25 April 2017 Global Equity Research Media The Future of Advertising The Credit Suisse Connections Series leverages our THEME exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Rise of the Machines Research Analysts Omar Sheikh ■ Digital to dominate, but targeted linear TV emerging: In this report, we 212 325 6818 [email protected] lay out our long term structural view on global advertising. We argue that Matthew Walker digital platforms will continue to dominate spending, with the expansion of 44 20 7888 2622 the "Internet of Things" and advancements in machine learning driving a [email protected] near-doubling of market share. However, we also believe new targeted ad Sophie Bell platforms being developed in the US, including the recently-launched Open 44 20 7883 1488 [email protected] AP, will help (i) move linear TV into the "sweet spot" of ad product Fraser McLeish positioning; (ii) drive a step-up in trend growth for US TV advertising; (iii) 61 2 8205 4069 provide a template for similar developments internationally; and (iv) [email protected] potentially act as a catalyst for more vertical M&A. Stephen Ju 212 325 8662 ■ A >$100bn revenue opportunity for targeted TV: We believe Open AP [email protected] and similar targeted linear TV products open up a >$100bn revenue Lawrence Dann-Fenwick opportunity for TV networks, driven by share gains from "below-the-line" 212 538 8442 [email protected] marketing spend. We argue this means US TV advertising revenues will Boyao Sun accelerate from the 2% pa seen in 2014-16 to 5%-7% pa 2017-2030, not 212 325 3494 slow down as investors currently expect. We argue it will also act as a [email protected] catalyst for vertical M&A given the value of combining (i) the ability to Stephanie MacAulay create video content with (ii) access to granular data on how, who, when 44 20 7883 3958 [email protected] and where it is being consumed, and (iii) the infrastructure and skills Joseph Barnet-Lamb involved in bundling and selling advertising. 44 20 7883 3535 [email protected] ■ Global CMO survey: Our work is based on a proprietary CMO survey of close to 100 advertisers with aggregate marketing spend of $21bn; and direct interviews with executives at ad agencies, advertisers, digital platforms and TV networks around the globe. We found (i) high and growing advertiser appetite to switch from traditional media (particularly print) into digital, (particularly social media and online video); (ii) very low current usage of targeted linear TV inventory; (iii) limited likely impact from the recent controversy about ad placement on YouTube; but (iv) widespread concern about digital ROI, ad fraud, viewability, and transparency. Concerns about digital suggest there could be a positive advertiser response to targeting innovations by the TV industry, in our view. ■ VIAB is our strongest call: Our strongest stock call is VIAB, where we upgrade our TP to $55 (from $50), and highlight "Blue Sky" upside to $80. We also highlight CBS and FOXA have high exposure to US TV advertising, and we see "Blue Sky" valuation upside to $91-$108 and $41- $47 respectively. We also argue that the targeted TV advertising opportunity adds to the rationale for (i) FOXA to acquire CMCSA's 30% stake in Hulu, if it becomes available, subject to valuation and appropriate programming supply agreements; (ii) T's acquisition of TWX; and (ii) an acquisition of NFLX by a wide range of ad-funded TV or digital platforms. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 25 April 2017 Table of contents Summary of stock coverage 3 Key charts 4 Executive Summary 9 Our conclusions ........................................................................................................ 9 Stock calls .............................................................................................................. 12 1. US advertising 14 1.1 The life cycle of advertising .............................................................................. 14 1.2 The future of advertising: the age of relevance ................................................ 16 1.3 The pattern of digital advertising growth .......................................................... 