Last year was a stellar one for companies that specialize in out-of-home advertising, a longstanding business of selling ad space on billboards, posters and other public spaces.
Companies in the once-sleepy business posted double-digit percentage growth in profit and stock prices. And while overall ad spending is largely expected to slow in 2007, forecasts for spending on out-of-home -- also called outdoor -- advertising are coming in behind the Internet as the second-fastest growing marketing sector.
The growth is not only sustainable, but also is accelerating thanks to the introduction of digital billboards with television-quality ads that can be changed on the fly -- all broadcast on huge, bright displays. The technology is sparking a renaissance in the stodgy business.
"We're really very excited about the potential that digital affords our industry," said Paul Meyer, president and chief operating officer of Clear Channel Outdoor Holdings Inc., which is 90%-owned by Clear Channel Communications Inc. "Over time, it's going to be truly transformational."
Digital displays can be modified quickly to meet demand, so a billboard can plug a coffee chain to commuters during morning drive time and a sale at a clothing retailer in the evening. Digital displays also can be programmed to beam messages to cellphones, potentially delivering marketing spots directly to hundreds of millions of pockets and purses.
Each company has only a fraction of their displays as digital, and it's likely the technology shift will be cost-effective only in a small percentage of locations. Still, even a small shift of its assets to digital has a huge impact.
"When you give an advertiser that kind of creative flexibility, you have an opportunity to get a great price point," said Wally Kelly, chairman and chief executive of CBS's outdoor division.
Indeed, Citigroup analyst Eileen Furukawa estimates outdoor-advertising companies can get five to 16 times the revenue from a digital display compared with a static billboard, and margins go from roughly 45% up to 65% or 70%.
"While there's been a lot of hand-wringing about the health of print and TV advertising, there's a bit of glee and unbridled bullishness on the out-of-home advertising," said Pete Winkler, director in the entertainment and media advisory practice at PricewaterhouseCoopers.
Enthusiasm has driven up stock prices of the country's two big stand-alone outdoor-advertising companies, Lamar Advertising Co. and Clear Channel Outdoor, with each up about 40% in 2006. Media conglomerate CBS Corp.'s shares rose 30% last year, and many credit the company's outdoor division -- where operating earnings climbed 47% through the first nine months of 2006.
Following the companies' stock rally in 2006, Lamar's price/earnings ratio stands at about 162, with Clear Channel Outdoor's at about 78. Lamar shares recently were at $66.35, with Clear Channel Outdoor's at $29.13 and CBS's at $30.89.
Digital displays also help ward off the bane of all marketers: the ability of consumers to avoid ads.
"The advent of TiVo started it," said Bill Apfelbaum, chairman of privately held media company Titan Worldwide and a veteran of the industry. TiVo, videogames and other demands on consumers' attention have made it easy to tune out or zap ads on TV, radio and newspapers. The same can't be said about outdoor advertising.
"It's going to be the in-your-face, unavoidable media that I think are going to be the biggest share gainers going forward," said Ms. Furukawa. "As people get frustrated with newspapers and frustrated with TV and [digital video recorders] in particular, that can only benefit cheap mediums like outdoor," Internet and direct mail. Ms. Furukawa has "buy" ratings on Clear Channel Outdoor and Lamar.
Growth in outdoor advertising isn't without skeptics. There's a risk that as displays become more ubiquitous, consumers may dislike seeing their environment filled with ads.
Also, advertisers can be loath to switch time-tested marketing tactics. "The advertisers are going to be very finicky until they're convinced through research that it works," Mr. Apfelbaum said.
But as the Internet captures a larger slice of the advertising pie, marketers may show an increased willingness to shift ad dollars. And each of the outdoor Big Three -- which together control a majority of the outdoor-advertising market -- has room to grow.
Shira Ovide, The Wall Street Journal. January 10, 2007
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