Standard and Poor's Whacks Advertising Companies

We had forgotten about these guys, with Moody's taking all the downgrading limelight over the past month. Zero Hedge, along with many, agrees that there is little of practical value to be extracted from rating agency actions or reports, however, notes that many CDOs and mutual funds are still stuck in a world where a company's rating has a binary holding outcome on a given security (i.e. to sell or not to sell). In this case, the S&P commentary is mildly insightful as it discusses the pain to come in the entire advertising space (no shocker there). We pull this nugget from the CBS report (one of the companies downgraded):

"The CreditWatch listing of the long-term ratings reflects our expectation that fully adjusted leverage will rise meaningfully above our 4x threshold at the current rating level in 2009," said Standard & Poor's credit analyst Michael Altberg. "Our concern is most focused on local advertising weakness that has compounded adverse secular trends that have affected radio, TV, and outdoor advertising in various degrees. Our analysis also incorporates economic data available through early March on rising unemployment, record lows in consumer confidence and automotive sales, and our expectation of a GDP decline in 2009. Based on our macroeconomic concerns, we are now less confident that the company will bring leverage back below our 4x threshold in 2010."

Aside from CBS, which got a Short-Term Debt cut from A-2 to A-3, S&P also assigned a Negative Outlook to advertising company Omnicom (OMC), essentially along the same parameters. To demonstrate just how little the credit market ultimately cares about rating agency opinions, the CDS of CBS barely moved today, while Omnicom actually tightened by several points.

It is about time to enable a wiki based rating agency: Zero Hedge will always be happy to provide its constructive input on any given rating.

Comments

[Doug Poretz:]

The real problem with the advertising stocks isn't the economy -- the economy will be the straw that breaks the agencies' back -- but the core problem is that they have the wrong business model it is outdated and has at least two basic flaws. I have been in the communications business for 40 years and have written about this extensively at my blog (linked above).

First of all, agencies bill on the basis of time. They remunerate on the basis of time. They measure success, make promotions, award bonuses and are totally driven by the time sheets that dominate their businesses. Crazy. Clients don't care how busy their agency may or may not be. They only care about whether the value they expected to receive is being delivered at a minimum. Time has very little to do with that. Skill, commitment, capabilities have a lot more to do with that. In fact, an agency's interests are just not aligned with their client's interests when the agency is obsessed with time. That is a core fundamental of the agency business, and it will kill them eventually.

Secondly, agencies are structured and organized on the basis of silos defined by distribution channels. That is, there are ad agencies (or "practice groups" within larger firms) that are separately identifiable because they buy time or space on a distribution channel owned by another enterprise. PR is identifiable because that effort seeks to "earn" coverage on someone else's distribution channel. Digital, interactive, events marketing -- go through the list of those specialities of the communications business and they all refer to the distribution channel. But this is 2009 and the way to get a message to an audience is by using whatever distributuion channels work. That goal is undermined when agencies are organized by silos where each practice group seeks to win more of the client's budget for their silo rather than seeking to be part of an integrated team that has the single shared goal of hitting a homerun for the client. This, too, will eventually kill the existing business model.

Washington Post Pulitzer Prize winning business reporter Steve Pearlstein wrote about this outdated model about three years ago and his points are still valid. You can read where he said here: tinyurl.com/ylobdq

Apr 07 10:01 AM

[joes:]

Ever since John Wanamaker moaned that half of his advertising budget was being wasted, but he didn't know which half, people have known that ad agencies weren't an efficient way to sell products. But they were the only way that anyone knew for most of last century.

As pointed out by Mr. Portez, agencies care about billing hours and collecting media buy cash to hold for 6 months for the interest, a good strategy when rates were good, not so hot now. If fact, very few of advertising tactics work as well as they did in the past. Mr Wanamaker might say today that 90% of his marketing budget is wasted, but he can't find the 10% that really drives sales.

I don't know what the advertising business can do in the future other than become more aware of consumer comments and try to react the reasons that people don't like what they are selling.

Psychology has always been a part of selling and new techniques of creating opinions and selling the dream are always in the works, but accountability is the key now and for folks like me that trust Amazon reviews way more than advertising they have a tough future.

Apr 07 12:14 PM