Digital Will Continue to Influence Innovation and Technology, Driving a Dramatic Change in User Behavior Across the U.S. Communications Industry

Posted: September 26, 2012

Digital-Related Expenditures Represented 16.7% of Total U.S. Communications Industry Spending in 2006, 26.5% in 2011, and Will Reach 39.3% in 2016

Industry CAGR Will Expand 5.2% to $1.455 Trillion By 2016, Nearly Twice the CAGR Increase During the Previous Five Years, Outpacing Nominal GDP Growth by 40 Basis Points Targeted Media and Business & Professional Information & Services Sectors Expected to Exceed 7.0% Growth in Forecast Period to Reach $285.97 Billion and $267.04 Billion Respectively

Spending within the U.S. Communications Industry will increase 5.2% in 2012 to reach $1.189 trillion as consumers and businesses increasingly embrace digital technology and return to spending levels not seen since before the recent worldwide economic downturn, according to the 2012 Forecast released today by Veronis Suhler Stevenson (VSS), a global capital private investment firm targeting companies in the information, education, communications and business services industries in North America and Europe.

The 26th edition of the VSS Communications Industry Forecast 2012-16 (www.vssforecast.com) found that U.S. Communications Industry spending grew 4.4% in 2011 to $1.129 trillion despite a sluggish economy in which nominal Gross Domestic Product expanded 3.9%. Spending rose at a compound annual growth rate (CAGR) of 2.7% in the 2006-2011 forecast period, surpassing GDP by a 0.3 percentage point. VSS expects the Communications Industry to grow at a 5.2% CAGR to $1.455 trillion by 2016, almost two times the growth rate during the past five years. At that pace, the Communications Industry will remain the fifth-largest industry among 15 economic sectors in 2016.

Once seen as a trend in only selected pockets of the U.S. Communications Industry, digital communications and services – encompassing content, technology and user access — has firmly established itself as the driving force of growth across all of its sectors, segments and subsegments. Through the use of ever-evolving platforms and channels, digital is giving a rising number of communications companies the power to more effectively target and connect with both consumer and business customers. Demand for digital and mobile devices continues to grow steadily, ensuring that there will be a similar increase in the number of end users. Traditional communications companies that relied heavily on print products continue to make the transition to digital, and those that fully embrace it are the ones most likely to remain relevant to their audiences.

In 2006, VSS found that digital-related expenditures represented 16.7% of total Communications Industry spending; it reached 26.5% in 2011, and VSS projects it will grow to 39.3% by 2016. Last year, digital-related expenditures accounted for 25.1% of consumer and advertising spending and 34.6% of institutional spending, and VSS expects those percentages to increase to 39.3% and 48.9%, respectively, by the end of the forecast period.

The importance of digital adoption is fully reflected in the 2011-2016 forecast period. Long-term growth in two Industry Sectors – Targeted Media and Business & Professional Information & Services – is expected to be robust. Targeted Media, which includes Branded Entertainment Marketing, Business-to-Business Media, Direct Marketing, Outsourced Custom Content, and Pure-Play Consumer Internet & Mobile Services, will post a 7.4% CAGR in the 2011-16 period, while Business & Professional Information & Services spending will produce a 7.0% CAGR. Consumer and institutional end-users will maintain their strong demand for continuous and faster digital access to information through traditional and emerging channels. This will fuel the desire for the latest computer, internet connectivity and wireless mobile technologies and devices. VSS data confirms the strong growth prospects that exist thanks to digital; for example, spending on Business & Professional Information accessed through mobile devices, particularly vertical industry-specific applications rose 95.6% in 2011 to $2.28 billion.

“Digital’s influence is now a constant and significant factor in every sector, segment and sub-segment of the US Communications industry,” said John Suhler, Co-Founder and President of VSS. “At the same time as digital technology and innovation continue to spur growth in the industry or propel the communications industry forward, emerging digital media and services are significantly changing consumption habits among both institutional and consumer end-users. These developments will drive digital-related expenditures to constitute nearly 40% of the overall U.S. Communications Industry spending by 2016.”

Communications Industry and Its Sectors and Revenue Streams

The VSS Forecast provides the only 10-year, multi-lens view of the communications industry by six Industry Sectors, four Revenue Streams, 20 segments, more than 100 subsegments, and an exclusive Consumer Media Usage Index tracking time spent with media by consumers, businesses and other institutions. Industry Sectors include Targeted Media, Business & Professional Information & Services, Entertainment & Leisure Media, Education & Training Media & Services, Traditional Marketing, and Traditional Consumer Advertising Media. Revenue Stream components include Advertising, Marketing Services, Institutional End-User, and Consumer End-User. Together, the VSS Forecast and the annual VSS Mid-Term Forecast Update – to be issued in the [second quarter of 2013 — provide the most comprehensive and in-depth views available of the U.S. Communications Industry.

