No broadcaster needs reminding about how tough it was in 2001. Ad bookings were already under considerable pressure prior to Sept. 11. Then, on that awful day, the bottom just dropped out of the market and made 2001 “the year to forget.” Stock prices tumbled, bank lending to TV companies dried up and doommongers predicted the world would never be the same again. But life for niche satellite players was even tougher.

Or was it?

Look at any broadcast market and the ugly truth is shocking. Last year was an absolute disaster for broadcasters, with more than a few leading names struggling to keep out of the bankruptcy courts. Germany’s ProSieben’s share price finished 2001 down 96.5 per cent from its December 2000 position. Kirch Group’s position is also dire. The UK’s Carlton was down 52.9 per cent, with its TV income suffering an “unprecedented” decline, down 14 per cent overall.

Overall, Germany’s TV sector fell 17 per cent in November 2001 alone, and there were double-digit falls in the United Kingdom (10 per cent) and Italy (12 per cent). Food advertising, normally the most resilient, fell in Germany and the United Kingdom. RTL, already predicting a year-over-year advertising drop of 6 per cent, put out a warning that it was likely to suffer an 8-10 per cent fall for November in what was the “worst month on record for TV in Germany.” The highly regarded Universal McCann index talked about a 4.9 per cent global decline in advertising last year.

The only major TV market to show any modest resilience last year was France, and even there advertising fell 5 per cent fall. Spain saw a fourth quarter fall of 16 per cent. In the United States, Canada and Australia, the situation was much the same.

Merrill Lynch said that last year the world overall saw a staggering 5.9 per cent fall in advertising income. Perhaps worse, it predicted that advertising income this year could fall by another 10 per cent on average from last year’s already depressed figures, before recovering in 2003 with a 4 per cent rise. Merrill Lynch estimated that 2002 U.S. and global advertising expenditures would decline 1.5 per cent and 2.1 per cent, respectively. Its preliminary 2003 forecast is for 4 per cent global growth. But that sweeping prediction covers a wide spread of expectations. Meanwhile, the downturn in the United Kingdom was the final straw for satellite channels like Granada’s Breeze, Carlton’s Taste, the Wellbeing channel and others.

There are few bright spots. SBS Broadcasting saw a praiseworthy 9 per cent advertising growth year-over-year. Most pay-TV distributors saw an overall increase in earnings as well. Cable TV stocks were not immune from fall. The precarious position of two of Europe’s major cable outfits, UPC and NTL, is nothing short of catastrophic.

But what of the future? The 2001/2002 upfront selling season extended well into the fall, far later than usual. Advertisers were cutting budgets and were hesitant to commit far in advance due to economic uncertainty. Given the drop in certain categories of spending, other advertisers sensed an opportunity to pay lower prices.

Merrill Lynch said that given the proliferation of cable and pay-TV networks over the last decade, it also became apparent that there was excess capacity in broadcast time. All told, ad-rates were down about 15 per cent year-over-year. Because of the declining rates, certain networks decided to sell a smaller amount of inventory, in some cases 60-70 per cent, in order to keep more inventory available for what are usually called “scatter” markets. U.S. networks in particular reported far higher than usual ad-booking cancellations, running as high as 15 per cent.

Merrill Lynch also said that, at least in the United States, there is money sitting on the sidelines waiting for the right opportunities. Growth in the Asia-Pacific region (excluding Japan) rebounded sharply in 2000 for the first time since the Asian crisis began in mid-1997, but results were mixed in 2001. For 2002, Universal McCann is projecting that ad spending levels will improve relative to 2001 in most Asian markets.

South Korea is forecast to post a 3 per cent gain in local currency ad expenditures versus a 4.5 per cent decline in 2001. Taiwan will continue to contract another 10 per cent this year after an estimated 15 per cent decline in 2001. China’s growth is forecast to slow to down 10 per cent from growth of 15 per cent in 2001. Japan is expected to contract a further 4 per cent after an estimated 3.5 per cent decline in 2001.

