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Forecast for Slow Growth in Communications Spending

The investment banking firm of Veronis Suhler is forecasting an increase in advertising spending next year but a slowdown through 2005 in the growth of this spending and in the communications industry as a whole.

In its 15th annual communications industry forecast, released today, the firm, which specializes in the media, predicted that advertising spending in the United States would increase 6.9 percent next year.

This would follow an 11.1 percent increase in 2000 - which was driven by double-digit growth in broadcast television, consumer magazine, Internet and radio advertising - and what it expects will be a 1.1 percent decline this year "as advertisers reduce their budgets in the wake of the economic downturn and dot-com shakeout."

For 2000 to 2005, the firm expects total spending to climb 4.9 percent a year; in the previous five years, growth was 8.9 percent a year.

Through 2005, the firm also expects a slowdown in growth in the communications industry, including advertising spending, marketing services and specialty media like direct mail and the purchases of books, home videos or trade magazines.

From 1995 to 2000, the firm said, the communications industry grew 7.9 percent a year, while for the period 2000 to 2005, it predicted that the industry would grow 5.5 percent.

Noting that communications was the second-fastest-growing sector of the economy from 1995 to 2000, Veronis Suhler projected that it would be only the sixth-fastest in the next five years. The firm attributed this decline to "a slower-growing economy, slower growth in advertising expenditures and tamer consumer spending."

James P. Rutherfurd, the firm's executive vice president, said the slower growth was a result of the maturing of certain industry segments and a slowdown in the general economy.

Mr. Rutherfurd said that the economy grew 6 percent a year from 1995 to 2000 and that Veronis Suhler expected growth of 5 percent a year from 2000 to 2005.

"Some communications businesses are getting more mature than they were in previous years," he said. "For example, cable is still the highest-growing business, but its growth is getting less because it's almost doubled in size in the last five years. Now it's penetrating a lot more households. The broadcast TV market is getting tougher and tougher. And the Internet, which barely existed five years ago, is in a maturing process."

In addition, he said businesses like books, magazines and newspapers are "very mature and growing at slower and slower rates."

But Mr. Rutherfurd said he did not find the slower growth alarming.

"In the context of five years of incredible boom times in the national and communications economy," he said, "it's pretty hard to replicate these growth rates, with some exceptions. It looks like for the industry as a whole it's steady-as-you-go growth, with pockets of high growth and pockets of slower growth."

One segment projected to have a high growth rate is cable, including cable TV access, advertising sales and licensing fees. These are expected to increase 9.1 percent a year through 2005, which will make cable the largest segment of the communications industry, replacing newspapers. Internet access and advertising are expected to increase 7.3 percent, while outdoor advertising is expected to rise 7.6 percent and sponsorships are expected to increase 9.4 percent.

Segments with the smallest increase are books, estimated to grow 2.4 percent; broadcast television, expected to rise 3.1 percent; and consumer magazines and newspapers, both expected to grow 3.7 percent.

Besides slower growth in the communications industry through 2005, Veronis Suhler is also predicting a decline in consumer spending on media. Consumer spending increased 7.8 percent from 1995 to 2000; it is expected to grow 5.4 percent through 2005.

Consumer spending on the Internet, which grew 44.7 percent from 1995 to 2000, is expected to increase 9.6 percent through 2005, while spending on home videos is expected to grow 5 percent after an increase of 7.7 percent in the previous five years. Video games, whose spending jumped 19.9 percent from 1995 to 2000, will increase 10.3 percent through 2005.

In addition, the firm found that people spent less time with media that have significant advertiser support - broadcast TV, newspapers, magazines and radio. The annual hours spent on these media fell 9.2 percent from 1995 to 2000, while the time was expected to increase slightly, 0.4 percent, from 2000 to 2005.

The time spent on media supported predominantly by consumers - cable and satellite television, recorded music, books, home video and video games, film and the Internet - increased 37.2 percent from 1995 to 2000 and is projected to rise an additional 12.2 percent from 2000 to 2005.

Veronis Suhler also found that in 1995, 69.3 percent of consumers' time was spent with media with advertiser support, while this figure fell to 60 percent in 2000 and is expected to drop to 57.2 percent in 2005.

Mr. Rutherfurd said changes in consumer preferences "are clearly not a good sign for advertisers."

"Over time, people are spending more and more time with the media they buy themselves," he said. "Advertisers are going to have to fight harder and harder for attention in an increasingly cluttered world, even before they fight for attention among themselves."


Jane L. Levere, The New York Times. August 6, 2001

Copyright © 2001 The New York Times Company. All rights reserved.