Transit Advertising Sales Agreements (2004)

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15 CHAPTER THREE MARKET FOR TRANSIT ADVERTISING Transit advertising is one form of outdoor advertising, a category that also includes billboards, newsstands, phone booths, and taxis. Changes in the market for outdoor adver- tising and the evolution of the advertising sales industry have and will continue to affect transit agencies and transit advertising in significant ways. This chapter highlights key developments in the outdoor advertising industry. RECENT DEVELOPMENTS IN OUTDOOR ADVERTISING Outdoor advertising has traditionally been a stepchild to television, radio, and print mediums, with media buyers traditionally reluctant to spend advertising dollars on bill- boards, transit advertising, and other outdoor venues. In recent years, however, outdoor advertising has be- come more attractive to advertisers. This newfound interest is partly the result of changes in other media, such as the fragmentation of the television audience with the spread of cable channels. In addition, the audience for outdoor ad- vertising is growing as Americans spend more time in their cars. Advertisers have increasingly recognized that outdoor advertisements deliver a mass audience and reach consum- ers who are not exposed to newspapers or television news. At the same time, outdoor advertisements can target con- sumers based on their location and deliver advertisements close to the point of sale, whether that be a downtown shopping district or a suburban mall (Cimine 2002). Since the mid-1990s, outdoor advertising has also bene- fited from the consolidation of advertising sales contrac- tors, a field now dominated by three major companies. These companies have brought increased resources to ex- panding and promoting the outdoor advertising market. Outdoor advertising has also benefited from improved printing technologies and high-technology digital and light-emitting diode displays. The creativity and quality of billboard and other outdoor advertising has improved dra- matically with the introduction of these technologies. New technologies also mean that advertisements can be pro- duced and mounted more quickly, increasing the timeliness and responsiveness of the medium. The profile of advertisers has also changed. All tobacco advertising was removed from outdoor advertising pursuant to a 1998 court settlement. Replacement of tobacco adver- tisements with national brand campaigns, combined with the improved technology for producing the advertising, has made outdoor advertisements more visually appealing. Of potentially great future significance is improved au- dience measurement and validation, because the value of outdoor advertising has been held back by the absence of detailed data on audience demographics. Demographic data are key information for advertisers, enabling them to target particular groups, and are the stock in trade of radio, television, newspapers, and magazines. In 2002, Arbitron Inc., a major media and marketing research firm, tested a consumer-oriented audience measurement system in At- lanta, Georgia. The new system uses global positioning system (GPS) technologies to track consumers’ move- ments, while also collecting information about income, age, and other variables. Arbitron and Neilson plan to in- stall new measurement systems in Chicago in the fall of 2003 and then throughout the country over several years. Advocates of outdoor advertising hope that the demo- graphic data to be provided by these systems will put such advertising on a level playing field with radio and televi- sion and thus increase the outdoor share of national adver- tising spending, currently about 4% (OAAA 2003b). Another argument for the outdoor category comes from advocates of a “media mix” advertising strategy. These ad- vocates believe that outdoor advertisements are able to generate a more cost-effective return on the marginal ad- vertising dollar than traditional media. Media consultant Erwin Ephron comments, “Research shows that the next dollar added to a medium produces less response than the one before. So, although a medium [such as television or radio] may start out being more cost-effective [for reaching a given audience], there will come a point where the next dollar should be spent elsewhere” (Ephron 2002). Outdoor advertising experienced growth of 8% to 9% annually during the 1990s, a substantially higher growth rate than for total advertising revenues (S. Freitas, personal communication, May 15, 2003). Although growth ceased with the recession, outdoor revenues were less volatile than the overall advertising market. Outdoor revenues dropped by 0.8% in 2001 and regained that ground in 2002 (OAAA 2002, 2003a). By contrast, total advertising spending was down 10% in 2001 and then increased by 4% in 2002 (TNS Media Intelligence 2002, 2003). Transit advertising represents approximately 17% of the $5.2 billion outdoor advertising market. Transit’s share has

