NEW YORK (AdAge.com) -- Business is about to go from bad to worse for Madison Avenue and media companies, a 2009 sector outlook issued this week by Fitch Ratings indicates.
The Chicago-based rating agency took a cautious view, predicting the advertising environment next year will be the weakest it's been since the 2001 downturn; that was the worst ad recession since 1970.
Crash and burn
The current turmoil in Detroit as auto companies restructure and pare down brands will lead to permanent reductions in local and national auto advertising, Fitch predicted.
Advertising is an easily scalable fixed cost, Fitch noted. As a result, major advertisers "could plan to pull back considerably," and more so than they did in 2001, "because the credit crisis has raised the stakes and forced many companies to emphasize capital preservation and liquidity, not just earnings growth."
Categories under the most pressure will include retail, automotive, financial services, airlines, hotels and car rentals, Fitch predicted.
While the 2001 ad downturn had its greatest impact on national advertising, this time around, both local and national advertising will be negatively affected. The report also pointed out that spending tied to the presidential election and the Olympic Games in China helped mask some market weakness this year, but the absence of those revenue sources in 2009 will be exposed.
More inventory in more places
Additionally, ad inventory is greater than in previous downturns thanks to the proliferation of digital options, which means marketers will be able to press media companies for better price terms and concessions.
The outlook for newspapers and magazines is bleak per Fitch, which anticipates shrinking newspaper-industry revenue for the foreseeable future, and for more individual papers and groups to default, shut down and be liquidated.
"Several cities could go without a daily print newspaper by 2010," Fitch said.
Among magazines, Fitch expects "the larger players to rationalize available print advertising inventory through consolidation and closing down titles. ... Several categories that used to have multiple titles will likely have advertising bases that can support only one major title." And while publishers have become more proactive online due to limited growth in their print products, Fitch is skeptical "about the ability of magazines to make the digital transition profitably."
Media companies face heightened risks into 2009, Fitch believes, particularly CBS. Seventy percent of its revenue base is exposed to the advertising downturn, its radio and TV businesses face continued secular pressures, and over $2 billion in debt will need to repaid or refinanced over the next few years, Fitch pointed out.
Broadcast networks have cause for concern, as viewership is expected to continue slowly eroding. Fitch also believes that TV networks could face cancellations or deferrals of ad dollars committed in upfront negotiations.
Outdoor, cable not as threatened
While it's not necessarily positive news, Fitch is maintaining a stable outlook for outdoor and cable networks, due to flat inventory and scalable cost structures, respectively.
Global advertising holding companies may also be well positioned to weather the storm, Fitch said, as many of those firms derive half their revenues from areas other than advertising and half their revenues from non-U.S. markets.
Additionally, the current fee-based structure of contracts makes for less-volatile pricing compared with the commission-based revenue arrangements that were in place during prior downturns.