When most major media companies reported earnings this week, 21st Century Fox President Chase Carey took the opportunity to address one of Wall Street's biggest fears.
Asked whether advertisers were moving away from TV to digital platforms, he acknowledged that "there is a marginal shift to digital." But he was quick to point out that the bulk of the recent advertising slump could be blamed on something much less worrisome: Weak confidence in the short-term economy.
While Carey was likely correct about the current state of play, many questions about digital advertising remain. First among them, could the shift to digital become a bigger worry over time?
Investors zeroed in on the potential move to digital earlier this year when companies began reporting surprisingly weak advertising revenue. Sales estimates for advertising-heavy companies like CBS began to fall and so did their share prices. Now underwater for 2014, shares of CBS, 21st Century Fox (formerly part of News Corp.) and Viacom are in danger of seeing their first losing year since the financial crisis.
Here's the trend that has investors spooked: Non-millennial Americans spend 12 percent of their "TV time" watching video online, with the balance spent on live, delayed and on-demand television, according to venture capital firm Kleiner, Perkins, Caufield & Byers. But millennials spend nearly three times as much, or 34 percent, of their time watching video over the Internet, the firm says.
When consumers began spending much more time on the Internet a decade ago, it was only a matter of time before advertisers began to abandon newspapers and magazines. Print advertising continues to slide and industry executives can't even predict when the pain will stop. Just this week, Time Inc. had to cut its revenue forecast for the second time in just a few months thanks to weak print advertising sales.
Just as the number of print newspapers has declined sharply, so too will the number of traditional TV channels, says Brian O'Kelley, CEO and co-founder of advertising-technology firm AppNexus. "It's going to be fragmented," he said. "There won't be less video to watch—it just won't be traditional TV."
Where would the ad dollars be going? Advertising executives say there's plenty of appetite for high-quality video content. Display ads can have limited usefulness, especially when there are several of them on the same Web page. A 15- or 30-second video spot is a rare opportunity to capture the attention of someone on the Web.
For now, much of that content belongs to big media companies themselves. Video-streaming service Hulu, for instance, is a joint venture between 21st Century Fox, Walt Disney and CNBC parent Comcast. Such sources account for more than 50 percent of the available video ad minutes that marketers choose to buy over the Internet, according David Bank, an analyst at RBC Capital Markets.
TV companies have been slow to put their content online and they could fall behind if they don't make digital a priority. Hulu was considered very controversial just a few years ago and some networks are reluctant to give consumers a way to circumvent highly lucrative cable-TV packages.
And many TV companies have chosen to sell content to the likes of Netflix and Amazon, which display movies and shows on ad-free platforms. It's not clear that the revenue from those platforms will be sufficient to make up for lost advertising revenue in the long run. After all, Netflix has already committed $9 billion to future streaming content obligations and yet generates virtually no free cash flow. At some point, there may not be as much to milk from a Netflix deal.
The door is open for a deep-pocketed technology company like Google or even Yahoo to spend more on high-quality content that advertisers want. Google has been somewhat slow to spend money on originals but its platform alone could attract self-funded projects. Even Twitter's Vine video-blogging service may attract advertisers as it gains popularity.
At the moment, Fox's Carey probably doesn't have too much to worry about. CBS is downright bullish, citing an improvement in advertising sales and an acceleration seen early in the fourth quarter.
Indeed, there's other evidence advertising was growing at a pace that wasn't sustainable in recent years. After a sharp falloff during the crisis, advertising spending needed to catch up, according to analyst Brian Wieser of Pivotal Research. He points out that advertising rose an impressive 3.2 percent in 2013, even without the benefit of elections or the Olympics.
But now, with the economy expanding only slowly, a more modest pace makes sense. Wieser also points out that several big advertisers added much less to their budgets in 2014 than they did in 2013. He expects advertising growth of 2.5 percent in 2014 with a pickup to 2.7 percent next year.
Big TV companies may have avoided the digital threat this time. But the battle has just begun.