The 21st Century LED Billboard

The 21st Century LED Billboard

By Paul Wright
July 2005

Approximately ten years ago digital printing revolutionized traditional billboard displays by offering advertisers more graphic image options, unlimited color choices, and faster posting times. Today, however, LED lighting has the potential to completely transform the use of creative copy in billboard advertising campaigns. New LED billboards are popping up all over the country and it is only a matter of time before there will be one in your city. Today’s high resolution color LED displays offer advertisers the same graphic image options and virtually unlimited color choices with posting times so versatile that advertisers can pick the time of day that they want to advertise. That’s because today’s LED displays are capable of changing the creative copy with the click of a button. These new displays are also extremely bright and colorful and capable of full motion video that can obviously attract considerably more attention than one static image.

In 1962, Nick Holonyak Jr. invented the first practical red Light-Emitting Diode (LED). Today the LED illuminates a variety of electronics, from alarm clocks to signs in Times Square. In early 2004, Merton Flemings, director of the Lemelson-MIT program said, “Within the next decade, LED’s could potentially make the incandescent light bulb obsolete.” In late 2004 the first LED-backlit computer monitors and TV’s will be introduced by electronics manufacturers.

So what is an LED? An LED is a solid-state component that uses electricity to make light. LED’s come in a variety of sizes, shapes, colors and light intensity ranges. LED’s are not all created equal, and in fact, there can be quite a difference between LED’s in terms of their performance, longevity, brightness and cost. Experienced LED sign vendors have told us that you definitely get what you pay for when buying LED components. Diode manufacturers claim that their diodes will last for up to 100,000 hours, but usually don’t. The following drawing illustrates the anatomy of a common LED used in outdoor signs.

The part that actually makes the light is the LED “die” or “chip.” The “lead frame” holds the chip and extends out of the package to provide electrical connection. The whole thing is encapsulated in an epoxy plastic package that may be colored or shaped. The diodes come from the manufacturer on a tape in rolls like artillery for a machine gun. The process of constructing LED signs is not complicated. Small sheet-metal or aluminum panels (approximately 1×1 foot) are punched with ball bearing sized holes in clusters of three or four so that red, blue and green (and most recently white) diodes can be grouped together. The holes are plugged with the diodes (just like the Lite-Brite toy you played with as a kid) so that the epoxy resin is exposed on the outside and the lead frame sticks out the back for connection to a power supply and circuit board. Keeping the lead frames cool is the biggest hurdle for most LED display manufacturers. Every company has a slightly different idea and proprietary method for cooling these components and they are all convinced that they have the best solution for the problem. After these panels are fully assembled to a power supply, circuit board and cooling system they are mounted side-by-side to form very large LED displays.

The distance between each group of diodes is usually measured in millimeters. This distance is referred to as the overall resolution of the display. Resolution can be very high or very low depending on the distance between each cluster, or the number of pixels in each horizontal row and each vertical column. Resolution is generally better when the diodes are closer together. For instance, a distance of 20mm produces better resolution than a distance of 89mm between diode clusters. The necessary resolution of an LED display depends in large part on the distance between the location of the display and the target audience.

Frank Barnes, a sales person for Multimedia, reported that his company’s displays in Times Square are between 12mm and 25mm resolution. Multimedia generally recommends the following resolutions based on various distances, text heights and environments.

