TV Advertising Rose 3 Percent in Third Quarter, Says Analyst: "That Was Unexpected!"

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MoffettNathanson's Michael Nathanson cites the return of sports and the elections as drivers of the gain for all TV spending, while national ad spending still declined 3.5 percent.

U.S. TV advertising revenue rose 3 percent in the third quarter, even though national spending fell 3.5 percent, MoffettNathanson analyst Michael Nathanson calculated in a report published on Tuesday.

In the report, entitled "That Was Unexpected!," he cited the return of sports and the elections as driving ad revenue despite the coronavirus pandemic. His team estimates that TV station advertising rose 22.9 percent in the latest period, pay TV companies' ad revenue increased 12.8 percent, and cable networks spending climbed 2.3 percent, while broadcast ad revenue fell 13.2 percent.

The decline in national TV ad spending came in better than Nathanson's expectation for a 6.6 percent drop. And overall, TV ad revenue even edged up to $11.01 billion, the analyst calculated.

For the current fourth quarter, he said "we expect growth to continue, at a 2 percent clip."

Discussing his surprise, Nathanson wrote: "At the start of the COVID-19 pandemic, we had theorized that the trend in U.S. advertising in 2020 would mirror the sharp collapse observed during the Great Financial Recession of 2008-09. As we are about to enter the last month of this forgettable year, it turns out that the current data points do not line up at all with historical precedents."

While the analyst and members of his team "have gone to great lengths to explain why digital advertising has been much more resilient, he admitted that "we have ignored another surprising development: the return of television advertising growth."

Wrote Nathanson: "By our math, after posting a record 28 percent decline in the second quarter of 2020, aggregate TV advertising increased by 3 percent in the third quarter. This outcome was about 1,900 basis points better than our first COVID-19 impacted forecast made in March." One basis point is equivalent to 0.01 percent.

The analyst argued that three reasons explain the trend. "First, the third quarter has a once-in-a-lifetime wave of every major sport returning to the market," he explained. "Second, the intense 2020 election cycle attracted huge local, regional, and national ad spending – which we estimate to be up roughly 75 percent over 2016 – in key presidential swing states and in the fight for the Senate. The 2020 news cycle including the elections also drove ratings gold at CNN, MSNBC and Fox News in the quarter."

Lastly, after pulling out in the second quarter, brands returned to ad spending in the quarter and "helped drive non-sports and non-news scatter prices higher given the ratings shortfall elsewhere," Nathanson said.

His forecast: "The TV ad market will post strong results in the coming three quarters as sports events, including the Olympics, return to their natural cadence."

Nathanson reiterated his ratings on big entertainment stocks, including his "buy" on Fox Corp. and his "neutral" ratings on the Walt Disney Co., ViacomCBS, Discovery and AMC Networks.