I hate to be the Grinch

It's time to prepare for a challenging New Year.

Having spent the bulk of a career on the equipment supply side of the broadcast industry, I have been through a number of business cycles. One lesson learned early on from industry legend and one of my mentors, Charlie Steinberg, was his theory that the broadcast industry was a leading indicator for the overall economy. For most companies, at the first sign of revenue slowdown, invariably, when it is time for cuts, advertising spending is the budget line item that draws the first blood. Reducing advertising spending is the least impactful to headcount and departmental spending plans.

As the national economy starts slipping slowly into an economic contraction, it is advertising that takes the hit and, as a result, so does the broadcast industry. The production and post segments feel it first. As there are fewer new commercials being created, the existing ones will get longer runs, and new ads will be shot with much tighter budgets. This is quickly followed by the impact to the broadcaster segment, with a few extra PSAs to fill avails, though with decreased revenue levels. Decreasing revenue in these key content creation and distribution segments leads to reductions in their own capital expenditures, thus negatively impacting broadcast equipment suppliers as equipment is neither replaced nor upgraded — all in all an unpleasant chain reaction. By the time jobless reports are reflecting upticks in unemployment, the economy is already in a full-fledged downturn, and our industry will have been been in recession for some time.

The indicators were already there early in 2008. In February, the Television Bureau for Advertising released its analysis of estimates supplied by TNS Media Intelligence/CMR, showing that broadcast advertising spending in 2007 was down 4.4 percent compared with 2006. As 2006 was a midterm election year, most attributed the drop in 2007 to the lack of political spending. Worrisome, however, should have been the fact that in the fourth quarter of 2007 spending by the top 10 advertisers, none of which represented political spending, was down 19 percent compared with the prior year.

The signs were there a year ago and continued into this year. Recent Television Bureau for Advertising figures for 2008 indicate that total broadcast ad revenue will be down slightly versus 2007. And, bear in mind that 2008 had a tsunami of ad spending for both the Olympics and the presidential race, two events that didn't contribute to revenue in 2007.

As we head into 2009, analysts' projections for broadcast ad spending vary from pessimistic to almost doomsday. The pessimistic side projects a range of broadcast ad revenue decreases from 2.7 percent to 6 percent, according to industry analysts at Wachovia and UBS, respectively. The doomsday projection comes from Goldman Sachs' Mark Wienkes, who estimates 2009 advertising revenue to drop by 17 percent at the local station level and by 10 percent at the broadcast networks.

Now let's take a look at some facts and figures. Political spending on broadcast advertising is projected to come in at $2.5 billion to $3 billion for 2008, up substantially from the $1.7 billion spent in the 2004 and $2.1 billion in the 2006 election years. NBC reported Olympics advertising in 2008 totaled more than $1 billion. Thus, even before factoring in the erosion of broadcast advertising by cable and the Internet, and, what at this writing is the second most severe downturn in U.S. economic history, 2009 starts out with a $4 billion Olympics and election deficit or 6 percent down against the Plunkett Research projection of $66.6 billion for 2008 in broadcast ad revenue. Perhaps then the Goldman Sachs projection isn't quite as radical as it first appears.

OK, you ask, what is all this economic folderol doing in what is ostensibly a technical journal? It is to help set the stage for what is going to be an extremely difficult year. The more dramatic the reduction in ad revenue, the greater the impact it may have on you. Engineering departments could be cut even further; capital equipment budgets might be slashed. This leads to challenging situations. Engineering directors could face increasing maintenance requirements for equipment that lacks the funding to be replaced and reduced resources with which to accomplish the task.

For all segments of our industry 2009 is shaping up to be a difficult year, so batten down the hatches. Oh, yes, Happy New Year.

Anthony R. Gargano is a consultant and former industry executive.

Send questions and comments to: anthony.gargano@penton.com