Per-Person Daily Media Use Keeps Rising, will Pass 10 Hours per day by 2004; Recorded Music, Radio, Video and Internet Get Huge Boost from Teenage Market

Internet Advertising will more than Quadruple to $24.4 Billion by 2004, Surpassing Cable, Network TV and Consumer Magazines

Total Advertising Spending Will Grow 8.6% Yearly through 2004

New York, NY --August 7, 2000-- The American appetite for media and information just keeps growing and growing.

The communications industry was the fastest-growing sector of the U.S. economy from 1994-1999 - ahead of financial services and general services - and will maintain that lead through 2004, according to the 14th annual Communications Industry Forecast (CIF) just released by media industry merchant bank Veronis Suhler. Total industry spending grew 8.1% to $524.7 billion in 1999 and is forecast to rise at a compound annual growth rate (CAGR) of 7.8% throughout the forecast period 1999-2004, reaching $745.8 billion in 2004. That's compared with only 4.7% growth in nominal gross domestic product for the same period.

The Veronis Suhler CIF is the most comprehensive accounting of consumer usage and advertising spending trends across the full bandwidth of the communications industry - from traditional media to the latest information-driven technologies. This year's CIF reports that new technologies and increased income have led to continued increase in consumer media use measured in hours, which spiked upward 3.8% to 3,399 hours per person in 1999 and is forecast to reach 3,786 hours - well over 10 hours per person per day - by 2004. The extra hours are concentrated in the Internet, video games (stimulated by online multi-player options), radio and recorded music, the last also spurred by the Internet and its fledgling download technologies so quickly popularized by American teens.

Veronis Suhler also reports that traditional media have not only held their own with regard to advertisers' dollars but have moved aggressively to establish themselves on the Internet. Magazine publishers, newspapers, and television networks have established sophisticated Web sites and begun to capture significant advertising revenue online. Business information providers and professional and educational publishers have been experimenting for years with online content delivery and are capturing substantial revenue through online channels.

Internet Drives Strong Advertising Growth

Pacing industry growth for the 1999-2004 forecast period will be advertiser spending, which grew 9.1% to $165 billion in 1999 and is projected to attain a compound annual growth rate (CAGR) of 8.6%, reaching $249.1 billion in 2004. The growth will be driven largely by Internet advertising, which exploded 140.6% to $4.6 billion in 1999 and is forecast to increase at a 39.5% CAGR, more than quadrupling to $24.4 billion by 2004. The growth in online ad spending spurt should account for nearly a quarter of total advertising growth forecast for all segments through 2004. It will propel Internet advertising ahead of cable & satellite TV ($21 billion), network TV ($19.4 billion) and consumer magazines ($16.4 billion) and to a near par with radio ($26.6 billion). Internet companies' heavy advertising in traditional media adds another dimension to the Internet's impact on total advertiser spending. Also propelling overall ad spending growth from 1999-2004 will be rapid increases in cable & satellite advertising (13.4% CAGR to $21.0 billion), outdoor (9.6% CAGR to $7.6 billion), and radio (9.5% CAGR to $26.6 billion). Most other segments will grow slightly more slowly than in the 1994-1999 period.

Major Segments to Double Over Ten Years (1994-2004)

To be sure, the communications industry has benefited from a strong domestic economy and with it, increased corporate profits, continuing trends which have fueled higher spending across all four master segments of the industry-advertising/specialty media, consumer end user, institutional end-user and specialty media.

Institutional end-user spending by businesses and schools is forecast grow 7.3% annually, to $157.2 billion, while spending on specialty media (consumer and b-to-b promotion, outdoor advertising, direct mail and sponsorships) grows 7.1% CAGR to $161.4 billion. Consumer end-user spending will rise 6.5% CAGR, to $178.1 billion in 2004.

Viewed from a 10-year perspective, these forecasts represent a doubling or near-doubling of spending in each of the above categories, with total industry spending in 2004 ($745.8 billion) representing a 106% increase over the 1994 total of
$361.2 billion.

Democratized Delivery of Business Information

The CIF projects continued strong growth from 1999-2004 across industry segments driven by institutional spending. Spending is forecast to grow at a 6.8% CAGR for business-to-business communications, 7.7% CAGR for professional, educational & training services & materials, and 7.8% CAGR for business information services.