RECOMMENDED VIEWING DISTANCES
Distance	Resolution	Examples	Text Height
5 to 50 feet away	3mm to 8mm	Office, Hallway, Retail, Lobbies, Etc.	1 to 2 Inches
50 to 100 feet away	6mm to 12mm	Warehouse, Window, Drive Through, Etc	2 to 4 Inches
100 to 200 feet away	12mm to 25mm	Parking lots, Surface streets, Line Signs, Etc.	4 to 8 Inches
200 to 350 feet away	25mm to 34mm	Surface streets, Parking lots, Etc.	8 to 10 Inches
250 to 500 feet away	34mm to 66mm	Parking Lots, Hiways, Spectaculars, Etc.	10 to 20 Inches
500 to 600 feet away	66mm to 76mm	Hiway, Skyscrapers, Spectaculars	20 to 24 Inches
600 to 1000 feet away	76mm to 89mm	Skyscrapers, JumboTrons, Stadiums	24 to 40 Inches
Source: Multimedia 2004 Product Catalogue

LED billboard manufacturers and owners have encouraged our clients to buy higher resolution displays to accommodate legal disclaimers and other fine print items that many national advertisers often have to include in all of their advertising. For example, one auto maker that was advertising special financing had to publish some of the specific terms of their offer. This “fine print” was not legible on some lower resolution displays, so they were limited to higher resolution displays. In another case a cooperative
advertising agreement required the inclusion of one of the company’s mottos under their logo. However, the text was too small to be legible. Sometimes these issues can be worked out in the graphic design department, but other times these requirements have been deal killers.

The outdoor advertising industry has only recently started to use LED displays. In an article for Sign of the Times Magazine, entitled “LED Billboards: Outdoor Advertising in the Video Age,” Louis M. Brill wrote,

In outdoor advertising, LED video billboards are a new ballgame, a pioneering effort of setting up electronic billboard installations as a multiple location advertising system. While print billboard agencies may see electronic as an upstart within their domain, LED video billboards sallies forth with the same pioneering spirit as other earlier entrepreneurs who started experimenting with the horseless carriage and the all new, all ‘talking’ movie pictures.

In their first quarter conference call with securities analysts, Lamar Advertising reported that they are currently buying LED displays from two “reliable” vendors and both YESCO and Daktronics have reported selling displays to Lamar. Lamar has installed YESCO and Daktronics signs in Las Vegas NV, Baton Rouge LA, Pittsburg PA, Cincinnati OH, Fort Walton FL, and Birmingham AL. They also have deployed LED displays in Kansas City MO, along Interstate 435. In an article in The Kansas City Star on May 17, 2004, Lamar’s general manager Bob Fessler said that “The feedback we’re getting from customers is they like the flexibility” adding that “rates are comparable to those of regular billboards” and the board is “completely sold out.”

In another interesting industry move that may forecast a future trend, Millennium Sign in Salt Lake City, Utah, rented traditional vinyl billboard space from a local billboard company, then leased a YESCO LED display. Millennium Sign now sells advertising spots to third party advertisers through a marketing agreement with the local NBC affiliate KSL TV. The 14×48 display is positioned in a high traffic location along Interstate 15 in downtown Salt Lake City. The display has 33mm resolution and 68.7 billion color
capabilities.

Rick Craig, the CEO of Millennium Sign, reported that their technicians connected a Sony PlayStation unit to their new sign to test the display’s graphic animation capability and it passed with flying colors (no pun intended). Although LED signs can produce stellar video quality imagery, the vast majority of city, county and state regulations that control billboards do not allow full motion video. One way that billboard owners might persuade government agencies to permit this new technology would be to offer officials the use of the new LED displays for emergency messages, such as Amber Alerts.

Border Billboard is another small company who has invested in this technology and is selling display space to third party advertisers. Their two Daktronics LED billboards are 18×25 feet and are positioned along Interstate 1 in Mexico (and Interstate 5 in the US) facing travelers crossing from Tijuana, Mexico into San Diego, California. The Daktronics Pro-Star LED displays are 23mm resolution and capable of one billion colors. The company reported that, “The technology changes so quickly that we must always
upgrade our billboards to stay ahead of the competition, as we have in Mexico.”

