Recessionary uncertainty and secular change across the U.S. media sector have presented the advertising industry with many opportunities and challenges since the global pandemic's onset last year. Where we first saw a spate of downgrades and negative outlooks, we're now seeing some positive momentum and advertising trends are outpacing our previous assumptions. When will the U.S. economy recover, and how fast can it happen? Which advertising segments will be better off when all is said and done? How are advertisers preparing for the new normal? S&P Global Ratings believes U.S. advertising spending is healthier than previously expected and rating actions are beginning to reflect this trend. We estimate that ad spending only declined 5.9% in 2020 compared with our previous expectation for a 9.4% drop. While our 8.8% growth estimate for 2021 is less than our previous 10.3% estimate, it results in total ad revenues that are 2.4% higher for 2021 than we previously projected. Still, 2021 growth rates are skewed because overall advertising was down 5.9% last year, though the steepest declines were generally limited to the second quarter, followed by sequential improvements over the second half of the year.

Economic Forecast Update

We're optimistic that the country's economic recovery is starting to accelerate in the U.S.  Advertising spending is strongly dependent on the health of the U.S. economy and, specifically is highly correlated to changes in consumer spending, which represents about two-thirds of U.S. GDP. Our S&P Global economists recently updated the U.S. economic forecast, indicating a pickup in the pace of recovery, raising the real GDP growth forecasts for 2021 and 2022 to 6.5% and 3.1%, respectively, from the 4.2% and 3.0% December forecast. Still, despite the improved outlook, we consider jobs a lingering weak point in the recovery, with unemployment, adjusted for labor force composition, reaching its pre-crisis rate by the second half of 2023. Discretionary spending on consumer-facing services will likely wake up this spring with solid spending activity this year and next. We believe companies will increase their advertising spending to capture this improving consumer confidence.

Table 1

Advertising Spending This Year Will Surpass 2019

We now expect advertising will recover more strongly in 2021 than our October 2020 forecast, and by the end of the year, total domestic ad spending will surpass 2019 levels (previously we didn't expect this to happen until 2022).   We credit this rapid recovery solely to digital advertising, which will return to its torrid double-digit percentage annual growth after a slowdown last year (only a 7% growth rate). Excluding digital, advertising on traditional media (i.e., linear television, radio, outdoor, and print) will increase 4% this year, and recover to 88% of 2019 levels. This rally is aided by the Tokyo Summer Olympics, which had been delayed from 2020 and could contribute $1.6 billion to this year's advertising totals. Within traditional media, we expect television will climb back to 94% of 2019 levels (again, with the caveat that the Olympics take place). Outdoor ads will take more than two years to recover even though billboard revenues will return to 2019 levels by the end of this year. Transit advertising, which depends on foot traffic in mass transit and airports, will take longer to recover, and won't return to 2019 levels until 2023, at the earliest. We expect radio will recover to 91% of 2019's level but only by 2022, then resume declining at a low-single-digit percentage rate. We note that every media sector has a growing digital component and, in nearly all cases, it's difficult to separate legacy advertising from digital advertising. For the purposes of this forecast, we aren't attempting to separate the two, so our TV advertising forecast, for example, includes both linear and digital components.

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Chart 1

Television

Identifying advertising trends within the television ecosystem has become more complicated as we head into 2021.   TV advertising has grown into a blend of both traditional linear TV and digital advertising on ad-supported streaming platforms. Viewing on linear TV is in secular decline while streaming platforms are in early stage growth mode. While it would be beneficial analytically to predict underlying advertising trends for each medium, media companies, and increasingly advertisers, are thinking and operating within these two media modes as though they were a single ecosystem.

In its simplest form, advertising can be broken down into two parts:

• Brand advertising, which companies use to build long-term relationships with consumers, and
• Transaction advertising, used by companies to connect with consumers who are seeking to make a purchase.

Even with declines in audiences, advertisers view traditional linear television as the best way to brand advertise while digital is by far the preferred ad medium for transactions.

