2005 Annual Report - Local TV Economics

Advertising revenue in local TV comes from two sources. One, called national spot advertising, accounts for approximately 45% of station revenue. National spot advertising comes from companies that wish to advertise in wide portions of the country but for various reasons don't want to advertise through the networks. For example, snow tire manufacturers don't want to advertise on the networks, since they'd be paying to reach viewers in Miami and San Diego who'll never need their services, yet they want to reach viewers in places as far apart as Boise and Boston. By using national spot advertising, such advertisers can buy ads in multiple markets until they've blanketed the areas they want to reach.

TV Station Ad Revenue

2003 vs. 2004

Source: Veronis Suhler Stevenson

All figures in billions of dollars.

National spot advertising came to $10.6 billion in 2003. The investment banking company Veronis Suhler Stevenson estimated it at $11.6 billion for 2004.

The other revenue source is local spot advertising, which is paid for solely by companies in a station's own market. For example, when Ford or Toyota wants to advertise its latest model, it would be considered national spot advertising; when a local Ford or Toyota dealer buys ad time, it's local spot advertising. Local spot ads make up roughly 55% of station revenue. It amounted to $13.6 billion in 2003 and was expected to increase to $14.5 billion in 2004, again according to Veronis Suhler Stevenson.

A major question, given the pressure on audiences, is whether the industry might be wiser if it moved in the direction of accepting slightly lower profit margin--still usually in excess of 40%-- in order to reinvest in stronger newsgathering and experiment in some new programming as a way of attracting new, particularly younger audiences.

One factor that mitigates against any such step is that local news plays such a crucial role in the financial health of TV stations that station managers may be unwilling to experiment for fear of damaging their product. As noted earlier, news directors in 2003 reported that news programs provided almost half (46%) of station revenue, the highest percentage recorded yet. In addition, 58% of news directors reported that their news operations were showing a profit, the highest percentage since 1999. In a time when stations are fearful of doing anything that might lead to audience loss, caution and conservatism are seen as safe bets.

Average Percentage of TV Station Revenue Produced by News

1998 to 2003

Design Your Own Chart

Source: RTNDA/Ball State University survey

Broadcast networks have been competing with cable networks for advertising on the national level for more than twenty years. Local stations had been safe from competition for local ad revenue because advertising on cable systems had been impractical until recently. Cable systems were initially franchised on a municipal level, and each system operated independently from its neighbors. Now, due to consolidation, cable companies dominate entire metropolitan areas, and new technology makes it possible to run the same ad on a group of systems at once, challenging broadcast stations' competitive advantage.

The new options are making cable an appealing choice for local advertisers. In 1998, cable systems received only 17% of local TV ad spending ($2.5 billion out of $14.7 billion total). Veronis Suhler estimates that in 2004, cable systems received 24% of local spending, and that the figure will rise in 2008 to 30%. That would represent a growth rate of at least 10% each year over the next four years. Local broadcast revenues are expected to grow barely 5% a year.

Local Ad Revenue on Television

1998 to 2008

Source: Veronis Suhler Stevenson
All figures in billions of dollars.

Local broadcast news was created, in part, as a way of establishing an identity for stations, as well as meeting FCC public-service requirements.⁹ At one time, 24-hour local cable news operations seemed to be a similar way for cable systems to win attention and prestige. But 24-hour local cable news operations in North Carolina and Texas closed in 2004, suggesting that cable, regardless of its growing importance to local advertisers, does not see the same need to appeal explicitly to local audiences.¹⁰