Zenith has estimated that the Asia-Pacific region posted a 1 per cent decline in major media ad-expenditures in 2001 but will reverse to a 2 per cent gain in 2002. For the near term, the Japanese advertising market has entered a phase of contraction amid economic stagnation.

According to Merrill Lynch’s Japanese analysts, the decline in the advertising market is expected to continue through 2002, with fiscal year 2003 advertising decreasing 1.7 per cent. This represents bad news for the local TV industry.

There are some hopeful signs in terms of the TV sector, but also some strong warnings. First, the good news, which most U.S. and European broadcasters will already have noticed. Campaigns for new products are back on air. It is not all that surprising that new product introductions were essentially halted by most companies during the fourth quarter of 2001. With news of the Afghanistan action, flying and anthrax scares taking up most of people’s time and energy, most U.S. advertisers made the decision that their new marketing messages should wait as the dollars spent wouldn’t receive the bang they deserved. At least in the United States, it seems that new product introductions and bookings have picked up again toward the later part of first quarter. Europe’s advertisers were less affected by Sept. 11, although significant downturns were noted in the airline, travel and business to business sectors.

But here’s the bad news. Merrill Lynch urges extra caution. Its current outlook is that the fall out from last year’s significant cost cuttings and the recent spate of corporate bankruptcies is contributing to rising unemployment. Combine that with historically high ratios of personal debt to disposable income in many countries, and there may well be a subsequent dampening of consumer spending this year.

In any event, the deterioration through 2001 means that first half 2002 year-over-year comparisons will be very challenging, and the visibility of an upturn in the second half is low. Hopefully, 2002 will be a tale of two halves, with bad declines in the first half, but a bounce in the fourth quarter on slimmed down cost bases for many advertising agencies and broadcasters. Merrill Lynch remains pretty depressed and maintains its negative stance on European broadcasters and neutral on U.K. broadcasters, ad agencies and consumer publishing, which appears to be on a later cycle.

The general impression is that it is still a buyer’s market, with indications that TV pricing is still well below last year’s upfront market. However, what will be the situation next year and later? Merrill Lynch said that advertising has tended to recover from similar downturns over a two-year period to what would then be historical peaks. If this is the case this time, then by the end of 2003 and the beginning of 2004, broadcasters should be back on the gravy train. “The only difference this time around” said Merrill Lynch, “is that the severity of the downturn may see a sharper shorter-term rebound.” This is a very real warning to remain watchful, and amplifies its overall caution on the broadcasting sector.

As for specific broadcasters, Merrill Lynch expects Carlton Communications [CCTVY] to see ad income fall by GBP55 million ($78.2 million) this year, recovering to a total GBP739 million ($1.0 billion) next year, and GBP763 million ($1.1 billion) in 2004. In other words, during 2004 the company would have recovered only to its already poor 2001 position of GBP760 million ($1.1 billion). It is much same at Carlton’s ITV stable-mate Granada. That company isn’t expected to match last year’s income of GBP931 million ($1.3 billion) until 2004, followed by gentle progress to GBP960 million ($1.4 billion) in 2005.

In mainland Europe, the experts predict ProSieben’s Pro7 channel will have a stable 2002 and a modest growth of 4 per cent next year. ProSieben’s Sat1 channel suffered a huge 15.5 per cent downturn last year, and is expected to have a flat 2002, with a 4 per cent rise in 2003. It is a similar picture at RTL, where overall ad income fell 4.6 per cent last year. Italy’s Mediaset is also expected to have a flat 2002, and a 5.5 per cent increase next year. France’s TF1 fell 5 per cent last year and might have a tiny rise of 0.3 per cent in income this year and 2.7 per cent increase in 2003.

What does all this mean for the market? It means for once, just for once, broadcasters may be telling the truth when they ask programme suppliers to be extra careful about the prices they want for next season’s blockbusters. –Chris Forrester