Media Companies Struggling With Ad 'Softness'

The culprits appear to be the national advertising market’s increased vulnerability to recession concerns and a recent preference by companies for ads on over-the-top (OTT) platforms, analysts said. Broadcasters have the local sales teams to capitalize on local advertisers eyeing OTT platforms, analysts said. “OTT has become a shiny new toy,” said Corey Elliot, Borrell Associates executive vice president-local market intelligence. “We're in an economic downturn, and national is the most volatile piece” of the advertising market, said Nextstar CEO Perry Sook on the company’s Q2 earnings call last week.

Ad spending as a whole remains weak but is particularly so for national advertisers, S&P Global said last month. Local ad spending “has remained relatively healthier” than national, though even that is softening for broadcast, S&P Global said. Broadcast executives on earnings calls this quarter appeared to concur. “On a relative performance basis, local is performing a little bit better than national,” said Gray Television Chief Financial Officer James Ryan. The company doesn’t expect that split to change in Q3, Ryan said. Nexstar said its core advertising was down 8.4 % from the prior year quarter, due partly to “double-digit declines” in national spot advertising. E.W. Scripps CEO Adam Symson said the market is in the grips of “an ad industry recession.”

Since most broadcasters are more exposed to local advertising than national, their balance sheets aren’t as hard hit as other industries, analysts told us. “Local ads are back as a whole” from their COVID-19 pandemic slump, said Mark Dugan, BIA Advisory Services director-data services and client insights. BIA forecast $161.7 billion dollars to be spent in U.S. local advertising in 2023, about $13 billion more than in 2019, Dugan said. Gray’s advertising revenue is so slanted toward local that its results don’t show a drop-off from national, Ryan said. “Other people, when national tweaks up or down, they may see it faster or see it proportionally more but because of our local, we just don't see it as much,” he said.

Many media companies with a more national footprint didn’t report a similar boost from local ads, according to earnings calls. Sirius XM is “cautiously optimistic” about a year-over-year improvement in ad revenue in the second quarter, but it seems likely more substantial gains in the ad market won’t come before 2024, CEO Jennifer Witz told analysts this month. Warner Bros. Disney interim CFO Kevin Lansberry told analysts last week that linear advertising “continues to see impacts from market softness,” particularly in entertainment. He said it expects direct-to-consumer advertising growth to help offset linear declines expected in the fourth quarter. Added CEO Bob Iger, the advertising marketplace for streaming is picking up and “is more healthy” than the linear TV ad marketplace. Programmers including Comcast and Warner Brothers Discovery also described the overall ad market as soft, in their most-recent earnings calls.

Advertisers preferring OTT options is also a likely factor in the local ad revenue stream broadcasters are seeing, analysts said. TV broadcasters are increasingly selling OTT options to their local advertisers on top of the usual TV ads, Dugan said. A BIA survey last year showed 49% of local advertisers were buying OTT ads through local broadcast TV companies, said Elliot. MVPDs and programmers have their own OTT channels, but they don’t have the local ad sales boots on the ground that broadcasters do, Elliot said. That enables broadcasters to scoop up more local ad dollars, he said.

Big Tech’s ad activities also appear more bullish. Alphabet said its Q2 YouTube ad revenue was up more than $300 million from the same quarter in 2022, to $7.7 billion, and its Google ad revenue, at $58.1 billion, was up by $1.9 billion. Meta reported Q2 ad revenue of $31.5 billion, up $3.3 billion. Meta Chief Financial Officer Susan Li said there’s strong advertiser demand, but the company also has had “sizable fluctuations in advertiser demand over the last year.” “It’s been a pretty volatile period,” she said.

Industry entities have differing views on how long the “softness” will last. Instead of a recession, the U.S. economy is headed toward slow growth in the back half of 2023 and into 2024, while ad spending, which has been depressed since early 2022, will remain that way through year’s end, S&P Global said. Meanwhile, FuboTV CEO David Gandler said July activity pointed to “an advertising rebound and sizable ad recovery” in the back half of 2023. “Advertising is a cyclical business,” said Sook.