Growth in the last category is all the more impressive in light of downward pricing pressure stimulated by new online forms of data delivery and collection. Indeed, the Web has facilitated access to specialized BIS data by individuals and small businesses as well as by larger institutions. Consumers are increasingly using credit cards to purchase specialized information online -- individual reports and articles and subscription-based services delivering financial, healthcare, legal, marketing and other data previously aimed almost exclusively at businesses. Increased bandwidth, reduced download times, rapid online data collection, conversion of massive databases to online formats, and creative new methods of screening, sorting and organizing data are driving this usage explosion. To date, business information services have had more success using the Internet to capture revenue than any other media segment.

Americans as Expert Media Multitaskers

"The communications industry has become a keystone in the U.S. economy, supplying two of our most voracious needs - information and entertainment," said James Rutherfurd, Executive Vice President of Veronis Suhler and head of the firm's investment banking operations. "To meet their demands and appetites, Americans have become expert media multitaskers - sending e-mail and Web surfing while watching an episode of The Sopranos, maybe downloading music at the same time, or tracking an online trading account while listening to a CNBC business program and perusing the latest issue of The Industry Standard," Mr. Rutherfurd said. "We've arrived at a point where consumption of media and information accounts for more than half of our waking hours. Indeed, our need for entertainment and information should persist no matter what changes occur in the economy over the next several years."

Mr. Rutherfurd noted that the Internet continues to spur media growth virtually across the board, adding "the good news is that it has sparked a metamorphosis for traditional media. By developing content-rich Web sites and information portals, traditional publishers and television networks are positioning themselves to capture their share of revenue diverted to the Web over the next several years."

The 2000 Veronis Suhler Communications Industry Forecast charts and projects consumer, advertiser/specialty media and institutional spending from 1994-2004 across 12 media segments: Advertising and Specialty Media, The Internet, Broadcast Television, Radio Broadcasting, Cable and Satellite Television, Entertainment (including filmed entertainment, recorded music, and interactive entertainment), Newspaper Publishing, Consumer Book Publishing, Consumer Magazines, , Business-to-Business Communications, Professional, Educational and Training Materials and Services, and Business Information Services.

Surpassing 10 Hours of Media Use per Day by 2004

American consumers, who spent an average of 9.3 hours per day using media in 1999, will fuel media spending growth by adding more than an hour to their average daily consumption totals by 2004, when the average is expected to reach 10.4 daily hours. (When two forms of media are used simultaneously, both are counted.) The usage growth will be concentrated in the Internet, video games, radio and recorded music - use of the latter lately being fueled by the fledgling downloading technologies.

These three media segments will together account for an additional 328 hours per person per year by 2004 - just shy of an extra hour per day. Each will gain significant share of total hours spent using consumer media - recorded music rising from 8.5% of total hours in 1999 to 10.3% in 2004, video games from 1.8% in 1999 to 4.2% in 2004, and the Internet from 2.9% to 6.0% over the same period.

At the same time, per-person use of daily newspapers and consumer magazines will drop slightly, while use of consumer books remains virtually flat. Daily newspapers' share of total consumer hours spent on media will shrink from 4.5% in 1999 to 3.9% in 2004; consumer books will drop from 2.7% to 2.4%, and consumer magazines from 2.4% to 2.0%. By 2004, Americans will spend more hours playing video games (161) and using the Internet (228) than they spend reading daily newspapers (147), books (92), and magazines (77).

It is worth noting that daily newspapers and consumer magazines continue to hold their own in attracting advertising dollars. Newspaper advertising spending rose 5.1% in 1999 and is forecast to rise 6.5% CAGR from 1999-2004. Magazine ad spending rose 9.9% in 1999 and s forecast to rise 7.5% CAGR through the forecast period.

Continuing a long-term trend, broadcast television lost market share of consumers' hours in 1999, dropping to 25.5% from 27.0% in 1998, and is forecast to fall to 22.0% in 2004. Cable and satellite television rose to 21.2% share in 1999, up from 20.4% in 1998, and is forecast to slip gradually over the forecast period to 20.1% in 2004.

Communications Industry Segment Highlights

1) The Internet

The number of U.S. online households soared 42% to 40.5 million in 1999, while spending on access rose 52% to $9.4 billion. By 2004, 67.1 million U.S. online households are forecast, while spending rises at a 9.2% CAGR to $14.6 billion. Downward pricing pressure accounts for the relatively moderate spending increase. Per-household spending on access is forecast to shrink from $232/year in 1999 to $217/year in 2004. Broadband Internet access is forecast to explode from 2.1 million subscribers in 1999 to 18.9 million subscribers in 2004, while broadband spending grows somewhat more moderately, from $1.1 billion in 1999 to $6.9 billion in 2004.

