television stations has grown to over 300. Additionally, the number of stations in Canada has increased at a 10%+ CAGR since the start of the decade, based on the loosening of licensing by the CRTC through the expansion of specialty TV licenses.
The specialty TV market has entered a more mature phase, given the significant licensing and launch activity that has occurred in the past decade. Through the end of 2008 and into 2009, the market has seen the beginning of the next multi-year transition in this market, as broadcasters seek to drive improved operating efficiency out of their portfolios through rebranding, divesting, or even shutting down channels that are not meeting expectations.
Previously, specialty TV broadcasters were active in seeking out new licenses from the CRTC, and eliminating services would have been unthinkable. It is anticipated that major media organizations are likely to leverage existing brands in an effort to differentiate.
4. Heightened ROI Focus
As the media industry has become increasingly fragmented, advertisers have put increased emphasis on the level of return on investment (ROI) that is delivered from their advertising campaigns.
The launch of new audience measurement technology in the remaining major metropolitan markets will result in some early-stage implementation issues similar to Montreal's, but will provide the industry with meaningful long-term benefits.
The trend within the directory industry to move towards a pay-for-performance advertising model reflects the desire by advertisers to more closely align advertising costs to sales generated. Under the pay-for-performance (value-based) pricing model, a local merchant does not pay for services on a fixed monthly subscription fee calculated using traditional pricing metrics, instead, the customer's bill is based upon the value that a business derives from the advertisement.
5. Shareholder Value Initiatives Return
After the credit crisis, investing in shareholder value initiatives will again be a focal point for investors and management as growth in many of the media industry sectors matures. We believe that media companies will once again focus on returning value to shareholders through a variety of initiatives, including: (a) dividends; (b) share repurchase programs; and (c) selected acquisition and internal growth initiatives. The strength of the established businesses at Canadian media companies is reflected by the strong ROIC and FCF generation that firms are forecast to deliver.
The strong dividend growth in recent years reflects the industry's increased focus on balancing growth and returns to shareholders. The firms that have delivered the highest levels of dividend growth in recent years reflect the maturation of companies that were previously aggressively growing their operations
Regulations
During the next year, a number of regulatory hearings and decisions are expected to be released that will have an impact on the Canadian media landscape. The most significant regulatory decisions beyond ongoing license renewals and applications include: television and group television license hearings and license hearings for the CBC.
TV Licence Hearings
The CRTC will convene a hearing on November 16, 2009, relating to the process for group licensing of television broadcasters. The hearing will focus on addressing the following issues:
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the conditions for group-based licensing that would provide the necessary criteria to consider applications for the group-based (conventional and specialty TV) seven-year license renewals;
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revenue support for conventional broadcasters; and
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possible digital transition models.
Group Licence Hearings
During the spring of 2010, the CRTC is expected to hold a hearing relating to the licensing of private television broadcasters. The licensing process will seek to deal with both the conventional and specialty TV licenses held by the major ownership groups (e.g., Astral, Canwest, CTVglobemedia, Corus, Rogers). In 2009, the CRTC approved a one-year renewal for various private conventional TV services to ensure that the near-term licensing requirement was met until it could review issues relating to conventional television.
CBC Licence Renewal Hearings
The CBC will undergo a series of regulatory licensing hearings relating to both its English and French language television services in the early part of 2010. We would expect a significant amount of debate to arise regarding the renewals given the considerable public financing of these services and the increased focus by the CBC on competing for commercial advertising dollars.
Advertising Market
Overall in 2008, the Canadian advertising market recorded modest growth despite a significant slowdown in spending during the last quarter of the year as the credit crisis froze spending.
Among leading advertisers, the top 10 industry categories by dollars spent in 2008 saw a slight increase in share of the total market to 67%, up from 66% in 2007.
The top three spending categories continued to be retail, automotive, and food, with two of the three groups increasing their share of the total market. The industries with the largest change in dollars spent among the top 10 were: food up 6%; restaurants up 5%; and financial services and insurance up 3%.
