We believe that U.S. advertising spending is healthier than our previous April 2021 forecast. We now estimate that ad spending will grow 14.4% this year, well head of our previous 7.8% forecast. We estimate that total ad revenues in 2021 will easily surpass 2019 levels and will end the year at 108% of 2019 levels. Still, this year's robust growth rates are off 2020, when overall advertising was down 5.9%. Last year, the steepest declines were generally limited to the second quarter, followed by sequential improvements over the second half of the year.

We credit this year's better-than-expected recovery primarily to digital advertising, which is growing at a torrid 25% annual growth rate after a "slowdown" in 2020 (only a 7% growth rate). Excluding digital, advertising on traditional media (i.e., linear television, radio, outdoor, and print) will increase 4.9% in 2021, and reach 89% of levels attained in 2019 by year-end. The Tokyo Summer Olympics, delayed from 2020, also spurred the recovery, and could, despite disappointing audience ratings, still contribute around $1.4 billion to 2021 advertising totals. Within traditional media, we expect television will climb back to 96% of 2019 levels (with the caveat that 2021 includes the Olympics but not the record political advertising of 2020). Outdoor advertising will take more than two years to recover even though billboard revenues will reach those achieved in 2019 in the second half of 2021. Transit, which we include in the outdoor segment, and 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. Radio won't recover to prepandemic levels, only reaching 90% of 2019 revenues by the end of 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 and so our TV advertising forecast, for example, includes both linear and digital components.

The recovery for advertising-based media sectors varies across each segment, and our ratings actions will likely continue to reflect these differences.

Table 1

Table 2

Advertising Returns To 2019 Levels With Continued Healthy Digital Growth

National Advertising--Legacy TV And Digital Video Platforms Paths Diverge

We're closely watching advertising trends for national TV because it's at the epicenter of the legacy digital transition. Positive headlines for TV advertising earnings for the second quarter actually mask a sector with trends moving in opposite directions. Legacy linear TV is under tremendous secular pressure as audience ratings plummet, while ad-based digital video platforms are experiencing tremendous double- and triple-digit percentage ad revenue growth.

Legacy TV Advertising

Audience ratings for both broadcast and cable TV continue to fall at alarming rates, down double digits on an annual basis (even the Tokyo Summer Olympics for which ratings were down more than 40% compared with the 2016 Rio Summer games aren't immune from this trend). As a result, media companies have had to allocate additional ad inventory (so called "make goods") to advertisers to reach guaranteed audience ratings (also known as GRPs, or gross ratings points).

This has severely limited available linear TV ad inventory just as the U.S. economy rebounds and demand from advertisers for commercial time on linear TV strengthens. Despite the ongoing audience downturn, linear TV remains the best way for advertisers to reach the largest audiences for now. The supply/demand imbalance has inflated the value of any remaining, available inventory such that overall pricing in TV's upfront cost per 1,000 impressions (CPMs) may have risen by about 15%, according to some press reports. In aggregate, these price increases only partly offset the decay in ratings so we believe linear TV advertising is likely modestly declining.

Digital video advertising

Conversely, digital video advertising is currently growing at an astonishing rate (ViacomCBS reported a 102% year-over-year increase in streaming advertising in this year's second quarter). This is partly because the segment is very early in its evolution. While YouTube had been selling advertising on its video inventory, it's only in the past year that many legacy TV companies have scaled digital ad inventory to attract advertisers. But it's also because this medium provides advertisers with two key characteristics: the ability to move down the advertising funnel and target specific audiences (rather than just serve as top of the funnel brand building) all the while offering an advertiser-friendly environment in which advertisers generally get to choose where their ads are placed and thus the ability to avoid objectionable content.

Still, the overall impact of these diverging trends to the legacy media companies is difficult to gauge because they are increasingly selling legacy linear TV advertising and digital advertising as a single bundle. Video advertising (our term) now includes linear TV, streaming (hybrid and advertising-based video on demand [AVOD]) platforms and connected devices (e.g., TVs, Roku, and other digital devices). Transparency between linear and digital is nearly impossible because media companies are selling linear and digital advertising inventory in a single package and, with a few exceptions, reporting advertising as a single line item.

