The overall U.S. advertising industry was better than expected, but not all companies equally benefitted. Unsurprisingly, Facebook and Google dominated as digital advertising is going strong. Interestingly though, while TV ad spend was higher than expected, Twitter and Yahoo still managed to lose out compared to TV advertising even though they’re in the digital segment.
Ad spending on the rise
Morgan Stanley analysts Benjamin Swinburne and Brian Nowak and their team analyzed the entire advertising industry through the lenses of companies’ third quarter earnings results and found some interesting trends. Total U.S. ad spend ran counter to expectations of a decline. The analysts found a 3% to 3.5% increase in total ad spend, while expectations have been declining for the last year.
They believe the U.S. ad industry is actually “healthier than the overall economy,” at least for now. The two media standouts they discovered were TV and paid search. Also North American ad agencies saw strong growth during the third quarter with IPG and OMC leading the way.
Online advertising drives strength at Facebook, Google
The Morgan Stanley team discovered that online advertising increased by about 18.8% year over year, beating their estimate of 17.6% growth. They said search, mobile display and online video led the way, which clearly shows why Google and Facebook did so well during the third quarter.
Google’s paid search in the U.S. increased by about 13%, coming out ahead of expectations at 11% growth and the previous quarter’s 11% growth rate. The analysts said the main drivers were an acceleration in mobile ad growth due to more ad coverage and improvements in the gap between mobile and desktop monetization. They estimate that growth in YouTube ads was at 50% or more year over year.
Facebook reported $2.1 billion in North American ad revenue, a 56% increase from last year. The Morgan Stanley team noted that the social network benefited significantly from growth in Instagram advertising and new ad products like video and carousel ads.
TV advertising surprises
The analysts were surprised that ad spend on TV actually grew by 1% instead of retreating during the quarter like they had expected it would. They said the four major broadcast networks of NBC, CBS, ABC and FOX drove the surprise with performances that were better than expected. Further, the broadcast networks did well even though a shift in the calendar pushed NFL games into the fourth quarter.
Advertising on cable networks also ticked upward a bit compared to their estimate of remaining flat to declining by 1%.
In general, Swinburne and Nowak found that TV saw benefits from more ad dollars in general, particularly as DraftKings and FanDuel spent more on TV advertising. Because of the increased spend from them, pricing increased. Also year over year comparisons were easier this year, although viewing ratings are still a headwind.
The analysts said “scatter commentary” indicates that this strength may be continuing into the current quarter. They also report that local TV looks to be stronger than expected, as it remained roughly flat with last year even though there were some political comparisons.
Twitter, Yahoo lose out
They said Twitter’s and Yahoo’s results were “the most notably light,” with Yahoo missing estimates for search revenue and guiding below consensus estimates because of continuing investments in its mobile search product Gemini. Twitter’s problem was continued slow growth in monthly active users, especially in North America. Also the microblogging platform’s guidance for fourth quarter revenue was lower than consensus estimates.
Radio advertising also underperformed the broader market, with both broadcast radio and streaming radio provider Pandora Media missing expectations. Pandora said growth in listening hours grew more slowly than expected and some of its most mature markets are seeing resistance to increases in ad load.
The Morgan Stanley team added that outdoor advertising was about as expected, and declines in print magazine ads were a little worse than expected.
Winner takes most
As a result of their analysis, the analysts are more bullish on Google and Facebook, which they rate as Overweight. They’re even more cautious on Twitter, which they rate as Underweight. They’re a bit more constructive on names with high ad exposure like CBS and AMC Networks, which they both rate as Overweight. The Morgan Stanley team said the third quarter “reinforces the ‘winner-take-most’ thesis.”
They also think it’s important to take into account the fact that organic growth at U.S.-based ad agencies continues to be strong, especially because of the “significant level of media reviews currently being held and the controversy around digital buying practices.”
All graphs in this article are courtesy Morgan Stanley.