The Wall Street Journal had an article reviewing the latest data from TNS Media Intelligence, a firm that tracks media spending patterns. TNS recently reported that spending on “measured media” among the top 50 advertisers fell by 1.5% in 2006 despite the fact that overall ad spending rose by 4.1%. The difference in the two figures represents internet advertising. I have highlighted in the past similar stats regarding specific ad categories or specific advertisers. This article notes some the same ideas. For example, Procter and Gamble is cutting TV advertising in favor paid search and other internet advertising. Johnson and Johnson (JNJ) sat out the upfront last year and according to TNS cut its national TV budget by 25% or $250 million. At the industry level, auto advertising continues to shift to the web aggressively. This is not too surprising given studies that show a very high percentage of auto buyers have searched the internet prior to heading to the dealer….

One new tidbit in the Journal article was that spending at cable networks such as CNN, TBS, and TNT rose only 3.4% last year. I have noted often how this advertising medium is seeing a sharp deceleration from many years of steady double digit growth. The weaker growth in 2006 was mainly at general interest channels as opposed to special interest channels like ESPN or HGTV. John Spiropoulos, vice president and group research director at Mediavest had an interesting comment regarding cable. He noted that advertisers looking for niche audiences “were the first to migrate to cable and now those advertisers are moving from cable and broadcast to the internet. You can take some money from cable and get a similar reach from the Internet.”
I think this is a good point which along with close to maximum penetration of multichannel TV in US households and lack of new subscriber growth as most large channels are fully distributed is creating a headwind for cable network advertising relative to past history. There are some offsets such as the ability to increase ad inventory and less exposure to DVRs than broadcast TV but I remain of the opinion that slowing growth in cable network advertising is not fully incorporated into the valuation models for major cable network owners like Viacom (VIA) and Time Warner (TWX).
Overall, the TNS data on 2006 reinforces the fact that market share shifts in favor of internet advertising are limiting growth in all forms of traditional media. This means that historical valuation multiples are no longer applicable. Not only does that limit upside in stocks based on fundamentals but it also suggests takeout multiples by private equity won’t be at big premiums.