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Midterm-Election Advertising Provides Shot In The Arm For Media Industry

Advertising spending is up 20 percent from 2008

Could be a boost to local TV stations

Record spending in the midterm elections will provide a large cash infusion for broadcasters and other media outlets, as the industry struggles in the aftermath of the recession.

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When the results are in, however, local TV and radio broadcasters, will have to hope that their regular clients—auto and retail—will spend in a flat environment.

“Political advertising is definitely helpful in 2010, but it will be a drag in 2011," says Moody’s Vice President and Senior Credit Officer John Puchalla.

With 37 races apiece at the U.S. and state governor level, as well as all 435 House seats up for grabs, close to $3 billion will be spent on advertising, says Evan Tracey, President of Kantar Media’s Campaign Media Analysis Group. That's about 20 percent more than 2008.

Seventy percent of that is expected to go to broadcast TV with the other 30 percent to all other media, including cable TV, radio, outdoor, internet and direct mail.

“It’s still probably the only business in the world that spends the most money when it has the least amount of customers left to influence,” continues Tracey, referring to the fact that the majority of political ad dollars are spent in the last 60 days before an election.

This campaign ad surge amounts to a significant portion of a local TV station’s revenues—anywhere from 5 to 15 percent, says Puchalla, but more importantly, it provides a cash-rich bridge to manage through what could be a longer downturn.

Variety of Factors

This midterm there are more competitive races and that is when ad spending is at its greatest, say industry analysts. There is also a lot of turnover, with more than the usual open Senate seats, which means more spending at both the party primary and general election level.

There's also several self-funded, former business candidates running for Senate and governor.

“Take a state like California where you get a Meg Whitman[former eBay CEO]or a Connecticut, where you have Linda McMahon running for Senate,” says Tracey.

What really heightens competition—and sparked spending—this year is that voters are not happy about the economy, and they haven’t been for a while, presumably since the financial collapse of 2008. Some are even angry.

As a result incumbents in supposedly safe seats, Democratic Senators Riss Feingold of Wisconsin and Harry Reid of Nevada, for instance, will feel compelled to spend more on ads than they would otherwise.

On the House side, even powerful, long-term incumbents may have to empty their campaign chests if they want to stay in office.

“Survival skills are going to kick in to a lot of these politicians, and they are not going to end up this election cycle with money in the bank because there is no such thing as a safe seat in this environment," says Tracey.

The rapid ascension of the Tea Party is also a factor. Senate primary wins in Kentucky, Nevada, Delawareand Colorado, for instance, as well as House wins in New York and elsewhere may mean ads directed at different audiences.

In another permutation, if polls convincingly show Democrats losing the House—as many pundits are predicting—then a lot of money will shift to the Senate races, says Tracey, particularly impacting states like Wisconsin, Nevada, Washington and California.

Gubernatorial races will also see a lot of ad dollars because there are a large number of open seats (37 vs. 11 in 2008).

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

What pushes these over the top is that the2010 Census will bring a redistricting in 2011and governors basically control the process of drawing new congressional lines. With states standing to gain or loose seats, the process has national implications, which means more money will flow to pivotal states.

Furthermore, with the introduction of more controversial legislation, comes additional issue-related political ads.

Other macro factors like the Supreme Court ruling in the Citizen’s United case ruling, which held that corporate and union funding of independent political broadcasts in elections cannot be limited under the First Amendment, will add more fuel to the fire, says Tracey. This boosts politically-related ads that will still be around after the elections.

In the final weeks before the election, political advertising sucks up inventory and tends to raise prices for everyone else. “There are only so many hours in a day,” says Puchalla. In this situation, the supply demand dynamic works out in broadcasters’ favor.

There is, however, some potential downside. All candidates are eligible for the "lowest unit rate" for broadcast ads, which can amount to a 30-percent discount to normal rates, says Dennis Wharton, executive vice president with the National Association of Broadcasters. Broadcasters are also legally required to provide air time to candidates.

Elections’ Outcome Could Twist Positive for Media

Though the surge in political advertising is unlikely to kick start a broader ad industry rebound on it’s own, it is possible that the overall outcome of the midterm election and the new legislative agenda that follows will be seen as constructive for the economy.

“If one of the perceptions holding back the markets is that there is so much uncertainty in Washington, what could potentially happen with tax laws, trade laws and other policies that impact business, come November, there will at least be some or more clarity and that could have an upside impact on how things happen on Wall Street,” says Tracey.

If Wall Street rallies, consumer spending could firm and companies could increase hiring. In that light, politically motivated ad spending could ignite a recovery not only for broadcast, but a more broad-based one that is felt on Main Street as well.

And that force will be evident on TV. It's called more commercials.