Will the fall off in ad spending bring about a recession?
A widespread outbreak of the new coronavirus could dent the U.S. advertising market, according to analysts.
"Potential broader coronavirus contagion in the U.S. will have a short-term negative effect on U.S. advertising, stemming from a swift and deep economic pullback," Neil Begley, a senior vice president of Moody's Investors Service, wrote in a report Wednesday. "However, the duration of the sector's contraction may be short-lived."
Economists have long viewed the health of the advertising market, which exceeds more than $150 billion in the U.S. alone, as a key indicator when trying to predict a recession.
During tough economic times, some advertisers forgo advertising because they are taking in less revenue and they view marketing as a discretionary cost. However, studies have found that eliminating advertising also leads to a decrease in sales.
"Consumer and advertising spend are significant drivers of revenue for most of the companies in our coverage," Todd Juenger, media analyst with Bernstein & Co., wrote in a report this week.
More than two-thirds of ad spending comes from sectors that appear particularly vulnerable to a disruption, including retail, auto, travel and tourism, according to Moody's Begley.
Media and entertainment industry stocks already have been hammered due to fears over the rapidly spreading COVID-19 virus. Beverly Hills events firm LiveNation dropped nearly 17%, or $8.35, to close at $42.01 Wednesday. Movie theater chain AMC Entertainment has lost half of its value since mid-February. Television and movie production could be postponed as more people become infected.
So far, productions in the U.S. have gone forward, but some producers in L.A. have voluntarily modified filming schedules due to concerns about the spread. Companies that own theme parks, Walt Disney Co. and Comcast, have closed their attractions in Asia. Movie theater companies are bracing for thinning attendance.
Other sectors of the economy — such as airlines, tourism and live events — have been grappling with cancellations and reduced interest because of concerns over community spread.
"There is concern that the Summer Olympics to be held in Japan may be delayed," Begley wrote. (Comcast's chief executive, Brian Roberts, said earlier this month that NBC was pushing ahead with its Olympics planning.)
NBC has already booked more than $1 billion in national advertising commitments for the upcoming Games in Tokyo.
Meanwhile, some media businesses could get a boost.
"Should the infection's spread require significant numbers of people to self-quarantine, we expect that both television and internet engagement will increase," Begley wrote. "Sectors that may benefit from higher engagement and increased subscriptions as people remain at home include pay-TV and streaming services."
But it is too soon to predict winners and losers because millions of people are paid by the hour and a loss in wages could prompt some to scale back on subscriptions.
U.S. media and technology companies sold $153 billion in advertising in 2019, according to Kantar Media, which tracks commercial spending. That was down nearly $4 billion from the previous year, when political campaigns were spending heavily to influence voters in the mid-term elections.
Kantar hasn't detected a drop in ad spending during the first quarter, in part, because most advertisers made reservations for that ad time last summer during the so-called upfront market, when the bulk of TV commercial time is sold.
Analysts are mixed over the length and severity of the ad market damage. They point to the fall presidential election, which should boost political advertising on TV. That surge could offset reduction in spending by general market advertisers. In addition, some industries such as tourism and retail may eventually boost spending to encourage consumers to book vacations and return to their stores.
