The worst appears to be past for the TV advertising market

KEY POINTS
  • The worst appears to be in the past for the TV advertising market, but a comeback from the effects of Covid-19 will likely be gradual. 
  • In recent days, media companies including ABC and ESPN parent Disney, Fox Corp., AMC Networks, NBCUniversal parent Comcast, WarnerMedia parent AT&T, ViacomCBS and Discovery, along with tech companies The Trade Desk and Roku, reported earnings that showed advertising dollars hitting a trough in the second quarter.
  • Several companies said the quarter wasn’t as bad as they expected as it pertains to advertising, but factors like production delays because of the pandemic will have an effect in future quarters. 

The worst appears to be in the past for the TV advertising market, but a comeback from the effects of Covid-19 will likely be gradual. 

In recent days, media companies including ABC and ESPN parent DisneyFoxAMC Networks, NBCUniversal parent Comcast, WarnerMedia parent AT&TViacomCBS and Discovery, along with tech companies The Trade Desk and Roku, reported earnings that showed advertising dollars hitting a trough in the second quarter. Several companies said the quarter wasn’t as bad as they expected for advertising, but factors like production delays because of the pandemic will likely have an effect in future quarters. 

Here are some of the big-picture trends the networks shared in their earnings: 

Not as bad as feared 

Several companies said the state of the advertising market was generally better than expected, though advertising did hit a bottom in the quarter. 

“While the advertising market was hit hard, it is coming back more rapidly than we anticipated,” NBCUniversal CEO Jeff Shell said on Comcast’s earnings call last week. Advertising revenue declined 27% for cable networks in the quarter and 28% for broadcast television.

On Fox’s earnings call, chief revenue officer Steve Tomsic said the company’s ad revenue was down approximately $160 million in the quarter, versus an expected $200 to $240 million, with the local ad market down closer to 35% The company said its television advertising revenues were down 29%, primarily from the impact of Covid-19 on the local ad market and the postponement of live events at Fox Sports, but that Fox News ad revenues posted a gain.

Discovery’s president and CEO David Zaslav said on the company’s call the advertising markets have largely bottomed out, with the worst in the past. 

“Though I would caution that visibility still remains relatively limited, April was a low in the U.S. with a nice recovery in May and June,” he said. “While internationally, with some regions like LATAM still searching for a bottom, we have seen a noticeable return of advertisers spending money against the TV marketplace, where economies have increasingly begun to open, particularly in Europe.” 

ViacomCBS’ ad revenue declined 27% in the quarter, but the company said it expects the second quarter to be the bottom in terms of year-over-year decline. The company said it’s seen sequential improvement month-over-month since April, and is “encouraged” by the third quarter so far. The company said it expects to see more improvement in the next two quarters. 

Deutsche Bank this week remarked in an analyst note about AMC Networks that U.S. advertising revenue held up better than it expected in the quarter. 

Roku, while reporting its second-quarter earnings Wednesday, said the advertising industry outlook remains uncertain in the second half of the year, and believes total TV ad spend won’t recover to pre-Covid-19 levels until “well into 2021.” 

Production delays and creative workarounds

Much of the recovery will be contingent on a return to production, which has been impacted by the coronavirus pandemic. 

AMC Networks said this week that though the ad market looks to be improving, it expects third-quarter results to be impacted by the timing of its original programs, like a delay in the airing “Fear of the Walking Dead.” It expects third-quarter ad revenue to be down in the mid-to-high teens year-over year. 

Meanwhile, AT&T blamed $2.8 billion of lost or deferred revenue from Covid-19 mostly on an absence of theatrical and television releases and lower advertising from delayed sports programming and a slow economy. 

But companies said they’re seeing green shoots in production and success with returning to sports. 

Fox, in its earnings call, described its return to NASCAR with minimal staffing.

“We brought NASCAR back using only 1/3 of the people we would normally have trackside. Our director and camera operators and audio were on site, while graphics, replays, producers and talent were spread out between Charlotte and Los Angeles,” CEO Lachlan Murdoch said. “With very few or no fans on the track, it allowed us to break new ground with miniature drones flying overhead to get never before seen aerial footage. As the season progressed, even our in-car audio production and feature editing were produced live in technicians’ homes.” 

Discovery, which last quarter remarked on some success with at-home content production, said that has continued to pay off. 

“At a time when most broadcasters and networks have been relying on tired repeats and reruns of scripted shows, we brought over 1,000 hours of fresh original content to our networks, since the world shutdown due to COVID,” Zaslav said. “It’s been cost-effective, creatively shot and produced and well received.”

ViacomCBS said it’s using a phased approach to its return to production, based on “geography, show format, in-studio versus location-based productions, along with other considerations.” 

“But against this backdrop, things are ramping up,” president and CEO Bob Bakish said. He said that Tyler Perry recently wrapped production on a new season of “Sistas” for BET, “Love Island” is shooting in a hotel in Vegas where the cast and crew are quarantined together, and that late-night hosts Stephen Colbert and James Corden are scheduled to return to their buildings next week without audiences.  

AT&T said with Covid shutting down production, it has been challenged to get all the originals on HBO Max that it had planned. 

“Like everyone else in the industry, we’re working on ways to resume production and we hope to see that engine start to fire back up next month,” CEO John Stankey said. “Having said that, it’s one of our more challenging things we’re doing to respond to the pandemic and it’s going to take time to return to our February production levels. We view getting our production back online as critical to making our 2021 subscriber plan.” 

From upfronts to scatter deals

In a normal year, advertisers commit much of their yearly TV spending in deals during the spring “upfronts” season, when the networks throw presentations and parties to show media buyers their programming, audience data and ad tools. Upfront talks are still happening, but these conversations are different than usual, as there’s much more uncertainty about advertiser budgets and what TV schedules will look like. 

As advertisers look for a more flexible way of buying, some are making “scatter” deals, meaning they’re buying closer to air. 

AMC Networks’ chief operating officer Ed Carroll said the scatter market was “relatively healthy” in certain categories in the second quarter. He said the company is having conversations with all the major agencies for the upfront, but that this will be a very different upfront than has happened in the past. 

“It’s clearly slower developing,” he said. “And I think the agencies … they’re aware of tightening inventory concerns. They are inclined to put their money [in, but] an issue they have is, not all of their clients have revealed what their budgets will be due to the uncertainty of the times.” 

Fox leadership said going into the upfront, it’s seeing healthy budgets for news and sports, but that entertainment is trickier since advertisers are waiting to see what’s happening in the fall TV season. 

In a research note this week, Pivotal Research analysts said any pullback in the upfront may mean good things for connected TV players. 

“To the extent there is a meaningful pullback by marketers in the TV upfront participation in favor of more activity in the scatter/spot market, we think programmatic TV will be poised to deliver on the value proposition,” analysts wrote. 

In its last earnings call, The Trade Desk CEO Jeff Green said his company, which has a particularly strong presence in the connected TV market, has seen a faster shift over to connected television during the pandemic. It helped that the upfront season in March and April coincided with the onset of the pandemic and the sharpest drawdown in traditional TV advertising, he said.

“We definitely benefited from that being taken out, and we definitely benefited from live sports being taken out of traditional television,” he said. “As sports come back, I think more and more people are going to be watching it streaming, and we’ll benefit from that.”