Internet advertising, as noted above, more than doubled from $1.9 billion in 1998 to $4.6 billion in 1999, and is forecast to grow at a 39.5% CAGR to $24.4 billion by 2004. Growth will be driven by the rapid online audience expansion, by improved and rapidly-evolving techniques such as permission-based e-mail, and by the added technical resources enabled by growing broadband access.

Traditional Media Responds to the Internet

The Internet shows no signs of toppling traditional media and has in fact stimulated growth and creativity, as traditional media companies have made concerted efforts to integrate the Web into their business models. Consumer magazines have been developing online content and advertising for years. The consumer book market was virtually a first mover in retail e-commerce and has found a significant new sales channel in the Internet, and while consumer e-book development has been slow, some progress is expected by 2004. Professional and educational publishers have been experimenting with e-books and digital media for more than a decade, and electronic databases were the fastest-growing segment of the professional publishing and services market in 1999.

Newspapers have lost some classified and real estate advertising to the Internet, but strong national advertising and growing dot-com ad spending have offset the losses. Newspapers are also taking steps to recoup their classified losses by putting their own classified ads online. Television viewing, according to several studies, is not being cannibalized by Internet use, and television networks and stations have benefited from a dot-com advertising bonanza - albeit a moderating one.

2) Broadcast Television

Advertising spending on broadcast TV rose 4.4% to $38.6 billion in 1999 - a good year considering the loss of political and Olympic advertising from 1998. The strong economy enabled automotive, telecommunications and dotcom advertising to take up much of the cyclical slack.

The rate of broadcast television's long-term loss of audience share to cable and satellite is slowing. Per-person hours spent watching broadcast television declined at a 4.5% CAGR from 1995-1999 but are forecast to decline just 0.8% annually from 1999-2004.

Current surprise hits like Who Wants to Be a Millionaire? are expected to boost broadcast ratings from 31.7 in 1999 to 32.2 in 2000. Ratings are expected to decline slightly in the years following, to 31.6 in 2004. Total advertiser spending on broadcast television is forecast to grow at a 4.6% CAGR, reaching $48.2 billion in 2004.

3) Cable & Satellite Television

Cable & satellite television was the second-fastest-growing industry segment (behind the Internet) from 1994-1999, achieving a 13.1% CAGR to reach $56.8 billion in 1999. Continued rapid growth will make cable & satellite the largest communications industry segment, surpassing newspapers and entertainment by 2004. Spending growth is forecast to rise 8.8% CAGR, reaching $86.4 billion by 2004. Advertising for the segment is forecast to rise at a robust 13.4% CAGR, reaching $21.0 billion by 2004.

End-user spending on cable & satellite subscriptions is forecast to rise at 7.4% CAGR, despite a slight decline of total per-person media usage share measured in hours and slowing growth in the number of new subscriptions of wired cable. Average monthly spending per household is forecast to rise 4.1% CAGR for cable and 7.8% CAGR for wireless and satellite TV. DBS will continue to gain market share: the number of wireless and satellite subscriptions will increase 9.2% CAGR over the forecast period, while wired cable subscriptions rise just 1.1% CAGR.

4) Radio Broadcasting

In 1999, radio broadcasting continued to benefit from the advertising bonanza triggered by the Telecommunications Act of 1996. Advertiser spending rose 12.3% to $16.9 billion in 1999. Radio advertising growth is forecast to moderate but remain robust, rising 9.5% CAGR to $26.6 billion
in 2004.

Driven largely by the increase in long auto-based commutes, the number of people listening to the radio in the average quarter hour has held steady over the last decade and grew 4.4% to 24.8 million in 1999. Average per-person hours for radio are forecast to rise by 45 hours, from 967 per year in 1999 to 1,012 per year in 2004.

5) Entertainment (filmed entertainment, recorded music, and interactive entertainment)

Total spending for the three entertainment subsegments rose 7.0% to $60.6 billion in 1999. Total growth is forecast at 6.7% CAGR from 1999-2004, reaching $84 billion in 2004.

Interactive entertainment is the smallest but fastest-growing subsegment, with sales up 25.7% to $5.2 billion in 1999. Growth was fueled largely by the launch of Sega's Dreamcast system and by the Internet, which has enabled multi-player games. Spending is forecast to grow at 21.7%, reaching $13.8 billion in 2004. This represents the fastest growth rate of any segment or subsegment of the communications industry.