16 held stable over the past several years, according to the Outdoor Advertising Association of America (S. Freitas, personal communication, May 15, 2003). TRANSIT ADVERTISING SALES CONTRACTORS A few national advertising sales firms account for the bulk of transit advertising sales, particularly in large media markets. Regional and local firms serve mid-size and smaller media markets that primarily appeal to local adver- tisers and thus do not need the connections to national ad- vertisers that the large firms offer. In major U.S. media markets, Viacom Outdoor is now the leading company for sales of transit advertising. Via- com Outdoor sells bus advertising in 9 of the 10 largest U.S. markets; New York, Los Angeles, Chicago, San Fran- cisco, Dallas–Fort Worth, Philadelphia, Washington, Bos- ton, and Detroit. (The other transit agency in the top 10 market, Houston Metro, does not display bus advertising.) Viacom Outdoor sells rail advertising in 6 and bus shelter advertising in 5 of the top 10 markets. In addition, Viacom sells transit advertising in 6 of the next 10 largest metro- politan areas. According to the company’s filings with the Securities and Exchange Commission, the company’s growth strategy is to acquire out-of-home media properties in the largest markets (Viacom 2003). This strategy has clearly been evident in Viacom’s acquisitions and recent bidding for transit contracts. Viacom Outdoor is part of Viacom Inc., a diversified worldwide entertainment company that owns CBS, UPN, Nickelodeon, MTV, and other cable networks, and Block- buster. Viacom’s subsidiary Infinity owns and operates 185 radio stations and outdoor advertising properties through Viacom Outdoor. Infinity is thus able to offer both radio and outdoor advertising venues in the largest markets (Via- com 2003). Viacom Outdoor was formed through mergers between several media companies. Most notably, in 1999, Outdoor Systems Inc., merged with Infinity Broadcasting Corp., which in 1996 had acquired TDI Worldwide, Inc. TDI was a major outdoor advertising sales contractor and sold ad- vertising space for large transit agencies in New York, Los Angeles, Chicago, New Jersey, Washington, Philadelphia, San Francisco, Atlanta, and several smaller cities (Silver- berg 1998). The acquisition of TDI thus made Viacom the leading advertising sales contractor serving the transit in- dustry. Viacom Outdoor has competed in some medium-sized as well as most large media markets. Viacom Outdoor made a successful bid to TARC for exterior transit adver- tising and can now offer a package of billboards, bus wraps, and other bus advertisements and bus shelters (the latter through a separate contract). According to TARC staff, Viacom has brought new national and corporate ad- vertisers to TARC. Two other companies with a major presence in the tran- sit advertising market are Obie Media and Clear Channel Communications. In recent years, both of these companies used acquisitions to expand their presence in transit adver- tising. In 1998, Obie Media acquired P&C Media, which had agreements with 19 transit districts. Clear Channel ac- quired Eller Media in 1997. Obie Media is an out-of-home advertising company that markets advertising space primarily on transit vehicles and outdoor advertising displays such as billboards and wallscapes. As of the end of 2002, Obie Media had 35 transit contracts, 9 of which were in the 30 largest U.S. markets; Dallas, Portland (Oregon), Sacramento, Hartford, Ft. Lauderdale, St. Louis, Tampa, Indianapolis, and Kansas City. Obie Media also had a contract in the third largest Canadian market, Vancouver, British Columbia (Obie Me- dia Corporation 2003). Clear Channel is a diversified media company that is best known for owning more than 1,200 radio stations in the United States. Clear Channel primarily sells bus shelter advertising. Shelters are often owned and controlled by the local municipality rather than the transit agency (where the two are separate). According to its website, Clear Channel has shelter contracts in the Los Angeles, Philadelphia, San Francisco, Washington, Miami–Ft. Lauderdale, Pittsburgh, and Milwaukee metropolitan areas. Clear Channel has been minimally involved in transit bus and rail advertising contracts. Another company with a market presence in transit has been Gateway Outdoor Advertising, which has 12 transit, bench, and bus shelter contracts in the United States (Gateway Outdoor Advertising 2003). Lamar Outdoor is one of the largest and oldest outdoor advertising companies in the United States. Lamar has advertising in 41 transit markets, with displays on buses, trains, commuter rail, subways, platforms, and terminals (Lamar Outdoor 2003). The survey indicated that most of these contracts are in relatively small markets. One transit agency in the survey, York County (Pennsylvania) Trans- portation Authority, contracts with Lamar. Other companies with transit contracts include Adams Outdoor; American Transit Displays; Attention Transit Ad- vertising; Burkhart Advertising; Freeway Advertising; Houck Motor Coach Advertising, Inc.; Michael Allen As- sociates; National Transit Advertising; Orion Outdoor Me- dia; Park Transit Displays; Princeton Media; Transit Ad-

