Tuesday, August 25, 2009

Veronis Suhler Stevenson Study Offers Industry Check-up

Back in 2000, the company I worked for was bought by New York-based Veronis Suhler Stevenson (VSS), a private equity firm that focuses on the information, education and media industries.

Ever since, I have followed what the company has done with interest. One of the things VSS does is a 10-year study looking at growth patterns in the communications industry. The study came up with four observations:

  • Institutional End User And Alternative Media Growing As Traditional Media Advertising Declines
  • Institutional End-User Spending Expected To Remain Largest, Fastest Growing Sector –5.6% Future Annual Spending Gain Driven By Business Information Services And For-Profit Higher Education
  • Communications Will Be The 3rd Fastest-Growing Economic Sector Going Forward, Rising From the 4th Position
  • Communications Industry Forecast To Decline 1% in 2009, But To Grow Faster Than GDP In ‘09 And Over Next 5 Years
  • Marketing Services Spending To Grow 3.4% Annually, Primarily In Alternative Marketing Segments
The VSS study predicted that total communications spending will decline 1% in 2009 to $882.6 billion, but grow 3.6% per year over the next five years to more than $1 trillion, making communications the third fastest-growing sector of the U.S. economy over that period. Segments driven by end-user spending and targeted marketing services are gaining even as traditional advertising is shrinking.

This is no surprise to any of us in the business, but the study found that 2008 and 2009 witnessed a major shift in the spending patterns in the communications industry as advertising became the smallest of the four major sectors in 2008 -- a first for advertising since VSS began tracking the industry in 1986.

“While this period culminated a decade-long trend away from traditional advertising vehicles and towards institutional and consumer end-user spending and marketing services, it also highlighted the emergence of institutional and consumer communications as the dominant sectors in U.S. communications spending,” said the study.

The current challenges facing the industry are largely the result of the current cyclical economic downturn, which is exacerbating the impact of structural and secular changes already underway, said the report.

“Over the five-year forecast period, 12 of the 20 major industry segments are expected to show positive growth, with the most challenged segments clustered in traditional advertising,” it said. “However, the long term secular demand for information, education and entertainment will continue, and the bright spot for advertising going forward will be in digital and other alternative and targeted advertising businesses.”

I thought the chart below sums up the current status of the industry nicely:

“The prolonged economic downturn has accelerated changes already underway in the communications industry. Notwithstanding significant declines in traditional media, the industry taken as a whole will continue to show relatively solid performance compared to the overall economy,” said Jim Rutherfurd, Executive Vice President and Managing Director at VSS. “These changes are driven by a confluence of factors – primarily the growth of digital end-user businesses and the shift from broad reach traditional advertising to targeted alternative advertising and marketing services.”

We are all watching as the segments and sub segments that are shrinking continue the struggle to adapt in a world that is rapidly moving toward the growth parts of the business. According to the Paper Cuts blog, we’ve lost more than 13,000 people to layoffs and buyouts. And there’s more pressure on those who remain as the industry continues to separate the wheat from the chaff.

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