Secular Trends, Boosted By The Pandemic, Favor Digital Advertising

The pandemic accelerated secular trends that have been in play for the past two decades, spurring consumers to spend more time online, leading to an increase in online ad spending by both large and small marketers. Marketers have also found the attribution provided by digital advertising enticing, and small marketers have leveraged self-service tools to target audiences and maximize the value of their online ad spending. While not as potent individually as the behemoth national advertisers, small businesses collectively are a substantial part of the local ad market, advertising in the outdoor segment, and on radio, local TV, and digital platforms. In fact, federal data indicates the pace of new business formation has been strong since the summer, counteracting 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 the reopening of sectors such as travel that significantly curtailed digital advertising in 2020, we raised our digital advertising projections for 2021. The insurance vertical is an example of the accelerating secular shift to digital advertising. The sector was historically under-indexed in digital advertising spending, but we're seeing accelerating investments and an increase in the number of rated issuers in the space. We now expect digital advertising will grow about 25% in 2021 (versus our previous expectation of 12% growth) benefiting in part from easier 2020 comparisons for the year, with growth slipping toward about 12% in 2022, an impressive rate. Digital advertising now accounts for more than 50% of total advertising in the U.S.

Recovery Is Uneven For Local Media

While the recovery in large markets lagged that of small markets going into this year, markets such as New York and Los Angeles experienced solid growth following the full relaxation of COVID-related restrictions in July. With limited restrictions across the country and rising vaccination rates, most local media companies reported little differentiation between the performance of large and small markets in the second quarter. We believe the pace of recovery for local media has therefore shifted more to the type of media rather than geographic location.

Local TV.  We've notably raised our 2021 growth expectations for local TV to 17% from 12%. Despite the slower pace of recovery among automotive advertisers due to vehicle shortages rendering advertising expendable, local TV broadcasters have been benefiting from strong growth in the services and sports-betting categories, which we expect will continue. This growth rate would put local TV advertising revenue at about 95% of 2019 levels in 2021.

Outdoor:  We have also modestly increased our growth expectations for outdoor advertising to 10% in 2021 from 9% given better-than-expected billboard performance in larger markets and robust secular trends in digital advertising. We expect billboard advertising revenue will meet, if not exceed, 2019 levels in the second half of 2021. Despite favorable trends in billboard revenue, our forecast for outdoor advertising revenue growth is constrained by the slower expected recovery of transit advertising (public transportation and airports). We continue to expect transit advertising will not recover to 2019 levels until at least 2023. We also believe its recovery is vulnerable to fallout from the delta variant and other potential future resurgences of the virus, to the extent it deters commuters from traveling to the office, or consumers from leisure and business travel.

Radio:  Like transit advertising, we believe radio advertising is also susceptible to the delta variant and potential resurgences of the virus. This is because broadcast radio is dependent on consumer drivetimes and the medium has greater exposure to more advertising categories subject to pandemic-related restrictions, such as restaurants, leisure, and entertainment. We previously assumed radio advertising would take longer than other forms of traditional media to recover and haven't changed our growth expectation of 8.7% for this year, which contemplates broadcast radio returning to about 80% of 2019 levels. Radio won't recover to pre-pandemic levels, only reaching 90% of that achieved in 2019 by the end of 2022, then resume declining at a low-single-digit percentage rate.

Ratings Trends Vary Across Segments

The pace of recovery for advertising-based media sectors varies across each media, and not surprisingly, our ratings actions this year reflect these differences. Most ratings actions are driven by not only improved operating trends but also a company's financial policies and a desire to return to pre-pandemic credit metrics and ratings. For companies that revise their financial policies, we'll incorporate those new policies in our ratings analysis.

Local TV:  We've already taken a number of positive ratings actions on local TV broadcasters, including several upgrades on those that benefitted from both record levels of political advertising in 2020 (bringing leverage down faster than we had anticipated) and greater retransmission revenue growth.

Radio:   For the radio industry, which isn't expected to return to prepandemic operating levels, we've been more cautious with our rating actions and have only revised outlooks generally from negative to stable, indicating a longer and weaker recovery path.

Outdoor:  For the outdoor advertising industry, we raised our rating on Lamar Advertising Co. one notch to 'BB' given its greater exposure to billboards, which performed much better than we expected last year. For those outdoor companies that are more exposed to transit (such as Outfront Media Inc.), we've yet to take any positive ratings actions because we expect transit revenues are unlikely to fully recovery before 2023.

National broadcasters.  Even though national TV (broadcast and cable) advertising is stronger this year than we expected, we haven't changed our credit ratings on TV network operators. The ongoing pressure on affiliate fees as the video bundle declines and cash flow pressures from elevated content investments for streaming services, more than counters the improved advertising environment.

Related Research

• Despite The Pandemic, There Are Good Signs Ahead For U.S. Outdoor Advertising, July 8, 2021
• U.S. 3Q Economic Outlook: Sun, Sun, Sun, Here It Comes, June 24, 2021
• Gauging The Business Risks Of Local U.S. TV Broadcasters, April 15, 2021
• Rebooting The U.S. Media Sector: 2021 Advertising Trends Are Nicely Up, With Some Sectors Lagging, April 12, 2021
• The U.S. Broadcast Radio Sector's Recovery Is Now Set To Drag Into 2022, March 4, 2021