VSS defines Communications spending as dollars invested by advertisers, marketers, consumer end users, and institutional end users in ad-based communications and marketing services, as well as entertainment, information, business and education content, subscriptions, access and services. It does not include spending on hardware, such as videogame consoles; spending on one-on-one telecommunications services, such as landline and mobile phone usage; sales generated by brand marketers through the redeemed value of coupons; or sales through direct marketing vehicles, such as direct response TV.

Digital Has Become a Rising Tide for the Entire Communications Industry

The VSS Forecast defines in detail how digital activities has become intertwined with all aspects of the Communications Industry, and will continue to grow. Within certain, fast-growing areas – such as the Targeted Media sector — digital communications is the accelerant. In segments with weakened growth prospects, digital has become a saving grace. For example, VSS projects overall spending on Consumer Book Publishing will decline 2.4% in 2012 and experience a drop in CAGR of 1.1% in the forecast period, but spending in one of its subsegments — e-books and other digital downloads — will increase from $1.91 billion in 2011 to $9.40 billion in 2016, representing a CAGR of 37.6%.

Digital communications’ growing influence is also witnessed in media consumption rates. Among institutional users, daily media consumption rose 5.3% in 2011 to 1 hour, 41 minutes and 2 seconds per employee, propelled by increased use of business information outside the office through wireless devices. Meanwhile, time spent by persons age 12 and above accessing consumer and business mobile content soared in 2011, rising 46.7% to 15 minutes and 7 seconds daily per person. VSS attributed the jump to increased penetration of wireless devices – including smartphones, computer tablets and e-readers — among consumers and institutions.

Media consumption has leveled out, but consumer and business mobile content are taking strong hold. During the forecast period, VSS expects media that exhibited deep declines during the substitution-caused shift to digital platforms, such as Recorded Music and Books, will stabilize as the digital segments of those industries account for the majority of units sold. Technological advancements will continue to drive growth in the consumption of institutional business media, with more companies providing employees with computer tablets and e-readers. Information and services will become more readily available through wireless devices, such as dedicated mobile content specific to a vertical industry.

Key Trends in Forecast Period for Industry Sectors

VSS added the Industry Sector analytical perspective to the Forecast in 2009 in recognition of the communications disruption caused by digital technology and innovation, which has caused the Communications Industry to diverge into six distinct communications ecosystems.

Digital communications platforms exist throughout all six Industry Sectors. VSS expects mobile advertising and marketing segments and subsegments will continue to grow dramatically as mobile and tablet technologies allow for a more dynamic interactive experience, while Internet access spending will remain about flat during the forecast period as household broadband penetration reaches saturation. Pure-play and related traditional related content sites that primarily provide text information will add online video to monetize the fast-growing video advertising market, and display ads will increasingly be bundled with this content as advertising dollars continue to shift to online.

VSS projects that all six Industry Sectors will post CAGR gains in the 2011-2016 period, with the biggest percentage increases coming in Targeted Media, and Business & Professional Information & Services, and the largest increase in spending coming from Targeted Media, which will increase from $200.38 billion in 2011 to $285.97 billion in 2016.

Spending on Targeted Media will increase 7.7% to $215.81 billion in 2012, with overall gains led by strong growth in Branded Entertainment and Pure-Play Internet & Mobile Services. Outsourced Custom Publishing will strengthen, while Direct Marketing and B-to-B Media will post steady but modest gains. Targeted Media will experience a 7.4% CAGR in the forecast period, reaching $285.97 billion in 2016, and fueled by Branded Entertainment and Pure-Play Internet & Mobile Services.

Traditional Marketing spending will grow 4.2% in 2012 to $75.91 billion, buoyed by political campaign spending in certain segments and subsegments, including Public Relations & Word-of-Mouth Marketing, and Promotional Products. Three even-year political campaigns, strong growth in Public Relations & Word-of-Mouth Marketing, and a turnaround in B-to-B Promotions will contribute to a 4.2% CAGR in the forecast period, reaching $89.34 billion in 2016.

In the Business & Professional Information & Services sector, spending will rise 7.2% to $204.43 billion in 2012 and post a 7% CAGR in the forecast period, fueled by solid growth in both Business & Professional Information and Business & Professional Services, particularly those relating to marketing, financial & economic and scientific & technical Information, as well as technology services, such as wireless data access, Software as a Service (SaaS) and cloud computing.

VSS projects spending on Education & Training Media & Services will increase 4.4% to $252.46 billion in 2012 and post a 4.2% CAGR in the forecast period. Solid gains in College Media and Outsourced Corporate Training will offset more modest growth in K-12 and declines in For-Profit Postsecondary Educational Services.

Spending on Entertainment & Leisure Media will increase 4.9% to $293.49 billion in 2012, with strong gains in Subscription TV spending expected to offset weaker growth in Entertainment Media and declines in Consumer Books. Steady growth in Subscription TV spending and a resurgent Entertainment Media will produce a 4.9% CAGR in the forecast period despite protracted declines in Consumer Book spending.