Recorded music will experience dramatic usage gains spurred by the new digital technologies that enable downloading of music. Spending growth will be limited, however, by pressure exerted by the availability of easy copying. A 2.1% CAGR to $16.3 billion is forecast for the 1999-2004 period.

Filmed entertainment includes box-office, home video and DVD and television programming spending. In 1999, spending grew 5.0% to $40.7 billion. The box office continues to hold its own as a popular way to spend a night out; healthy cable TV growth is maintaining spending on new programming; and the growing popularity of DVD, coupled with quick turnaround from blockbuster film to Blockbuster video is helping drive spending on home video. Over the forecast period, spending on filmed entertainment will grow 5.8% to $53.9 billion in 2004.

6) Newspapers

Reports of the death of newspapers at the hands of the Internet remain greatly exaggerated. Overall spending by advertisers and readers increased 5.1% to $63.1 billion in 1999, led by 5.8% advertising growth to $52.2 billion. While the Internet has siphoned off some classified ad revenue, spending on national advertising grew an unprecedented 17.7% - ironically fueled partly by dotcom advertising. Newspaper publishing remains the largest communications industry segment. Continuing a long-term trend, weekly newspapers outpaced dailies in 1999, growing 8.7% to $6.3 billion.

Ongoing rapid growth in national advertising is projected for the forecast period - a CAGR of 8.7% to $10.2 billion in 2004. Total ad spending for newspapers is forecast at 6.5% CAGR, reaching $71.5 billion in 2004. Circulation spending is projected to advance at 2.3% CAGR as the rate of newspaper closings and mergers continues to slow down. An aging population bodes well for newspaper circulation, as 71% of the population over 35 read a newspaper.

In the past two years, newspapers have moved aggressively to exploit the Internet. More than 1,100 daily newspapers are now online, and many are bidding to become regional information portals. While revenues remain insignificant, many newspapers are positioned to divert the classified advertising lost to the Web back to their own Web sites.

7) Consumer Books

Spending on consumer books rose 3.2% to $17.3 billion in 1999, hampered by slower-than-expected spending in adult hardcovers and trade paperbacks. The juvenile trade segment, given a huge boost by the Harry Potter titles, surged 16.0% to $3.0 billion. Online sales, led by Amazon.com and bn.com, continued to surge, topping $1 billion.

In the forecast period, end user spending is projected to grow 4.4% CAGR to $21.5 billion in 2004. Juvenile trade sales will grow 7.3% CAGR, while mail order will continue its slide at -4.0% CAGR. All other segments - adult trade, mass market paperbacks, religious, book clubs, and university press books - are projected to grow in the range of 3.0-4.8% CAGR. Despite periodic surges in sales, Americans aren't expected to spend significantly more time with books over the next few years - 1999's per-person average of 91 hours per year is projected to increase only one hour by 2004. While experimentation with e-books will continue, meaningful sales are not expected within the forecast period.

8) Consumer Magazines

Consumer magazine spending grew 5.9% to $20.6 billion in 1999. Ad spending grew 9.0% to $11.5 billion, with strong gains in the financial, insurance and real estate, and media and advertising categories - and a boost from dot-coms, which spent $382.8 million. Circulation spending, fueled by per-copy price increases, grew 2.3% to 9.1 billion. Total spending is forecast to grow 5.8% CAGR to $27.3 billion by 2004.

Consumer magazines have proved resilient with regard to the Internet's growing reach. Most have been steadily incorporating the Internet into their business models for several years, resulting in greater publishing creativity and broader-branded online product offerings. At the same time, the Web has so far failed to duplicate the look, feel and ease of use of magazines and is unlikely to do so in the near future. Nonetheless, per-person use of magazines is forecast to decline slightly, from 80 hours per year in 2000 to 77 hours per year in 2004.

9) Business-to-Business Communications

Spending on B2B communications - industry trade media and trade shows - rose 7.5% to $23.1 billion in 1999. The segment is one of the media industry's healthiest, with spending up 8.2% CAGR since 1995.

Spending on trade magazines rose 7.1% to $14.6 billion in 1999, more than doubling the growth rate for 1998. The recent vigor reflects strong corporate profits and spending, but it was also spurred by a surge in dot-com advertising. Although the outlook remains strong, Veronis Suhler anticipates a "broad-based softening of the B2B publications market as the Internet siphons off a greater share of ad dollars." By 2004, total expenditures on B2B media are expected to grow 5.7% CAGR to $19.3 billion. Total B2B advertising should rise 6.4% CAGR to $17.1 billion by 2004. While the entire magazine sector remains strong, total B2B unit circulation actually fell 2.7% in 1999 due to double-digit declines in construction and farm-related publications.