17 vertising Group; Vista Media Group; and Washington Transit Advertising in addition to various local advertising sales contractors. This listing is based on survey responses; other firms undoubtedly provide advertising sales services to transit agencies not covered by the survey. (Note that mention of these firms does not constitute an endorsement of any firm, and omission of any firm is inadvertent.) There is some evidence that consolidation among ven- dors over the past 6 years has reduced the number of ad- vertising sales contractors serving transit agencies. In a 1997 survey, 19 U.S. transit agencies that contract advertis- ing sales used 13 different advertising sales contractors (Silverberg 1998). By contrast, in the survey conducted for this report, a much larger sample (37 transit agencies) that contract for advertising sales also used 13 different adver- tising sales contractors. Transit managers should also be aware that financial stability and the ability to fulfill contract obligations have been an issue for some advertising sales contractors. Sev- eral transit agencies, including agencies in Chicago, San Antonio, Cincinnati, Louisville, and Knoxville have termi- nated contracts as a result of the inability of the contractors to meet contractual obligations. Previous track record and current financial health should be reviewed in the contract- ing process. Useful financial and contracting information is found in public companies’ Securities and Exchange Commission filings, particularly the annual Form 10-K re- ports, which are available at www.sec.gov. COMPETITION FOR TRANSIT ADVERTISING SALES CONTRACTS The small number of advertising sales contractors that op- erate nationally raises the issue of competition for advertis- ing sales contracts, particularly for large transit agencies in top 20 media markets. One argument is that consolidation of firms in the outdoor segment has been beneficial to cli- ents. Larger advertising sales contractors are able to bring resources and sophistication, as well as national advertis- ers, to generate higher sales levels. One executive has said that consolidation is attracting more new advertisers in the outdoor sector. The executive states that “The ownership by very large companies has created a situation in which you have a much more professional approach to the busi- ness, so a lot of advertisers who didn’t use the media are now doing so” (MediaWeek Online 2000). Indeed, a num- ber of large transit agencies saw significant increases in revenues from advertising sales in the late 1990s and into early 2002 as a result of consolidation and aggressive bids for transit accounts. (For a discussion of revenue trends see chapter four.) However, revenues at many agencies have been hurt by the recession. Some agencies, such as WMATA, do have long-term contracts with revenue guarantee levels that were set before the recession. Some transit agencies that have had to renegotiate their contracts, however, have ex- perienced sharp declines in revenues. For example, in 2003, advertising revenues for the Santa Clara Valley Transportation Authority (VTA) in San Jose and King County’s Metro Transit in Seattle, were less than half the revenues received in 2002. One notable exception, how- ever, is BART, which in 2003 negotiated a 43% increase in their revenue guarantee over a 5-year extension of their contract. Looking ahead, consolidation among advertising sales contractors has raised concerns among transit agency staff about the level of competition for advertising sales con- tracts. The number of firms responding to requests for pro- posals (RFPs) lends credence to this concern. In the survey, 36% of RFPs issued in 2001 or 2002 garnered only one bid, and only 18% produced three or more bids. By con- trast, none of the RFPs issued between 1997 and 2000 re- ceived only one bid and at least three bids were received in 63% of the procurements (see Table 5). TABLE 5 NUMBER OF PROPOSALS SUBMITTED FOR ADVERTISING ALES CONTRACTS S Year of Solicitation No. of Proposals Received 1997 to 2000 2001 to 2002 1 0% 36% 2 38% 45% 3+ 63% 18% Total 100% 100% No. of respondents 16 11 One firm has consistently won out over its competitors in bidding for large agency contracts. Twelve survey respondents reported that other firms bid on their most recent RFP. How- ever, one firm emerged with the contract award in 10 pro- curements and other companies in only two. It remains to be seen how transit agencies will fare as the advertising market emerges from the recession and cur- rent contracts come up for bid again.