20 1.4 Six challenges for digital advertising ................................................................ 21 1.5 The emergence of targeted linear TV advertising ............................................ 24 1.6 Are eyeballs shifting away from linear TV? ...................................................... 29 1.7 IoT and machine learning: the next frontier ...................................................... 31 1.8 US advertising in 2030 ..................................................................................... 34 1.9 Implications for US stocks ................................................................................ 37 2. Credit Suisse Global CMO Survey 42 2.1 Summary & Key Charts .................................................................................... 42 2.2 Time series with historical results..................................................................... 44 2.3 Full Results ....................................................................................................... 46 3. European Advertising 55 3.1 Summary .......................................................................................................... 55 3.2 Sky and AdSmart ............................................................................................. 56 3.3 A view on the future of TV from WPP .............................................................. 62 3.4 A view from Europe: little to slow the digital juggernaut; TV to slowly decline . 63 3.5 Impact on ad agencies ..................................................................................... 69 3.6 The future of the European FTA broadcaster .................................................. 70 4. Australian advertising 85 4.1 Australian Media – key trends .......................................................................... 85 4.2 TV advertising spend continues to decline ....................................................... 85 4.3 TV viewing under structural pressure ............................................................... 86 4.4 Programmatic buying and targeting can help offset structural pressures ........ 86 4.5 Investment view – NEC the top pick ................................................................ 87 Appendix: Ad Spend Mix by Country 88 The Future of Advertising 2 25 April 2017 Summary of stock coverage Figure 1: Credit Suisse stock coverage: Media & Entertainment, Cable & Satellite Market Target Market Net Enterprise EV/Sales EV/EBITDA P/E Net debt / Rating Price Price Cap Debt Value 2017E 2018E 2017E 2018E 2017E 2018E 2017E EBITDA Media & Entertainment The Walt Disney Company O $114 $125 $181,742 $16,754 $202,463 3.4x 3.2x 11.6x 10.8x 18.5x 16.3x 1.0x Time Warner Inc. O $100 $108 $79,327 $22,800 $102,127 3.3x 3.1x 11.6x 10.7x 16.8x 15.1x 2.6x 21st Century Fox O $30 $37 $56,173 $15,363 $73,329 2.5x 2.4x 9.9x 9.3x 14.7x 12.5x 2.1x Viacom O $43 $55 $17,074 $11,857 $28,982 2.2x 2.2x 9.3x 8.6x 11.1x 9.9x 3.8x CBS O $66 $75 $27,650 $8,327 $35,977 2.6x 2.5x 11.2x 10.4x 14.9x 13.2x 2.6x Discovery Communications U $29 $24 $17,826 $7,623 $25,692 3.8x 3.6x 10.2x 10.1x 12.5x 11.7x 3.0x Interpublic Group O $25 $28 $9,748 $915 $10,942 1.4x 1.3x 9.4x 8.9x 16.7x 15.1x 0.8x Omnicom N $83 $81 $19,628 $2,905 $23,248 1.5x 1.4x 9.8x 9.4x 16.3x 15.0x 1.2x Manchester United O $16 $20 $2,637 $523 $3,161 4.3x 3.9x 12.4x 10.7x 56.2x 32.9x 2.0x 2.8x 2.6x 10.6x 9.9x 19.7x 15.8x 2.1x Cable & Satellite Comcast O $38 $41 $182,280 $57,745 $243,702 2.9x 2.7x 8.7x 8.2x 20.2x 17.7x 2.1x DISH Network N $60 $52 $29,303 $11,120 $40,753 2.7x 2.7x 13.4x 14.0x 22.8x 24.2x 3.7x 2.8x 2.7x 11.1x 11.1x 21.5x 20.9x 2.9x Movie Exhibitors National CineMedia N $12 $12 $812 $866 $2,505 5.4x 5.4x 10.6x 10.7x 33.6x 34.6x 3.7x IMAX Corp N $31 $33 $2,117 ($177) $2,004 4.8x 4.4x 13.9x 11.6x 29.5x 22.0x -1.2x AMC Entertainment Holdings U $31 $26 $4,017 $4,229 $8,246 1.6x 1.5x 9.0x 8.3x 40.2x 30.3x 4.6x Cinemark Holdings, Inc N $44 $38 $5,316 $1,482 $6,810 2.2x 2.1x 9.2x 8.7x 20.0x 18.5x 2.0x Regal Entertainment Group U $22 $19 $3,481 $2,094 $5,575 1.7x 1.7x 8.8x 8.4x 19.0x 18.2x 3.3x 3.1x 3.0x 10.3x 9.5x 28.5x 24.7x 2.5x US Media, Cable & Satellite 2.9x 2.8x 10.6x 9.9x 22.7x 19.2x 2.3x Note: Prices as of 4/24/2017; IPG & OMC valuations are based on Average Net Debt of last 4 reported quarters; estimates are calendarized and adjusted for differing fiscal years. Source: Thomson Reuters, Company data, Credit Suisse estimates Figure 2: Media/Cable: EV/IC vs CFROI Figure 3: Media/Cable: Economic Profit vs EV 20 350,000 18 OMC R² = 0.8967 R² = 0.8149 300,000 16 latipaC detsevnI / eulaV esirpretnE 111 468024 DIS IPG TWX DISCA )m$( VE 112205050000,,,,000000000000 FOXA TWX DIS CMCSA CBS 2 CBS VIABFOXA 50,000 IPG VIAB OMC - - DISCA 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Forecast returns on capital (CFROI) Economic Profit ($m) Note: CFROI is calculated excluding goodwill and intangibles Note: Economic Profit is calculated excluding goodwill and intangibles Source: Credit Suisse HOLT, Company data, Credit Suisse estimates Source: Credit Suisse HOLT, Company data, Credit Suisse estimates Figure 4: US Media vs S&P 500 & global ad agencies Figure 5: US Media vs S&P 500 composite YTD 250 2017 YTD US Media FACEBOOK CLASS A 26% APPLE 24% 200 VIACOM 'B' 22% TEGNA 20% CHARTER COMMS.CL.A 18% 150 CINEMARK HONLEDTINFLGIXS 14% 16% NEWS 'A' 14% ALPHABET 'A' 11% 100 COMCAST 'A' 10% S&P500 MEDIA - PRICE INDEX 9% WALT DISNEY 9% TWENTY-FIRST CENTURY FOX CL.A 8% 50 DISCOVERY COMMS.'A' 7% Global adagencies S&P 500 REGAL ENTM.GP. 'A' 7% S&P 500 COMPOSITE - PRICE INDEX 6% SCRIPPS NETWORKS INTACT. 'A' 6% 0 INTERPUBLIC GROUP 5% 7002/42/47002/42/87002/42/218002/42/48002/42/88002/42/219002/42/49002/42/89002/42/210102/42/40102/42/80102/42/211102/42/41102/42/81102/42/212102/42/42102/42/82102/42/213102/42/43102/42/83102/42/214102/42/44102/42/84102/42/215102/42/45102/42/85102/42/216102/42/46102/42/86102/42/217102/42/4 DOIMSHNT IINCMEOIEMTM WWA XGAOC RRR(BNONSKYUE ''SBARP)'' -2%-1% 44%%4% Global Ad Agencies S&P 500 DJ US Media AMC ENTERNLTAIAOTININOMSN EGANLAT TC EHIN DEEGNM.T ECMDL.'.IAAA' -16% -9% -4% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates The Future of Advertising 3 25 April 2017 Key charts Figure 6: Innovation from digital platforms has shifted the basis of competition for advertising products – from simple reach to relevance and engagement Primary basis of competition Reach Engagement Relevance Price Time period 1920-1950 1950-2000 2000-2030 Beyond 2030 Incumbent medium Print Radio, TV TV, Digital Digital, TV Innovator medium Radio TV Digital Digital Innovation barriers Ability to deliver audio message Ability to deliver audio/video message Ability to deliver relevant message Ability to deliver message at lowest price 1) Internet infrastructure 1) Ubiquitous Internet infrastructure 1) Spectrum use for TV 2) Digital media platforms 2) Ubiquitous digital platforms Technology catalysts Spectrum use for radio 2) Cable infrastructure 3) Video delivery over IP 3) Ubiquitous video over IP 4) IoT 4) Ubiquitous IoT Source: Credit Suisse Research, adapted from The Innovator's Dilemma (Boston, Harvard Business Review Press, 1997) Figure 7: Digital advertising is already in the "sweet spot" of performance for advertisers. Targeted linear advertising is moving TV in its direction Reach Broad reach, narrow targeting Highly targeted, broad reach Linear TV Radio Digital Outdoor C i n e Print m a Cinema Ad-funded VOD Narrow reach, narrow targeting Highly targeted, narrow reach Relevance Note: Digital advertising includes display, online video, search, social on both desktop and mobile platforms. Size of bubbles denotes estimated time spent by medium. Source: eMarketer, Credit Suisse Research The Future of Advertising 4 25 April 2017 Figure 8: Open AP allows advertisers to define audiences for ad buys across Fox, Turner and Viacom networks, representing c40% of US TV viewing Manage platform, validate campaign results Advertiser Accenture Media agency First/Third party data from client Open AP Define targeted audience, e.g. “heavy detergent users” or “people whose auto lease is about to expire” Fox, Turner, Viacom Third party data Linear inventory optimisation platform from network e.g. AIM, Ignite, Vantage Dynamic ad insertion platform Match targeted audience definition with viewing data Serve tailored advertising to targeted audience based on samples from MVPDs & third party sources actual viewing