PQ Media POV

Amid Industry Consolidation, Digital Place-based Nets Must Differentiate Assets, Convey Benefits & Prove Value to Increase Advertiser Confidence

By Patrick Quinn, President of PQ Media and Publisher of the Global Digital Out-of-Home Media Forecast Series

Digital placed-based network (DPN) revenue growth once again outpaced that of the broader US economy and advertising industry in 2011, but sharply decelerated from the 2010 pace, leaving industry stakeholders wondering what the future holds for this emerging medium. While growth accelerated in the first half of 2012, several key challenges facing the DPN industry prior to the Great Recession remain. And with a nebulous economic outlook for 2013, these hurdles will prove tough to clear for DPN operators that don’t differentiate their assets, prove value propositions, and establish unique roles in the multimedia ad mix.

Following a 15.3% growth acceleration in 2010, DPN revenue expansion decelerated to 7.5% in 2011, hindered by negative cyclical trends that affected all ad-based media in the second half of the year, according to PQ Media. Growth in each of the five major venue categories, particularly cinema, slowed in 2011, as the industry generated total revenue of $1.41 billion for the year. Total US DPN revenue increased at a compound annual growth rate (CAGR) of 10.7% from 2006 to 2011, driven primarily by double-digit expansion in the corporate & healthcare, entertainment & education, and transit categories.

DPN revenue, however, grew only at a single-digit pace in three of the four years from 2008 through 2011. While the profound recession clearly hampered industry growth in this period, following the lofty double-digit peak of 2007, a deeper dive inside the DPN business reveals a set of challenges that must be overcome for this industry to evolve into a mature growth business.

The 5th edition PQ Media Global Digital Out-of-Home Media Forecast 2012-2016 identified eight major challenges to the growth and health of the US DPN industry, all of which were based on extensive input from PQ Media's Global Opinion Leader Panel™ (GOLP). This panel, which includes high-level executives at network operators, media agencies, brands and investment firms, came to consensus on the following growth hurdles:

  • Lack of Strong Audience Metrics & Research
  • Weak Awareness of DPNs Among Agencies & Brands
  • Conveying DPN Benefits to Agencies & Brands
  • Lack of Scale & Reach
  • Industry Fragmentation
  • Creatively Integrating Mobile & Social Media
  • Facilitating the DPN Planning & Buying Processes
  • Developing Stronger Content & Creative

PQ Media's GOLP overwhelmingly agrees that DPN operators should be more focused on the strategic objectives of advertisers, particularly how their networks can help brands engage target consumers in the right mindset at critical times during their daily routines. DPN advertising reaches consumers in attractive venues, such as theaters, professional offices, taxis, airports and big-box retailers, and tends to be less invasive than most conventional media. DPNs also allow advertisers to reach desirable demographics and psychographics in contextually relevant settings where consumers are often more receptive to advertising.

The primary advantage DPNs have over traditional print and broadcast media is their ability to engage target audiences in appropriate locations to seed their next buying decision. The key challenge – and opportunity – going forward will be for DPN operators to effectively differentiate their networks, positively convey end-user benefits and successfully position their assets versus traditional and other emerging media. In order to accomplish these important objectives and gain a meaningful share of brand budgets, DPN operators need to sharpen their pitches and prove their value as part of integrated media solutions.

US DPN Landscape by Venue Category

Cinema DPNs, which account for nearly half of industry revenue, endured a series of negative cyclical events in 2011 that severely hindered growth, following a strong performance in 2010. Cinema revenue increased a mere 1.7% in 2011 compared to 12.7% the prior year, due to the impact of a record broadcast and cable TV upfront in the second quarter and an unexpected downturn in global economic sentiment in the third quarter, according to PQ Media. Recession fears mounted in the third quarter and, consequently, brands tightened their remaining ad budgets.