On April 12, 2004, Clear Channel Outdoor indicated that they may have plans to start installing LED displays in place of some of their traditional vinyl billboards over the next two to three years. Their Chief Executive Paul Meyers told Reuters,

“We have decided to actively seek out developing technologies that enable us to remotely and instantaneously change static signage. Within two to three years, there is a good chance that this kind of maximally flexible outdoor display is going to be available on our traditional structures.Instead of selling space on traditional displays, we’ll be selling time slots but with incredible flexibility. It’s a whole different pricing scheme and it should dramatically increase the aggregate revenue from any given location. We’re going to make significant capital expenditures to provide that service.”

We estimate that there are about a dozen companies currently operating between 50 and 75 LED billboard displays nationwide. These companies are selling display time in spots between 6 and 60 seconds much like radio and TV advertisements are sold. The owners we spoke with said that they required advertisers to buy a minimum number of spots per week or month. High resolution LED billboards at prime locations are generating three to six times more revenue than traditional static vinyl displays. LED billboard operators have reported ad revenue between $3,000 and $60,000 per month, per display depending on the location and resolution of their displays. Obviously, these relatively expensive signs are only warranted at high traffic locations in major media markets.

One might expect operating expenses to be lower on LED displays because there is no need for traditional vinyl copy production and installation. However, we have found that expenses are as high as or higher than traditional vinyl displays. The higher expenses are due in part to the additional time salespeople must spend educating potential advertisers. LED displays also have higher electricity costs and higher logistical management costs due to the numerous advertisements that can be placed on such a versatile medium. Since advertising spot management can be time consuming it is important for sign owners to investigate the operating systems that come with the LED displays and how those systems will manage the creative image that is displayed.

The cost of high resolution LED bulletin displays (14×48 feet) is still in the $400,000 to $500,000 price range, but we expect those prices to drop significantly in the next three years as more and more companies invest in the technology and the price of diodes continues to fall. Diode prices have reportedly dropped between 75% and 85% in the last few years and we expect prices to continue falling for the next decade. Ultimately, those companies that make the investment in this technology will have to be able to support it with salespeople and technicians to manage the signs as efficiently as possible.
Ten years from now there will undoubtedly be a few LED billboard displays in every top 50 media market. We are clearly at the beginning of a revolution in outdoor advertising created by the 21st Century LED Billboard.

Paul Wright is the President of SignValue, Inc. an outdoor advertising appraisal and consulting firm
based in Scottsdale Arizona. He can be reached at (480) 657-8400 or paul@signvalue.com.

Adams Outdoor Advertising vs. City of Madison
Wisconsin Circuit Court Branch 20 – December 31, 2004
Case No. 03CV777 – Maryann Sumi, Judge

A billboard permit is inextricably intertwined with the billboard structure, and taxation of the permit is included in the valuation for property tax purposes.

Adams Outdoor Advertising owns and operates approximately 336 billboard faces in and around Madison, Wisconsin, which are classified as personal property. From 1991 to 1993, the assessed value of the signs in Madison was $1.3 to $2 million. In an inverse condemnation action in 1993 (arising from restrictions placed on billboards), Adams’ expert appraised the billboards at $5 million. In 1994, the assessed value by Madison rose to $4 million, and by 2002, it was $6 million based on the Income Method of appraisal. In 2004, Adams challenged this method of determining value for property tax, and submitted values of $300,000 to $400,000 based on the physical structures alone. Adams claimed that the higher value under the Income Method was for eminent domain (real property), and that method does not apply for personal property tax.

The City Assessor countered that the hierarchy of appraisal methods is: 1) recent sales of the subject property; 2) recent sales of reasonably comparable property; 3) cost; and 4) income. Without recent sales of the subject or any reasonably comparable property sales, and with cost data deemed not applicable, the Assessor selected the Income Method as the best approach. He argued that under the Cost Method, it is almost impossible to determine the cost to put billboards into productive use because of such factors as site procurement expenses, entrepreneurial profit, and so forth. Adams Outdoor disagreed with use of the Income Method, and the case went to trial for three days in July 2004.

