Cable networks struggling to drum up revenue in this summer’s sluggish upfront ad market may take some comfort in knowing the outlook for advertising in full-year 2005 and going forward is decidedly more upbeat.
   Ad spending on cable networks this year is projected to go up 13.3 percent, to $13.25 billion, with expenditures by 2009 surpassing $21.6 billion. That is according to a new report by Monterey, Calif.-based research company Kagan.
   “The double-digit growth is due to a combination of cost-per-thousand growth, which we think will be in the 5 percent range, slight growth in the number of multi-channel homes, and increased viewership as cable networks take more share from the broadcast networks,” says Derek Baine, who manages Kagan’s entertainment and programming practice.
   Kagan reports that ad spending in 2004 was up 11.6 percent, to just under $11.7 billion, a pace comparable to figures reported earlier this year by the leading ad-tracking services. TNS Media Intelligence estimates expenditures last year were up 13.8 percent, to more than $14.2 billion.
   The strong outlook for cable networks is especially notable in light of the medium's struggles during the ad recession of recent years. Kagan estimates that ad spending on cable networks dipped 1.5 percent in 2001, the year of the terrorist attacks, which were followed by a tumble in ad spending.
   Now, Baine says national cable TV is, in his words, the picture of health.
   Unlike broadcast networks, cable networks have a second revenue stream in the license fees they collect from cable system operators, and those fees account for a larger share of revenue. That will continue to be the case, but ad revenue will grow to narrow the gap.
   Kagan estimates that ad revenue in 2004 accounted for 44 percent of all cable network revenue. Baine expects ad revenue in coming years to grow faster than license fees, accounting for 46 percent of revenue by 2009. Revenue from license fees is projected to grow 55 percent between 2005 and 2009, compared to 63 percent for advertising expenditures.
   Baine attributes the relative slowdown in license fees to multiple system operators growing tired of paying substantial hikes in recent years to networks like ESPN, which bumped up its fee 20 percent in 2004, by Kagan's calculations.
   Cable's ad growth is being driven by its increasing share of total audience. Ad-supported cable TV accounted for 52.1 percent of the primetime household audience in the just-concluded broadcast season, according to the Cabletelevision Advertising Bureau. That is up from 49.9 percent one season earlier.
   Kagan projects that a combination of heavy advertising demand for commercial time on cable networks and the continuing growth for license fees will result in a revenue growth pace averaging  12 percent per year through 2009, when ad spending and license fees combined will hit $47 billion.
   The networks will be swimming in cash. Based on a survey of cable TV executives, cash flow in 2004 was $9 billion, representing 34.1 percent of revenue. That cash flow margin is expected to increase to nearly 41 percent by 2009, which Kagan attributes in part to emerging and smaller cable networks becoming cash-flow positive.
   Kagan’s bright outlook for cable TV networks comes despite challenges facing the cable industry.
   Key among them is the rapid rise of direct broadcast satellite services like DirecTV in the past few years. DBS penetration in May hit 20 percent, according to the Television Bureau of Advertising. Penetration of wired or analog cable dipped to 71.7 million homes in May, according to the TVB, down from 72.7 million the same time last year.
   However, DBS penetration is affecting local cable TV, not cable networks. As its penetration grows, eating away at local cable's subscriber base, DBS has the effect of reducing the amount of advertising local cable systems can sell. 
   But the cable networks are distributed by DBS, so they stand to see advertising revenue grow in the event their total audience grows. At worst their audience will remain flat if the rise in DBS subscribers is matched by the falloff of cable subscribers.