data for individual households Live linear feed DVR IP feed Cable DBS Telco Over the Air ”Virtual” MVPD Connected Device Smart TV Source: Credit Suisse Research Figure 9: By allowing advertisers to target messages on narrower groups, targeted linear platforms can materially reduce ad loads Truck manufacturer Campaign Plan (Vehicle Launch) Men aged 34-55 All potential truck buyers Current truck owners with lease about to expire Traditional Linear Targeted Linear Buy 200 GRPs –Men aged 34-55 Buy 40 GRPs –Current truck owners with lease about to expire 50% of 10% of inventory inventory 80 GRPs 70 GRPs 30 GRPs 20 GRPs 10 GRPs 10 GRPs 10 GRPs 10 GRPs Show 1 Show 2 Show 3 Show 4 Show 1 Show 2 Show 3 Show 4 Note: Illustrative example. GRP = gross ratings point. 1 GRP = 1% of TV households watching at the time of broadcast Source: Credit Suisse Research, Nielsen The Future of Advertising 5 25 April 2017 Figure 10: By 2030, we see US marketing spend split between "brand building" and "call to action" campaigns, with just under 60% spent on digital platforms and 35% on TV, vs 32% and 36% in 2016 Marketing Spend $670bn Brand Building Call to Action $234bn $435bn Interruptive Non-Interruptive Digital Non-Digital Other Sponsorship Newspapers Price P’motions Video Non-Video $59bn Connected Devices $0.6bn $125bn Machine Learning PR Magazines Telemarketing Newspapers $14bn $0.3bn $9bn $3bn Sports Entertainment Video Non-Video Magazines Radio Direct Mail $3bn $2.6bn $8bn Radio TV Search Outdoor $3bn $70bn $92bn $0.1bn TV Digital $98bn $35bn O$u1t3dbonor $D2ig2ibtanl $S8o2cbianl C$i0n.e0mbna Cinema Other Digital $1bn $22bn Source: Credit Suisse Research Figure 11: US marketing mix 2016 Figure 12: US marketing mix 2030 Cinema - Digital - BB Magazine - Radio - CTA Outdoor - BB $8bn PR $5bn Digital - BB $35bn CTA $6bn BB $5bn $9bn Outdoor - $4bn Magezines - BB $15bn Newspapers- BB $15bn Radio - CTA $16bn PR $14bn BB $14bn Newspaper - Other BB $5bn Newspaper TV - Brand Building $55bn TV - CTA $14bn Other TV - Brand Building $98bn - CTA $4bn TV - CTA $44bn Tele- Telemarketing - $56bn marketing $7bn Sponsorship $35bn Sponsorship $59bn Direct Mail $7bn Digital - Call to Action $54bn Digital - Call to Action $218bn Price Promotions $77bn Direct Mail $49bn Price Promotions $125bn Note: BB = "Brand Building" marketing; CTA = "Call to Action" marketing Note: BB = "Brand Building" marketing; CTA = "Call to Action" marketing Source: ZenithOptimedia, Credit Suisse Research Source: ZenithOptimedia, Credit Suisse Research The Future of Advertising 6 25 April 2017 Figure 14: Cumulative change in US advertising Figure 13: US advertising 1935-2030 expenditure 2016-2030 450,000 $250bn 400,000 $195bn $200bn 350,000 R² = 0.9789 $163bn 300,000 $150bn 250,000 200,000 $100bn $67bn 150,000 $50bn 100,000 $5bn $0bn 50,000 $0bn 0 -$14bn -$13bn -$13bn -50,000 53918391149144917491059135916591959126915691869117914791779108913891689198912991599189911002400270020102310261029102220252028202 -$50bn Total Newspapers Magazines TV Internet Radio Outdoor Cinema US Advertising 1935-2030 Trend Cumulative change in Advertising Spend 2016-2030 US Census Bureau, Zenith Optimedia, Thomson Reuters, Credit Suisse Research Source: Credit Suisse estimates Figure 15: We expect US digital advertising to grow Figure 16: …but expect US TV advertising share to to just under 60% of advertising spending by 2030… remain broadly stable at 35% 70% 45% 40% 60% 35% 50% 30% 40% 25% 30% 20% 15% 20% 10% 10% 5% 0% 0% 53918391149144917491059135916591959126915691869117914791779108913891689198912991599189911002400270020102310261029102220252028202 53918391149144917491059135916591959126915691869117914791779108913891689198912991599189911002400270020102310261029102220252028202 US Internet Advertising Share 1935-2030 US TV Advertising Share 1935-2030 Note: Shows medium's share as % of total advertising spend, i.e. excluding various below- Note: Shows medium's share as % of total advertising spend, i.e. excluding various below- the-line categories including direct mail, telemarketing, PR, event sponsorship and directories the-line categories including direct mail, telemarketing, PR, event sponsorship and directories Source: US Census Bureau, Zenith