Excluding cinema, however, the deceleration in overall industry growth was much less severe in 2011, as combined operator revenue in the other four venue categories – retail, corporate & healthcare, entertainment & education, and transit – increased 13.2%, according to the PQ Media Global Digital Out-of-Home Media Forecast 2012-2016. Double-digit expansion was fueled by relatively strong growth in the transit and entertainment & education segments, although all four categories decelerated from the 2010 pace due to the aforementioned headwinds.

While cinema's 2011 performance was its worst in the 2006-2011 period, in-theater nets remain the gold standard of the industry as a result of their highly captive audiences, long dwell times, reduced noise level and clear sight lines. As a result, cinema nets command the industry's highest CPMs with an average of $25 in 2011, followed by corporate & healthcare nets, transit, entertainment & education, and retail, according to PQ Media.

Cinema is also the most consolidated segment of the US DPN industry, with only two major operators – National Cinemedia and Screenvision – generating almost 90% of all cinema ad revenues. And this consolidation has enabled the major in-theater nets to offer brands the closest thing any venue category has to national scale.

Meanwhile, retail DPN revenues increased 8.4% in 2011, PQ Media estimates. The retail category, which includes operators like IZON Media and AdSpace, accounts for nearly half of all networks operating in the US, but they command the lowest average CPMs. Retail-based DPNs also represented the majority of networks that were consolidated or shuttered over the last five years as a result of major obstacles they need to surmount in order to survive industry consolidation.

Independent retail networks, in particular, face considerable challenges due to intense competition from other advertising and marketing options in these venues. Retail nets are also challenged to create more engaging content and ads, as well as more interactivity and audience metrics, to prove connections and engagement with transient shoppers. Providing compelling content and metrics is essential for retail DPNs because of competition from traditional point-of-purchase displays, product sampling and event marketing. On the upside, retail nets have the advantage of engaging consumers at the point of sale with mobile and social media to extend brand experiences through sales promotions and loyalty programs.

Corporate & healthcare DPN revenue expanded at a brisk 12.5% in 2011, according to the PQ Media Global Digital Out-of-Home Media Forecast 2012-2016. Growth in this category, which includes operators such as Captivate Network and Care Media, was driven by specialty medical care centers for men, women, children and pets, as well as doctors' offices, clinics and hospitals geared to specific demographic groups. Like cinema, the healthcare sub-segment benefits from relatively captive audiences and long dwell times, but also highly targeted content at the point of care.

Despite some DPN difficulties in the entertainment & education category, network operators combined to generate strong growth of 17.8% in 2011. Leading operators, such as Zoom Media and AMI Entertainment, fueled the segment's growth with investment in acquisitions, new networks and local sales forces to expand their reach in fitness clubs, bars/restaurants, casinos, arenas and college campuses.

Transit DPNs posted the fastest growth of all venue categories in 2011, expanding 19.7%, PQ Media estimates. Transit nets, including those at airports, on planes, in taxis and at gas stations, continue to attract new advertisers and investors due to their captive, transactional and interactive nature. Taxi and gas-pump DPNs, in particular, are driving the strong growth of the overall transit category, as leading operators like Creative Mobile Technologies and Gas Station TV expanded their nets, launched new services, and forged partnerships to provide brands with the ability to geo-target, day-part, customize product messages and deliver mobile coupons.

Shakeout: Industry Fragmentation & Consolidation

PQ Media identified over 200 US DPN operators running more than 450 ad-based networks in all five venue categories in the first quarter of 2012. More than 1.5 million digital video screens were installed in these venues. Compared with prior years, these data suggest the DPN industry is consolidating, albeit relatively slowly, and network operators are gradually expanding their footprints in an effort to offer advertisers better scale.

Nevertheless, PQ Media's research indicates further consolidation is expected and needed to defragment the DPN landscape into a smaller group of stronger operators providing better scale, metrics, content and value propositions for incorporating DPNs into multimedia campaigns. As a result, the industry's shakeout and consolidation period will continue in the midterm, as leading operators strategize to develop stronger, more efficient networks around target audiences in order to capitalize on the unique advertising opportunities afforded by out-of-home venues.

