Local TV Economics

The bulk of revenues that local stations generate come from advertising sales, so much so that this figure alone offers a good indicator of a station’s economic health. (Other components of station revenue include trade and barter, production and promotional revenues).6

The long-standing rule of thumb is that even-numbered years are better for the local TV business. This is known as the even-year feast, odd-year famine cycle. The rule is tied to the fact that inevitably, more spending occurs during the Olympics, political campaigns and (most lucrative of all) presidential election campaigns.7

Advertising revenue comes from two major sources for local TV stations: national and local spot advertising.

National spot advertising accounts for approximately 45% of local television revenues. Companies that want to advertise in many parts of the country, but not all, purchase such ads. Companies that want to reach, say, the New England and Gulf Coast regions need multiple-market advertising, but don’t need advertising on national networks. National spot advertising, then, helps advertisers reach the specific areas they want to reach, and is a cheaper option than the broadcast networks.

Local spot advertising is placed by companies that are in the same market as the station. As an example, local car-dealers or service professionals buy local spots targeted to their specific clientele (this could be as specific as one county). Local spots bring in about 55% of station revenues.

According to the latest figures, 2004 proved the even-year adage by bringing in a bounty of revenue for local stations.8 Advertising revenues (the sum of national and local spots) increased over all by 9% to $25.6 billion. Unprecedented political advertising, particularly in the congressional races, fueled the spike. The national spot market benefited most, growing 10% to $10.9 billion in 2004. The local spot market wasn’t far behind, boosted by automotive, financial and real estate advertising. It grew 8.5% to $14.6 billion.9 Veronis Suhler Stevenson had forecast (in 2004) national spot and local spot growth of 8.5% and 6.8%, respectively.10

Other market research agencies confirmed the pattern of growth and ebb in revenues. According to the Television Bureau of Advertising (TVB), local TV ad revenue grew by 12% in the top 100 markets in 2004. It put the figure at $18.3 billion (1% better than the bureau’s 10-11% forecast). Further, the bureau noted that all of the top 10 advertisers in local broadcast, nine of which were the major automotive companies, posted increases in 2004.11

TVB also released its forecast for the television industry’s next two years at its annual Forecast Conference in September 2005. According to its projections, total spot revenues would grow between 6.1% and 7.9% in 2006. Local spot was projected to grow between 2.9% and 5.1% and national spot by 10.5% to 11.7%.12 If growth matches the projections, it would be in line with the odd-even-year cycle of local advertising. But the fact that the projections are more modest than those for previous even years may be a cause of concern for the local market — especially with the added threat of local cable.

Local Cable Advertising

Traditionally, cable systems were confined to national advertising, but that has changed over the last few years. Factors such as consolidation of markets and new technology have enabled cable systems to carry the same advertisement on a group of systems at once.

And local cable advertising has been flourishing. According to the latest Veronis Suhler report, it grew at an annual compound rate of 10% from 1999 to 2004. For 2004 to 2009, it is projected to grow at a rate of almost 15%. By comparison, local spot ad revenue for local broadcast stations grew at a rate of 3% annually from 1999 to 2004 and is expected have an annual compound rate of growth of just 3.8% until 2009.

Growth of Local Spot Advertising vs. Local Cable Advertising

2000 - 2008, Percentage Growth

Source: Veronis Suhler Stevenson 2005-2009 Industry Forecast

One reason for the increased profitability of local cable is the growing number of “interconnects.” The term refers to linkages that multiple cable systems have formed to allow advertisers to air ads simultaneously across all participating systems in a TV market. Interconnects represent a challenge to local broadcast station revenue in part because they can offer rates that are a fraction of what individual stations charge; the cable systems make money by aggregating their revenues from ads on some 30 or 40 different channels.

The impact that the interconnects will have on local station economics will become clearer in 2006, but it is bound to become a more important consideration for local TV economics in the years to come.