Optimedia, Thomson Reuters, Credit Suisse Research Source: US Census Bureau, Zenith Optimedia, Thomson Reuters, Credit Suisse Research Figure 17: Advertisers are increasingly concerned Figure 18: ROI on social media vs ROI on traditional about viewability and ad blocking media 40% 37% 60% 35% 31% 50% 48% 48% 51% 30% 28% 25% 26% 22% 22% 25% 24% 40% 36% 32% 20% 19% 30% 26% 24% 15% 20% 20% 10% 15% 5% 10% 0% Viewability standards of display / video Rising use of ad blocking software Ad fraud 0% ads ROI lower ROI the same ROI higher May-16 Dec-16 Mar-17 May-16 Dec-16 Mar-17 Question: "Looking at your DIGITAL ADVERTISING BUDGET across all your territories today, Question: "Looking at the marketing dollars your firm spent on social media campaigns (e.g. please stipulate your level of concern (if any) about the following issues?" on Facebook, Instagram, Twitter, Snapchat, etc.) over the last 2 years, do you believe the ROI Source: Credit Suisse proprietary survey (return on investment) was higher or lower than the ROI on traditional media campaigns (e.g. on TV, radio, outdoor, newspapers, etc.)?" Source: Credit Suisse proprietary survey The Future of Advertising 7 25 April 2017 Figure 19: Feedback from our CMO survey suggests Figure 20: YouTube ad placement issues – only 8% global advertising budgets will grow by an of respondents say they plan to reduce spend, 31% aggregate 3.7% in 2017 say they expect the platform to expand safeguards 6.0% 35% 31% 31% 5.3% 30% 26% 5.0% 25% 4.1% 20% 4.0% 3.7% 3.7% 3.7% 15% 12% 3.0% 10% 8% 2.2% 5% 2% 2.0% 0% Do not advertise on Advertise on Advertise on Advertise on Advertise on Other YouTube YouTube, will YouTube, this news YouTube, but too YouTube, expect 1.0% reduce future will not impact early to say how this the platform to 0.2% spending in future spending news will impact expand safeguards response to this future spending to prevent this from 0.0% news happening in the Asia USA Global UK LatAm Europe Germany future Question: "Looking at your TOTAL ADVERTISING BUDGET in 2017 vs 2016 in your Question: "It has recently been widely publicized that some advertising on YouTube has been LARGEST TERRITORIES, by approximately how much do you expect it to grow / decline?" displayed adjacent to extremist or offensive content. If you advertise on YouTube, how will Source: Credit Suisse proprietary survey this impact your future spending on the platform? SELECT AS MANY AS APPLICABLE" Source: Credit Suisse proprietary survey Figure 21: The overwhelming majority of our US Figure 22: …and reduce spend on traditional media, respondents intend to increase spend on digital… particularly print 100% 0% 6800%% 59%51% 67%63% 73%81%79% 82%75%82% -1-50%% -5%-9% -4%-10%-9% -9% -8% -15% -13% 40% -20% -19% -18% -17% 20% -25% -30% 0% -30%-30% -7% -35% -33% -20% -17%-15% -40% -41% -40% -45% Linear TV Other online Search Social Media Online video Newspapers Magazines Cinema Radio Outdoor May-16 Dec-16 Mar-17 May-16 Dec-16 Mar-17 Question: "Directionally over the next 5 years, how do you expect the mix of your Question: "Directionally over the next 5 years, how do you expect the mix of your ADVERTISING BUDGET to change?" ADVERTISING BUDGET to change?" Source: Credit Suisse proprietary surveys Source: Credit Suisse proprietary surveys Figure 23: 5% pa domestic ad growth lifts "Blue Figure 24: …and by 54%-88% if we assume 7% pa Sky" valuations for VIAB, CBS & FOXA by 36%-61% domestic ad growth 70% 100% 61% 88% 60% 90% 80% 50% 70% 64% 40% 38% 36% 60% 54% 30% 50% 22% 20% 14% 40% 31% 30% 24% 10% 4% 20% 10% 0% 10% 5% -10% -6% 0% VIAB CBS FOXA CMCSA DIS TWX DISCA VIAB CBS FOXA CMCSA DIS TWX DISCA Blue Sky valuation upside if domestic ad growth = 5% Blue Sky valuation upside if domestic ad growth = 7% Note: Analysis calculates future stock price using assumed P/E multiple and 2030 EPS Note: Analysis calculates future stock price using assumed P/E multiple and 2030 EPS forecast, then discounts back to PV at 8% discount rate. 2030 EPS forecasts are based on forecast, then discounts back to PV at 8% discount rate. 2030 EPS forecasts are based on CS 2017 estimates for domestic advertising and 5% domestic advertising growth from 2018- CS 2017 estimates for domestic advertising and 5% domestic advertising growth from 2018- 30, with all other revenues growing at CS 2017-20E segment CAGRs. Analysis assumes 1% 30, with all other revenues growing at CS 2017-20E segment CAGRs. Analysis assumes 1% annual share buyback after 2020, 10bps basline net margin expansion, and a net margin on annual share buyback after 2020, 10bps basline net margin expansion, and a net margin on domestic advertising growth of 33%. Prices as of 04/24/17. domestic advertising growth of 33%. Prices as of 04/24/17. Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The Future of Advertising 8 25 April 2017 Executive Summary ■ Over $500bn is spent annually on global advertising, and at least twice that figure on "below-the-line" marketing. And yet there is remarkably little investor consensus on how this will be allocated between the myriad of existing and emerging platforms in the long term. In this report, we lay out our vision for how secular trends in consumption, and technological change, will shape the marketing mix between now and 2030. ■ To inform our thinking, we conducted a proprietary CMO survey of close to 100 global advertisers with aggregate marketing spend of $21bn, and directly interviewed market participants at ad agencies, advertisers, digital platforms and TV networks. Our report is necessarily weighted to developments in the US market, where we believe important innovations are under way, but includes work from CS analysts covering media owners and agencies across the globe. Our conclusions ■ Advertising is in the third phase of its development in the post-1922 era, in which the relevance of the advertising message is the primary basis of competition between platforms, replacing reach. Digital platforms are intrinsically better able to deliver relevant advertising and, as they grow in size, are on a near-inexorable path to take share from all parts of marketing budgets. ■ It also clear that the performance of digital advertising continues to improve at a rapid pace. We highlight two secular trends which will drive further improvements in performance over the next 10-15 years, namely (i) the expansion of the "Internet of Things" (wearables, connected homes, connected cars, smart appliances, smart bottles, connected clothing), which will allow advertisers to refine target audiences and deliver messages to consumers in new ways; and (ii) advancements in machine learning, which will allow platforms, advertisers and agencies to analyze the explosion of data from both current sources and from IoT, with the aim of further improving the relevance of advertising messages. ■ The feedback from our CMO survey supports the view that digital advertising will continue to capture share of marketing expenditure. Overwhelming net balances of our respondents told us they expect to shift advertising spend to digital platforms over the next 5 years, with social media and online video the biggest beneficiaries; and told us they expect to move spend away from traditional platforms, with print and TV the most notable sources of funds. [See Section 2] ■ Our survey does highlight some potential "yellow flags" for digital advertising, with respondents citing elevated concern about (i) viewability of online video ads; (ii) ad fraud; (iii) the use of ad blocking software; and (iv) the lack of transparency in the media supply chain. Moreover, despite planning to spend more on digital platforms, advertisers also have surprisingly mixed views on how effective digital marketing spend actually is: only half of our respondents told us they believe their social media and online video campaigns over the last two years have delivered higher ROI's than traditional media campaigns. We argue the combination of these factors, if not addressed by digital platforms, represents a meaningful risk to growth in digital advertising spending in the coming years. [See Section 2] ■ Heightened concern about digital advertising comes at a time when the performance of TV advertising is on the cusp of materially improving. For example, 21st Century Fox, Turner and Viacom recently announced the launch of a new advertising platform, called Open AP, which allows advertisers to use their own (first party) data, and