Despite dozens of mergers, acquisitions and bankruptcies from 2006 to 2011, PQ Media estimates the top 10 DPN operators still accounted for just over 60% of total US revenue in 2011. In a mature growth business, it's typical for the largest three to five companies to comprise 90% or more of total industry revenue. In addition, PQ Media estimates 84% of US DPN operators generated less than $10 million in annual revenue in 2011.

PQ Media's research indicates the DPN industry was in the first of four key phases of successful emerging media – the gold rush – from 1998 through 2007, a year in which total revenue grew 25.2%. In the second half of 2008, however, the Great Recession began to negatively impact the broader US economy, overall ad-based media and DPN operator growth, which decelerated in 2008 and 2009 as the industry moved into the second phase of emerging media evolution – shakeout and consolidation, a phenomenon that accelerated through the first half of 2012.

While leading DPN operators in major venue categories moved to shore up their core market positions and expand into new venues in 2011 and 2012, some high-profile industry operators were among those that were shuttered, reorganized or acquired, a vital component of the shakeout and consolidation phase of new media. Perhaps the most telltale trend in 2011 was the fate of ad network aggregators SeeSaw and AdCentricity, whose assets were acquired in April 2012 and folded into a location-based mobile ad platform. PQ Media's GOLP was clear in its consensus that the DPN industry was not quite ready for this type of aggregator model, due to leading operators managing their own sales forces and client relationships, as well as the lack of remnant inventory.

The lack of broad scale and reach among most DPNs has been another important obstacle to growth. Cinema net operators are unique compared with other major venue groups, due to their consolidated landscape, control of venues, and ability to provide captive, measurable and coveted audiences through relatively broad national networks. Cinema DPN operators also worked closely with major brands over the past decade to extend and activate other media as part of integrated brand campaigns. As a result, in-theater advertising grew every year from 2000 through 2011.

Meanwhile, leading operators in other categories that don't have cinema's advantages have been expanding and acquiring complementary networks, local sales forces and new technologies in an effort to develop broader footprints. For example, Zoom has expanded its fitness nets significantly in the US, Canada and Europe, while RMG has built out its in-airport and in-flight nets, and Gas Station TV added 50 new markets in 2012.

US DPNs on Pace for Double-Digit Growth Again in 2012

Economic and advertising indicators were encouraging in the first half of 2012, although PQ Media expects a relatively slow and choppy economic recovery through 2013. Meanwhile, PQ Media's 6th edition Forecast (to be published later this year) will reveal whether record increases in political and Olympics ad spend in 2012 squeezed TV inventory enough to crowd out brands in the second half and lead them to consider investments in alternative video platforms. The flip side is how this trend contributed to another strong TV upfront, which may have strained second-half ad budgets again.

Based on first-half pacing and projected second-half trends, PQ Media in mid-2012 expected US DPN operator revenues to increase at an accelerated 10.5% in 2012, driven by the transit, entertainment, education and healthcare categories. Taxi, gas station, fitness and point-of-care networks, in particular, are expected to be leaders going forward due to their transactional, interactive, demographic and dwell-time profiles.

In 2013, DPN operators need to concentrate their resources on stronger metrics, industry consolidation, greater network scale and selling their value as part of integrated media solutions. In this increasingly competitive media landscape, it is imperative for network operators to prove their value to agencies and advertisers, improve the efficiency of media buys and position DPNs as a valuable complement to other media. As more advertisers explore alternative media options, DPNs need to do a better job of pitching their key advantages of targeted environments, longer dwell times and contextually relevant content.

Patrick Quinn will deliver the “State of the Global Digital Place-based Network Industry” at the 4th Annual Digital Place-based Advertising Summit on February 26 in Las Vegas. For more information about the research and insights included in this article, please visit the following hyperlink: PQ Media Global Digital Out-of-Home Media Forecast 2012-2016.