Traditional Consumer Advertising spending will post a 2.0% gain in 2012 to $146.57 billion. Even-year political and Olympics spending on Broadcast Television and accelerated growth in Broadcast & Satellite Radio and Out-of-Home Media will drive the gain. Broadcast TV, Broadcast & Satellite Radio, and Out-of-Home Media will also drive a 2.1% CAGR in the forecast period. Newspapers, Magazines and Local Consumer Directories will continue to struggle during the forecast period.

Key Trends in Forecast Period for Revenue Streams

All four Revenue Streams – Advertising, Marketing Services, Consumer End-User and Institutional End-User — are projected to see positive CAGR in the forecast period, with Advertising posting the largest CAGR at 6.1%. The slower growth will come in spending on items such as home video, box office, books, newspapers and magazines, adding further weight to digital communications’ influence and growing impact on the overall picture. Digital will continue to play a key role in the faster-moving Revenue Streams in the forecast period.

VSS projects spending in the Advertising Revenue Stream will grow 5.9% in 2012 to $200.76 billion — driven by political and Olympics spending on Broadcast Television; growing interest by advertisers in lower-cost Subscription Television; accelerated gains in Out-of-Home Media and double-digit growth in internet, mobile and entertainment media. Advertising spending will posted a 6.1% CAGR in the forecast period to reach $255.23 billion in 2016. This will be fueled in part by three years of Olympics and political ads, and the ongoing shift to alternative advertising, including digital Out-of-Home Media and the brand-related internet and mobile platforms of traditional communications.

Institutional End-User spending is projected to grow 6.0% to $546.63 billion in 2012, with a 5.8% CAGR in the forecast period, reaching $682.41 billion in 2016. Gains in 2012 and the forecast period will come from growth in Business & Professional Information, Business & Professional Services, TV programming, B-to-B live events and related digital platforms, and Outsourced Corporate Training.

Spending in the Consumer End-User Revenue Stream is expected to increase 3.7% to $237.29 billion in 2012, and post a 4.2% CAGR in the forecast period to reach $281.20 billion in 2016, primarily as a result of consumer spending on pure-play and related traditional digital platforms, enhanced Subscription TV services and satellite radio. In the latter part of the forecast period, new console videogame titles will also contribute to growth as the next generation of hardware is released.

Marketing Services spending will increase 4.4% in 2012 to $203.98 billion, and post a 3.9% CAGR in the forecast period to reach $236.16 billion in 2016. VSS projects higher spending on alternative marketing vehicles such as Branded Entertainment and Word-of-Mouth Marketing will lead to increased face-to-face engagement with consumers and drive a return on investment.

About Veronis Suhler Stevenson

Veronis Suhler Stevenson is a private equity and debt capital fund management company dedicated to investing in the information, education, media, marketing and business services industries in North America and Europe. VSS provides capital for buyouts, recapitalizations, growth financings and strategic acquisitions to companies and management teams with a goal to build companies both organically and through a focused add-on acquisition program. Since the closing of the first VSS Buyout Fund in 1987, VSS has managed four Buyout Funds and two Structured Capital Funds with aggregate committed capital in excess of $3.1 billion. The six funds have to date invested approximately $2.7 billion in 68 portfolio companies which have in turn completed over 320 add-on acquisitions. The company’s website is www.vss.com.

About the VSS Forecast

The VSS Communications Industry Forecast, Mid-Term Forecast Update, and Historical Database, are the only sources to track, analyze and forecast spending, usage and trends in six Industry Sectors — Targeted Media, Traditional Marketing, Entertainment and Leisure, Traditional Consumer Advertising Media, Business & Professional Information & Services, and Education & Training Media & Services – and four Revenue Streams – Advertising, Marketing Services, Consumer End-User, and Institutional End-User Spending. With 20 segments and 100 subsegments of the U.S. communications industry covered, these reports provide actionable strategic intelligence to executives and owners with stakes in the communications and business services industries since 1987. VSS Forecast research is the essential source of econometric data and operating drivers for understanding the factors that influence the historical and future spending patterns of the Communications Industry.

Available in digital format, the VSS Forecast takes a 10-year view of the U.S. Communications Industry and includes a five-year historical record of actual spending patterns and metrics and a five-year forecast of spending. After 25 years, it has emerged as an authoritative source of comprehensive spending, usage and trend data across the Communications Industry. (www.vssforecast.com).

About PQ Media

PQ Media (www.pqmedia.com), a leading provider of media econometrics and pioneer of emerging media research, partners with Veronis Suhler Stevenson on the VSS Forecast. PQ Media has collaborated with VSS since 2003 on the research and development of the VSS Forecast and licenses its Alternative Media Research Series data to VSS for use in the Forecast, including econometrics covering digital out-of-home media, product placement, word-of-mouth marketing and event marketing, among others. PQ Media is a research consultancy that provides actionable strategic intelligence through a variety of consulting services and research reports to leading media companies, financial institutions, management consultants, media agencies and brands. The firm’s experience, knowledge and insights have influenced strategic plans, investment parameters and tactical approaches for clients since 2003.