The strongest portion of this segment continues to be trade shows, which "remain a critical element in the B2B buying and selling equation. With operating margins ranging from 30-52%, the number of shows produced each year is increasing despite slow growth in the number of attendees." Despite a less than 2% increase in attendance to 39.5 million people, total trade show expenditures jumped 8.2% in 1999 to $8.5 billion, due mainly to increased expo rental footage and costs. The CIF forecasts that exhibit space spending will continue apace, growing at an 8.5% CAGR to $12.8 billion in 2004.

10) Professional, Educational and Training Materials & Services

According to Veronis Suhler, this segment represented "three of the most consistent growth markets in the communications industry in the 1990s." Professional, educational and training "outpaced nominal GDP growth in nine of the ten years of the decade." The CIF predicts more of the same through 2004, given "rising enrollments, more instructional materials funding and an increase in the number of professionals" in need of specialized training.

Overall, the segment rose 5.6% in 1999 to $32.8 billion, driven primarily by a jump in spending the college and professional markets. Over the 1994-99 period, spending on the three markets advanced at a compound rate of 7.3%. Looking to 2004, the CIF projects a CAGR of 7.7%, reaching $47.5 billion. As with all other segments, this one has seen a strong Internet component of late, as the Web has greatly enhanced research capabilities, while also providing publishers with a means to distribute far more information than previously.

11) Business Information Services

The BIS market, composed of companies that sell business and professional data, continued its upward growth path in 1999, with spending jumping 7.7% to $44.2 billion - the fifth consecutive year in which spending growth surpassed 7%, in spite of generally declining unit pricing of subscription services. Over the 1994-99 period, the segment achieved a 7.6% CAGR. From 1999-2004, total spending is forecast to grow 7.8% CAGR to $64.3 billion.

Economic and financial information dominate the market, with spending here topping $14.9 billion in 1999, followed by marketing data ($13.8 billion) and payroll and human resources ($4.8 billion).

Factors driving BIS expansion include the integration of e-commerce and e-content into traditional data-driven services; increased computing power; increasing availability of broadband Internet access; advances in streaming video and Web browsers; and improved analytical software - all enabling businesses and individuals to access information efficiently from an ever-increasing universe of sources. The enhanced technology has also been a boon for third-party aggregators - companies such as NewsEdge, FactSet, Comtex and OneSource that integrate and interpret business data from multiple sources for high-margin resale.

12) Specialty Media

Spending on specialty media, which rose 6.6% to $119.2 billion in 1999, is forecast to expand 6.2% CAGR to $161.4 billion by 2004. Sponsorships are expected to post the strongest CAGR from 1999-2004, climbing 11.3% to $161.4 billion in 2004. Sporting event promotions have been on the rise in recent years and will receive a further boost from the Olympics. Consumer promotions are forecast to grow 4.2% to $42 billion in 2004; business-to-business promotion will grow 5.3% CAGR to $50.4 billion. Direct mail is expected to grow steadily through the forecast period, at 6.1% CAGR to $56.0 billion in 2004.

Please call if you would like to discuss detailed CIF findings with Veronis Suhler managing directors. See the attached list of managing directors for various industry segments.

Businesses interested in obtaining a copy of the 2000 CIF should contact Veronis Suhler at 800-935-4990. The 358-page report is available for $1,495.

Note: The 2000 Communications Industry Forecast sells for $1,495. To order, call 800-935-4990.

Veronis Suhler (www.vss.com) is a leading independent merchant bank dedicated to the media, communications and information industries. Since its formation in 1981, the firm has acted as a financial advisor across the full spectrum of media industry segments including Broadcasting, Cable & Entertainment; Newspaper Publishing; Consumer Magazines; Business Information Services; Consumer, Professional & Educational Books; Business-to-Business Communications; Specialty Media & Marketing Services; and the Internet.

In addition to the CIF, which tracks consumer media consumption and spending trends over a ten-year period (1994-2004), Veronis Suhler also publishes the Communications Industry Report, tracking financial performance of all publicly reporting media companies over a five-year period.

VS&A Communications Partners III, L.P., the firm's $1 billion private equity affiliate, is also exclusively dedicated to investments in the media and communications industries.