Despite ongoing steep declines in audience ratings, we believe demand for traditional linear television's scatter inventory, which is sold at market rates, is strong, and in some cases, is up double digits in price versus upfront pricing.  Fox's Chief Financial Officer Steven Tomsic recently commented that "entertainment scatter [is] at times up to 50% premium to last year's upfront." Why is this happening even with double-digit declines in audience ratings? We believe advertising inventory on key TV networks is constrained because the networks must make up for missing audience guarantees by providing additional advertising inventory to advertisers for free (so-called make goods). As a result, the networks' remaining ad inventory is insufficient to meet demand from advertisers who want to buy television, leading to significant price increases for what is available.

As part of their pivot to digital platforms, media companies have been launching advertising video on demand (AVOD), including Paramount+ and Peacock, and free advertising streaming television (FAST) video platforms, including Pluto TV and Tubi. These streaming platforms, which have lighter commercials loads versus traditional linear TV, have added additional inventory, somewhat lessening the supply/demand imbalance. In addition, the media companies have been using this additional inventory to settle make goods but and are also making this inventory available to advertisers who want to buy linear TV.

While these streaming platforms address advertisers' need for additional inventory, the media companies will likely face pressure from advertisers to maintain, or even reduce, pricing.   On the one hand, media companies want to charge premium pricing for their streaming inventory because of the ability to target (NBC has said that it plans to pursue pricing on par with cost per thousand impressions, or CPMs, for prime-time television). On the other, advertisers will argue that programming on these streaming services won't be watched live, lowering the value of streaming inventory. To counter this, media companies will seek to control streaming ad inventory like they do traditional linear TV inventory, using its internal sales teams' relationships to connect to known advertisers rather than selling programmatically. The media companies will then control who advertises (one of the key advantages of TV for advertisers who fear being placed next to bad content or bad advertisers) and how much and when inventory is released to the market.

Digital Advertising Now Dominates Total Advertising Spending

Since the start of the pandemic last year, we believed smaller businesses that don't have the size, scale, and access to available liquidity were more likely to shutter at disproportionate rates.   While not as significant individually as the behemoth national advertisers, these businesses collectively are a substantial part of the local ad market, advertising on radio, outdoor, local TV, and digital platforms. In fact, federal data indicates the pace of new business formation has been strong since the summer, countering those businesses that have closed. Key digital platforms, such as Facebook and Google, that have become the advertising media of choice for small businesses, have benefitted most from this trend. As a result of their resilience, the overall uptick in economic growth and opening up of sectors such as travel that significantly curtailed digital advertising in 2020, we're raising our digital advertising projections for 2021. We expect digital advertising will grow at about 14% in 2021 and growth will begin to moderate gradually in subsequent years primarily due to its large overall base, contributing more than 50% of total advertising in 2021.

Local Market Recoveries Remain Uneven

Local markets around the country have been recovering from the pandemic at different rates and to various degrees.   Markets in states that have taken a more cautious approach to social distancing and to reopening are recovering more slowly while those markets in states that opened sooner are returning more quickly to more normal economic activity. Many of the key larger markets such as New York, Chicago, Philadelphia, and San Francisco, face long roads to recovery. Not only are these cities located in more cautious states, but they also depend on mass transit for their citizens to get around. We expect the pace of recovery of local media (i.e., local TV, radio, and outdoor) will depend more on location than on specific media.

Impact On Ratings

As U.S. advertising recovers in this post pandemic world, we expect our ratings actions to reflect the improving advertising fundamentals. We have already taken a number of positive ratings actions on local TV broadcasters that have benefitted from both record levels of political advertising in 2020 (bringing leverage down faster than we anticipated) and geographic diversity (such that the slower recovery in the larger coastal markets is more than countered by the faster recovery in the rest of country. In addition, we have taken several ratings actions on the radio sector, which we now expect to recovery more slowly.

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Related Research

• Economic Research: For The U.S...Let The Good Times Roll, March 24, 2021
• The U.S. Broadcast Radio Sector's Recovery Is Now Set To Drag Into 2022, March 4, 2021
• Reassessing The Pace Of Recovery For U.S. Media, Oct. 20, 2020