data from third parties, to define narrow target audiences for ad buys across the networks of all three partners. The target audiences could be "heavy detergent users" or "truck The Future of Advertising 9 25 April 2017 owners whose lease is about to expire" rather than Nielsen definitions, which might be "men aged 18-34" or "women aged 55+". The platform will be managed by Accenture, with campaign results validated and reported back to the agency/advertising client. Each of the partner networks will use Open AP alongside proprietary inventory optimisation systems (AIM for Fox, Ignite for Turner and Vantage for Viacom) to significantly improve the efficiency of their linear inventory. Our understanding is over the long term the partners could use Open AP and their inventory optimisation tools to reduce ad loads from an average 15 minutes per hour to as low as 2-5 minutes per hour – this highlights the scope for targeted linear TV advertising to win share of marketing spend, but also to substantially improve the user experience and potentially also win back share of viewing from non-ad funded SVOD platforms like Netflix and Amazon. [See Section 1.5] ■ Beyond targeted linear with Open AP, and a similar product from Comcast, the US TV industry is also improving its ability to deliver fully addressable advertising on IP- delivered "virtual" MVPDs. DISH's Sling has led the way since early 2015, but we expect DirecTV NOW, Hulu's live streaming service and YouTube TV to significantly expand the volume of video advertising inventory which combines the engagement of video with the targeting of digital. This will eventually add another tailwind to the US TV industry's market share over time, in our view. ■ So we argue that emerging technological advances by the TV industry put it in a strong position to compete for share of marketing spend. In that context, we lay out our vision for US advertising in 2030, which crystallizes our views of how competition between advertising platforms will play out between now and the end of the next decade. The key elements of our view are: o We assume marketing spend will grow 3.5% pa 2017-2030, broadly in line with the 3.2% pa growth in 1995-2016. o We assume marketing spend will be split into two broad buckets: (i) investment in "brand building", which seeks to create an affinity between the brand and consumers; and (ii) investment in "calls to action", which seeks to convert affinity into a sale. We assume the mix between the two types of marketing spending will be the same as it is today, i.e. 35% in brand building and 65% in calls to action. o We believe the current distinction between "media" spend (TV, digital, print, radio, outdoor and cinema) and "below-the-line" marketing spend (price promotions, PR, sponsorship, direct mail and telephone marketing) will blur. We believe proliferation of IoT devices and the development of machine learning will enable media platforms – both digital and targeted TV – to take share from below-the-line spending. We highlight that of the $414bn spent on marketing in the US in 2016, 54% ($223bn) was spent on below-the-line items with the balance ($191bn) spent on media. o We expect only modest changes to brand building expenditure, but much bigger changes in "call to action" spending. We estimate 44% of US marketing expenditure in 2016 was in this category, including price promotions, direct mail and telephone marketing. We expect the proportion spent on price promotions will remain unchanged in 2030 (at 19%), but that spending on direct mail and telephone marketing will migrate to digital platforms and targeted TV. We argue that advertisers will be able to use machine learning of data generated from connected devices to analyze consumers' habits, preferences, location and purchase patterns, to learn which advertising messages might work best and to deliver them on digital and targeted TV platforms wherever consumers may be. For this reason, we think digital and targeted TV platforms will become substitutes for direct mail and telephone marketing, and expect virtually all of today's investment in these two items ($106bn) to migrate to digital and targeted TV by 2030. The Future of Advertising 10