Sign company expert Donald Sutte testified that the proper approach in a situation like this is to isolate the value of the structure alone for property tax purposes. When isolated, the Income Method does not apply because it erroneously includes leasehold value (which is a real property interest, not personal property).

Sign company expert Rudolfo J. Aguilar testified that the Cost Method is best for personal property tax purposes. According to Aguilar, the income approach erroneously includes the value of the permit, which is an intangible personal property asset that cannot be taxed under Wisconsin law.

Sign company expert Mark Ulmer, an attorney and contributing author of Nichols on Eminent Domain, testified that a distinction exists between valuation for eminent domain purposes and valuation for property tax purposes. Eminent domain determines the value of the leasehold, improved with a billboard structure under the ‘bundle of rights’ concept in real estate appraisal. On the other hand, for property tax purposes the value of the structure alone is proper because the leasehold interest is real property and the permit is an intangible property. Since the real estate is taxed through ad valorem real estate taxes and intangibles are not taxable, only the billboard structure should be taxed for personal property purposes.

The court agreed with part of this argument: “The selected property tax valuation method must also avoid assessment and taxation of real estate value.”

The City Assessor applied the Income method by eliminating the portions of income attributable to the real estate and to the business enterprise value.

Example of City Assessor Approach

(For demonstration only, not actual numbers.)

Assumed Effective Gross Income (EGI)	$ 100,000
Less: Lease Expense (removes real estate value)	–   25,000
Less: Operating Expenses (removes business value)	–   50,000
Income to billboard	25,000
Capitalization Rate	÷     0.14
Value of Billboard for Personal Property Tax Assessment	$178,571

The Assessor testified that one of Adam’s experts, Donald Sutte, had stated in the past that this Income Method was appropriate for the purpose of property tax assessment. According to the court, Sutte could not clearly recall taking that position. The Assessor produced notes made during a prior meeting and a conversation with Sutte. The court stated that Sutte “hedges on the ultimate issue, which is whether City Assessor Kurth applied the appropriate methodology to Adams’ billboards.”

Expert Aguilar testified that billboards have three components of value for property tax purposes: the ‘bonus value’ of the lease, the cost of the structure, and the value of the permit. A permit is not normally taxed because it is intangible property. Aguilar testified that the permit is the vehicle that provides the income.

To gain additional perspective, the court looked at the valuation of shopping malls. Market value is usually greater than cost due to location, which is “a transferable value that is inextricably intertwined with the land.” The court also noted that the same is true for landfills: the inherent value of an approved and licensed site would pass to a new owner upon sale. The written opinion states that there are other examples where business value is inextricably intertwined with real estate, and the income would survive a transfer of the real estate. The same is true for a billboard: “its value is a function of its permit and its location.” The income-generating capacity is based on the permit and the billboard structure together at a specific location.

Finding

The permit value is inseparable from the structure, and therefore is taxable. It is not the permit that is taxed, but the value represented by the permit as part of the billboard.

“… the court determines that the City of Madison correctly utilized the income approach to value Adam’s billboards and that the application of the income approach properly subtracted value unrelated to the billboards themselves.”

Comments

It can be argued that the permit is more connected to the land than the structure because a permit is usually site-specific: permits are normally issued for a particular street address or highway location. That could be an argument that the intangible value of the permit would be connected to the land. However, rarely is the owner of the land also the owner of the permit. In most cases, the billboard company owns the structure and the permit. This ownership structure links the permit more closely with the structure than the land, supporting the notion that the permit value is intertwined with the structure.

Another argument that the permit is part of the billboard structure is based on the cost approach. The cost of obtaining the permit must be incurred before the asset can be put to productive use. This is consistent with the definition of the cost of an asset or property.

