In presidential race, TV can't lose

Campaign forecast to be costliest ever

By James P. Miller
Tribune staff reporter

July 18, 2004

Thanks to what amounts to an advertising arms race between the two major political parties, the 2004 election promises to be the costliest presidential campaign in history.

And this year's politicking already has produced some clear-cut winners: TV broadcasters.

Political advertisers will shell out a record $1.3 billion for TV time nationwide this year, nearly 50 percent higher than the $910 million "spend" of four years ago, estimates Legg Mason analyst Sean Butson.

Another estimate suggests that ad spending may surge more than 60 percent, to $1.47 billion.

Not all broadcasters are benefiting equally, of course. That's why in 2004, as in other recent election years, the billion-dollar question for the broadcast industry and investors is, where will the money be spent?

The Kerry and Bush forces have been focusing their ad spending in a handful of swing states considered up for grabs, while largely ignoring those where one side or the other holds a wide lead.

Depending on who is doing the counting, there are about 17 swing states. But the four states drawing maximum attention are Ohio, Florida, Pennsylvania and Michigan. In fact, stations in those four crucial states are expected to soak up half of the nearly $700 million that the two presidential campaigns are projected to spend on TV.

"The battleground states in the presidential race are clearly getting an intense amount of campaign advertising already," said Kenneth Goldstein, professor of political science at the University of Wisconsin in Madison and head of the Wisconsin Advertising Project, which tracks political advertising nationwide.

The spending spree is being fueled by a number of unique political and legal developments, as well as new trends in campaign strategy.

For the first time ever, for example, both major presidential candidates have opted to forgo public matching-funds campaign support, a maneuver that freed them from any regulatory limits on their ad spending in the period prior to the party conventions.

Thus, "It's spend it or lose it" for John Kerry and President Bush, said Gary Belis, a spokesman with the broadcast-industry trade group Bureau of Television Advertising. "That's why you're seeing such an early spend this year."

Advertising campaigns also launched early because Kerry emerged as the Democratic Party's choice so early in the primary season, providing Republican strategists with a clear target.

But the river of political cash for broadcasters really began to hit flood stage in mid-May, when the Federal Election Commission decided to delay a decision on whether to restrict the so-called soft-money fundraising activities of groups known as "527 organizations."

Such advocacy groups, which are separate from the political parties but affiliated with them, have emerged as a way around campaign-finance reforms enacted two years before. And although the issues before the FEC may have been complex, the implications of the commission's decision to defer a ruling were immediately crystal clear to Wall Street.

"To TV broadcasters, the FEC's [non] decision amounts to a windfall," Harris Nesbitt analyst Leland Westerfield told investors at the time. With the ruling, he continued, "the last serious impediment to a landslide of political advertising goes away."

"Political advertising: Prepare for the `soft dollar' arms race," Bear Stearns analyst Victor Miller echoed in an enthusiastic report exploring the FEC decision.

Wall Street's focus on an issue that on the surface would seem of interest only to political analysts underscores the growing bottom-line impact political advertising has on the broadcast sector.

Over the past few decades, as television has become the principal medium by which campaigns reach voters, investors have learned that broadcasters' profits will show a predictable little bulge in the final quarter of even-numbered years. That financial boost reflects the revenue contribution of ads for congressional races, as well as the occasional fight for a senate seat or the governor's chair.

But the serious political money comes every fourth year, during the extravaganza that is the American presidential campaign.

From about Labor Day through early November, the airwaves in most cities are saturated with ads touting not just the two major parties' presidential candidates but also would-be state and national representatives, senators, sewer commissioners, judges and a host of other politicians.

Presidential campaigns used to advertise on network TV, picking up spots on "Monday Night Football" or "NYPD Blue" as they reached out to their target demographic groups. But since the mid-1990s, candidates have dropped the use of national TV almost completely. Instead, seeking to get the most bang out of their funds, they buy spots on individual TV stations in select markets.

Picking their battles

The new targeting strategy acknowledges that because of the electoral-college format, a presidential election is, in effect, 50 winner-take-all elections. That means national advertising is less efficient than advertising keyed to specific undecided states.

"All politics is local," said Westerfield, "and all candidate marketing is, therefore, local."

In placing their ads, candidates generally pick the two most-watched local news shows in a TV market, on the theory that people who watch the news are the most likely to vote. Or a campaign trying to reach women voters might pick up spots on whatever local station is airing the syndicated "Oprah" show.

As a result, the smaller stations in a city generally get a much smaller piece of the political advertising pie.

Thanks to the peculiar structure of the TV advertising market, however, just because such stations don't carry political ads doesn't mean they can't get a piece of the action when the political dollars wash into town.

If a magazine gets a big surge in advertising, it simply adds more pages to the next issue. But TV stations always have the same number of advertising minutes available to sell.

What changes is the price. Broadcasters often say that political campaigns "tighten up the inventory" by introducing an aggressive new bidder for the finite number of ad slots available. That sends prices higher.

"Classic supply and demand," observed Belis of the broadcast trade group.

Because the political season is short and intense, political ads are generally more lucrative for TV stations. For scheduling flexibility, stations often give their regular advertisers a discount if the buyers agree that the station can reschedule individual ads at the last minute. For the local grocery stores, furniture outlets and other regular advertisers, having their spot delayed is no big deal.

But politicians, faced with a looming voting day, don't have that luxury. As a result, they usually buy ad slots that are guaranteed to run at specific times. And that generally means they pay a higher price, just like business travelers who buy airplane tickets on the day of the flight.

A trickle-down effect

The result? During the campaign season the pols' demand for airtime is so great that their ads often displace the stations' regular advertisers. Those bread-and-butter ad customers then turn to rival local stations, driving their profits higher even though they're not directly getting political money.

"Ads will start getting bumped to the third and fourth stations in a market," said Belis. "It's a rising-tide-that-lifts-all-boats situation."

There are fine points, of course. Even in states that are largely being ignored by the presidential campaigns, such as Illinois and California, broadcasters can make out very well from political advertising if there's a hot battle for senator, governor or a key congressional district.

But, in general, financial observers are figuring that broadcast companies with a big presence in the swing states, whether their stations are carrying political ads or simply reaping the spillover benefits in their local market, stand to do best.

Because CBS owns a number of stations in the hot regions, CBS owner Viacom Inc. will enjoy a bump in second-half earnings. So will General Electric Co., which owns the NBC network and has a number of company-owned stations in the battleground states.

But those corporate parents are so huge that even the inrush of political ad money will be a minor factor in overall earnings. Several other media companies also are well positioned in the pay zone that the swing states have become, including Meredith Corp., Gannett Co., and Belo Corp.

For the stock-pickers who are trying to handicap the financial winners of the election-spending blitz, one company stands out: Hearst-Argyle Television Inc.

New York-based Hearst-Argyle has stations in 9 of the 17 swing states, including one in New Hampshire that also benefited from hefty primary-season ads.

More impressive to analysts, Hearst-Argyle has a presence in three of the four crucial battleground states. And two of those states, Pennsylvania and Florida, are expected to see hotly contested U.S. Senate races that will generate saturation-level advertising.

Companies in such a situation, said Belis, in a sense "have hit the trifecta."

Hearst-Argyle is also small enough that the political ad money it is reaping has a significant bottom-line impact.

In sum, said Legg Mason's Butson, "Hearst-Argyle is the best positioned of any company in the media universe to benefit from political [advertising] this year."

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