In Canada, the retail category has held up better than its U.S. counterpart, as reflected in retail sales data. Additionally, consumer confidence in Canada has been sustained at significantly higher rates than the U.S. market in the current recession, supporting a more positive outlook for this segment.
TV Outlook
Scotia expects that through 2010, conventional TV will continue to struggle with challenging underlying economics related to programming costs and advertising rate pressure, requiring fundamental changes to its structure.
Specialty TV remains poised for future growth at the expense of conventional TV, supported by viewership trends. Specialty TV's share of English station viewing in Canada has increased 690 basis points (bp) since 2004. The growth of Canadian specialty TV viewership accelerated in 2009, with year-over-year (YOY) viewership increases of 230 bp, compared to 110 bp in 2008.
Viewership of U.S. specialty TV programs in Canada has remained flat over the past five years. Pay TV viewership in Canada has been stable during this period, with small fluctuations on a yearly basis. Canadian conventional TV has experienced the most drastic declines in viewership, falling 760 bp since 2004.
Furthermore, the rate of attrition increased in 2009 with declines of 310 bp, relative to a decrease of only 80 bp in 2008.
Scotia expects that the shift in viewer preference towards specialty TV will lead to further growth in both advertising and subscriber revenues. Advertisers' increased focus on ROI and target audiences support a shift in advertising dollars toward specialty TV over conventional.
Specialty TV advertising revenues continued to demonstrate strong growth in 2008 at 8.1% YOY. While conventional TV advertising growth recovered slightly in 2008, it remained relatively flat in comparison to specialty TV. In addition, specialty TV continued its steady rise in total TV ad spending in Canada, reaching 30.4% in 2008, up from 28.9% the year before. Scotia anticipates this trend will go on as advertisers continue to seek the benefits offered by specialty TV over conventional.
Specialty TV
Scotia predicts that specialty TV advertising revenues will fall 3% in F2009 and recover with growth of 3% in F2010, as viewers and advertisers increasingly transition to this segment of the market.
The lifting of genre protection in specialty TV is likely to be limited in the near term to opening up the news and sports genres to competition. The CRTC's decision to maintain the existing barriers to foreign broadcasters directly entering the Canadian pay and specialty TV markets is a meaningful positive for each of the incumbent TV broadcasters.
Scotia's view is that the decision to open up competition within the news and sports TV genres is unlikely to generate a wave of new entrants, given the number of existing services already in operation. Competition among the existing stations in these categories, however, is expected to intensify as previous license restrictions are now lifted, enabling channels to more directly compete on content. CBC's new amateur sports channel, for instance, will have greater flexibility in competing with TSN, Rogers' Sportsnet, and The Score.
Advertising Environment
Scotia forecasts that the conventional television market in Canada will leave 2009 with a decline of 7%, and a modest recovery in 2010 with revenue growth of 0.5%.
The presence of the 2010 Winter Olympics in Vancouver represents a major event for the television advertising market in Canada. There is currently a large amount of unsold advertising time relating to the Olympics, which has created a stand-off between broadcasters and media buyers in terms of pricing for spots.
Inadvertent consequences of the unsold airtime from the Olympic Games for the overall media market may be a slowdown in advertising spending in January and February 2010, with advertisers looking to withhold their usual spending to avoid competing directly with Olympic advertisement spots. Scotia expects that all the available spots for the Olympics will eventually be sold, but that CTV and its partners are likely to fall well short of their original expectations in terms of advertising revenues.
Since 2006, there has been a noticeable shift of advertiser spending in the key categories within the conventional TV sector. The food segment has experienced the greatest share increase of total TV spending since 2006 at 90 basis points. In contrast, the retail and automotive sectors have experienced declining spending as a result of North American automaker bankruptcies and also softened demand for discretionary products during the current recession.
The financial, pharmacy, and telecommunications segments have modestly increased their total ad share since 2006. Despite reductions of total spending in the conventional TV segment since 2006, the top 10 groups by share have remained unchanged over the period. Scotia expects pressure on automotive and retail will be sustained into 2009, given their high sensitivity to recessionary conditions.
Source: Scotia Capital, 09/2009
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