Political ad boon for media companies

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September 23, 2020
 
Digital platforms are taking an increasing share of political ad spend but there are other ways heightened tech adoption is impacting the 2020 presidential election and creating future investment opportunities, say Brian Blongastainer and Erik Swords of Mellon.

Political advertising is set to make records this year and digital is getting a bigger piece of that pie. Earlier this year digital marketing research firm eMarketer predicted the election cycle’s spending would be 63.3% higher than in the 2015/2016 season and would likely top out at almost US$7bn by Election Day.1

In early August, Democratic nominee Joe Biden was forecast to spend US$220m for television spots and a further US$60m in digital ads across 15 states; President Trump reportedly reserved more than US$145m in television ads in 11 states but at that time hadn’t indicated the size of his digital reservations.2

While many sectors in the US economy have been hurt by the Covid-19, political advertising is seeing a boost as candidates hampered by an inability to host face-to-face activities, increase their online presence. Erik Swords, Mellon portfolio manager and research analyst covering software and IT services, and Brian Blongastainer, research analyst covering global travel, leisure, luxury and media, note the record ad spend has also meant a record share taken by digital platforms. The latter, the two say, are transforming the US election cycle and the way people vote. They expect this to only gather pace from here.

Blongastainer says the lion’s share of political ad spend is still going to local and cable TV as they reach a broad audience but the big change is how quickly digital is catching up. This, he says, is due in part to the pandemic and the forced adoption of technology during lockdowns. He believes Covid-19 has led to the advancement of digital trends by several years. “We were ‘fortunate’ that a lot of the tech needed during the lockdowns was already in existence, just not as utilized. With so many working from home, we’re all using more media tools than ever before. That has led to a perspective change on digital platforms.”

According to news reports, TV still dominates political advertising, likely accounting for more than 65% of all political ad spending.3 However, digital advertising is experiencing significant growth, with spending projected to more than double from the 2018 midterm elections, a much higher growth rate than television.4 In May that projection was for US$1.8bn alone to be spent on digital videos.

Generational game

Yet candidates keen on targeting different demographics will likely use other platforms too, according to Swords. That is another way digital is changing the face of US politics, its ability to reach voters more precisely. Blongastainer says: “Because we have so much more data than ever before, political advertisements can be aimed at both traditional voters and non-voters.”

Swords and Blongastainer both note the greater wiliness of younger generations to share personal data online, which in turn enables political advertisers to make even more targeted overtures. Swords says: “The type and quality of information available has improved dramatically and that in turn will provide more options to advertisers.”

Social media influencers also have a role in this election, unlike in previous ones, including 2016, Swords and Blongastainer point out. In sectors like luxury goods, the ever-increasing numbers of social media influencers have a buy-conversion rate some six times higher than conventional advertising – and that is just for those with 30-50,000 followers, he cites based on industry conversations he has had. “Imagine that influence in a political sphere,” he says. “Whereas advertisers use influencers to sway on products, political operatives can target younger voters this way to sway them on specific issues.”

Another generational change the Mellon analysts point to as being key to future elections, most especially 2024, is the generational trend of moving from “cord cutters” to “cord nevers”. By this they mean the shift from people who have been moving away from traditional TV to online streamers and the next step in that trend is to a generation who will have never have cable TV. “This will see a continuation of the line between TV and digital platforms blurring,” Blongastainer says. There are several ways to play this evolution from an investment point of view, the duo note, pointing to cable companies, digital platforms and a third way: streaming services.

Swords agrees, noting the platform usage is already evident in this election cycle, pointing to the likes of a Chinese video-sharing social networking service and a US-based social media company, which, even with an under monetized political ad strategy, is still playing a key role in the political world.

Outside risks and opportunities

But digital adoption aside, there are other technology-based factors creating new challenges for investment analysts. Swords points out that with respect to actual voting, the 2020 election’s digital reliance is also highlighting vulnerabilities, making cyber security another growing area of interest. In May, Facebook announced it had taken down more than two billion fake accounts from its platform while news reports noted there were more active fake accounts on the social media site than ever before.5

This specter of outside influence via social media ads and accounts is one of the key risks Swords sees but says election security concerns aren’t all from international players. The 2020 election already looks set to be contentious no matter who the winner ultimately is given the rising skepticism over mail-in voting and the widespread inability to use digital means when it comes to voter registrations.

“There is no central way to track voters,” Swords comments. “Every state differs and little is done digitally at this point.” While he and Blongastainer believe eventually US elections will be entirely digital, potentially even utilizing blockchain technology to do so, it is a long ways off at the moment. Hence why Swords sees security – from foreign and domestic sources - as a risk in this election.

A look back at 2016

In the run-up to the 2016 election, BNY Mellon Investment Management wrote about the record increased digital ad spend at that time. Looking back at that article, which cites Mellon US equity income manager John Bailer, Blongastainer and Swords each say the same trends are visible today albeit more advanced than previously expected. They believe the accelerated increase in omni channel marketing strategies in election campaigning, is likely down to the effect of the pandemic.

Bailer noted in 2016 the big campaign expenditures mostly benefited companies owning and operating broadcast stations in states that also featured tight political races. The increase in revenue came at a time when overall advertising revenues were stronger than they had been for several years, suggesting the overall health of both the broadcasters and the economy as a whole was more robust than sceptics may have believed, he added.

National media companies that program political content would likely claim some of the campaign cash – but smaller, local and regional media enterprises were expected to be the prime beneficiaries of electionyear spending in 2016, according to Bailer. One reason for this was that, while US elections are conducted at the state and local level, by 2016 the system of financing for US campaigns had largely superseded the federal system. This meant big money raised from special interests in New York and Hollywood was routinely being poured into campaigns for local elections elsewhere, creating potential windfall opportunities for local media operators.

Swords believes this trend is still intact, despite the increase in digital use, with local TV still playing a significant role in reaching voters, particularly the older demographic. This will be particularly key today in swing states, he adds.

1 emarketer.com. US political ad spending hits record high as TV continues to dominate. March 2, 2020.

2 NY Times.com Biden Announces $280 Million Fall Ad Buy Across 15 States. August 5, 2020.

3 emarketer.com. US political ad spending hits record high as TV continues to dominate. March 2, 2020.

4 Politico.com. Political ad spending increases as economy tanks. May 15, 2020.

5 Buzzfeed News.com Facebook Removed Over 2 Billion Fake Accounts, But The Problem Is Getting Worse. May 24, 2020.

 

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