US newspaper USA today has floated a story this week suggesting that the two dominant cinema advertising specialists ‘ National CineMedia and Screenvision are looking at a merger, and even raised the idea that it should be referred to financial regulators because it would lead to a monopoly in one of the areas where advertising is still growing.
Screenvision is owned by French technology conglomerate Thomson and UK independent broadcaster ITV both of whom need cash right now and who have hired UBS to sell the firm.
We think the idea of raising monopoly as an issue is a non-starter, because what’s actually happening is that these two companies are adding cinemas to their satellite and IP distributed advertising systems, replacing the more difficult logistics of transporting adverts as film and physically splicing them into the movie. So they have neither a monopoly of all cinemas, nor one of advertising, and despite the fact that their figures are being seen as growing, the weakness right now of other types of cinema advertising and advertising markets overall, would suggest that there is no danger here.
On the other hand National CineMedia is controlled by the three largest movie theater chains Regal Entertainment, AMC and Cinemark so they perhaps have a different view on exactly where it is best to make profit ‘ in the advertising channel or in their Cinemas, and that continued line of control may NOT be healthy.
The total industry in the US right now is around $650 million annually and has been on the rise for the past five years growing well into double digits each year.
Other companies which are attacking the digital movie distribution market will also attack this market in time, but in the US that really amounts to Thomson and its Technicolor operation and so Screenvision, but outside of the US there are other equivalents ‘ so the chances of this turning into a monopoly which can distort market pricing is probably out of the question. At least it is in the current market, and who else is Thomson going to offload this particular part of its empire to? What other type of company could it approach?
But the condition of the overall cinema market suggests that advertising success is not assured. The average capacity per film performance has been falling now in the US for about 3 years. In opposition to this has been the replacement of 250 seat cinemas, which had once been theaters, into multiplexes with 5 to 15 screens. Capacity has been going up across the US, as attendance per viewing does down and they about balance each other out right now. They won’t in future.
In recessions, attendance would usually be expected to go up. More people go to the cinema because it is seen as a cheap way of going out, people eat out less, but they also watch more TV. However cinemas have been saying for some time that the few $hundred millions which pre-roll advertising brings the industry is what’s making survival possible for many cinemas.
It should then follow that, even if during this recession companies like National CineMedia and Screenvision do better than ever and grow their revenues, they do it not by getting more for their advertising but by signing up more outlets. They are in fact creating inventory. But given that less people are watching each sitting, the total inventory of total eyeballs watching cinema screens, rather than the total number of eyeballs viewing satellite and IP distributed advertising ‘ is going down, not up.
It would be just like financial regulators and monopoly legislators to decide to refer a transaction which is in a market which may soon evaporate, but we don’t think it should happen. There is an argument that says that it might affect advertisers, studios and theater chains who like to play these two companies off against each other, but as we say it has to lead to a market distortion (artificial price hikes) to make sense and we can’t see how that could happen because there are so many new advertising options.
This whole idea of creating more advertising inventory isn’t just happening in the cinema industry. Obviously video advertising on the internet is in its infancy and is growing rapidly. If and when more complete TV programs drift to the internet, whether that is through operations like Hulu or through the TV Everywhere campaigns of Time Warner Cable, or through broadcasters seeking to claw back reducing TV advertising revenues, then there will be a radical rising in the amount of advertising inventory on video on the internet. Existing search advertising is continuing to rise, as is existing internet display advertising.
On terrestrial TV services, the simple expedient of replacing a single analog TV channel in 6 MHz or 8 MHz of spectrum with 5 or 6 separate TV channels, means 5 or 6 times as much broadcast TV advertising inventory. In mobile TV, it is pretty much becoming universal common sense that there must be at least SOME free to air content in order to trigger the market.
In the US the ATSC M/H may lead to anything from 6 to a dozen new mobile local TV channels. If some of these have to be free to air, then that’s yet more advertising inventory.
So at a time when the world wants to have LESS advertising inventory, the owners of the inventory which already exists, want to produce more ‘ such as National CineMedia and Screenvision. TV companies continually try to create MORE inventory by the simple expedient of putting more adverts per hour into programming. In the US it has already reached around 25 minutes per hour. In China a few years ago it was about to go past this point, and legislation had to be brought in to stop this from happening.
Coincidentally, this week Ofcom, the UK regulator has just passed judgment on yet another attempt to increase advertising inventory on UK broadcast TV. It agreed that there would be no significant changes to the rules on the amount of advertising on TV, but said that it would review it again in Spring 2010 in preparation for digital switchover. At which time what will happen? The increase in numbers of TV channels will mean that there is more inventory on the market, which once again will drive down pricing, which means everyone will want to have more advertising to sell (because it’s not worth as much) as it gets cheaper. The trouble with this is that it creates more downward pricing pressure on advertising, which could begin a permanent price spiral.
We know that’s a long journey from a simple story about one merger, but the continued creation of more advertising inventory will create constant downwards pricing pressure on all forms of advertising until there is a major correction in the advertising market, a correction that must be caused by eliminating huge swathes of inventory through media bankruptcy and consolidation.