The cost of just the physical billboard structure erected at a site is rather easy to determine through a quote from a steel fabrication and erection company. The total cost of obtaining a permit is more difficult to determine because it can include many hours of research, legal representation, filing fees, various regulatory approvals, and property owner approvals. When permits are bought and sold, the prices can be substantial. Actual prices for permits might be from a few thousand dollars to $50,000, and even higher in some cases. Permits have been sold in conjunction with signed leases at prices exceeding $100,000 for the combination.

The implications of this case could be important for condemnation purposes. If a permit is part of a billboard structure, and the structure is determined to be personal property, could that part of value be excluded in an eminent domain taking? The only remaining value to billboard companies would be the possible ‘bonus value’ of the leasehold interest.

Lamar Advertising Company (NASDAQ: LAMR) reported strong sales and earnings for the second quarter ending June 30, 2004. In a conference call with securities analysts on August 5, 2004, the company reported that revenue on signs owned for one year or more rose 7.7%. When signs acquired through acquisitions since last year are included, revenue rose 9%, from $208,178,000 to $226,915,000. Management reports that the increased revenue came as a result of both higher occupancy rates and higher prices. Occupancy on Bulletins was 79% in the second quarter this year compared to 75% in the same quarter last year. For Posters, occupancy was up to 70% versus 67% in 2003. Advertisers are also willing to pay higher rates for signs. The average rate on Bulletins this year is $1,037 per face compared to $996 in last year’s second quarter. Posters were also up. The average rate rose to $426 from $416.

While some of the growth came from new customers, such as companies in the insurance industry, the driving force for Lamar was existing customers buying more faces at higher prices. Management attributes this to the strong local economies that they see throughout the nation.

The trend to increased occupancy and higher prices should continue at least through the second half of this year according to Lamar. The amount of business that they have already booked from customers is 87.5% of their budget for the year. This is not only a solid rate of booked business at this time; it is a strong increase over last year. In the summer of 2003, the company had booked 82.8% of budgeted sales. Management reports that all of their nine regional managers are reporting strength in sales, and crediting solid local economies for business spending on ads.

Lamar expects occupancy levels and ad rates to continue increasing for the rest of 2004 and probably into 2005. The company has historically looked at normal occupancy as 80% to 85% for Bulletins, and 70% to 75% for Posters. These traditional norms could be reached in late 2005. However, that does not mean that the company’s revenue growth will stall from that point. When occupancy levels are high, further demand will simply push prices higher.

The company also reported that acquisitions continue to be an important part of their business. During the first half of this year, Lamar has made 42 acquisitions for total outlays of $124 million. The company is also continuing to buy easements from property owners in order to replace term leases. Referred to as “buying down leases,” Lamar has developed a program to pay landowners for an easement that terminates the need to keep renegotiating leases periodically. This stems the growth of rising lease payments and is a good use of company cash. The pace of easement acquisitions is about the same as in 2003 and may pick up speed in future years.

The rollout of digital billboards has continued, and the Pittsburgh market now has a full complement of 10 of these modern signs. With the completion of this group, management will now be able to better assess the potential of this new segment of outdoor advertising. Placing digital sign faces on other billboards, such as highway Bulletins, will probably be a slow process. Local and state regulations, and in some cases local opinion, can be difficult and time consuming to overcome. Like the other major billboard companies, Lamar sees electronic billboard faces as the future of the medium.

In a presentation to securities analysts on June 14, 2004, management reported on several issues affecting both the industry and the company.

• Lamar has increasing opportunities to cooperate in advertising programs with other media such as radio and TV. This might be with independent stations not owned by Clear Channel or Viacom, or it could include the stations owned by those companies. With the strength in ad spending that was seen beginning in 2003, cooperation even among competitors could benefit everyone.
• Audience measurement for the outdoor advertising industry is becoming much more important, and will drive further growth because advertisers will have growing confidence in the statistics. The number of cars is known now, but the key issue to advertisers in the future will be who is in the car.
• The company may participate in future Nielsen studies of media measurement, but there may be limited benefit for Lamar from more studies in the top 10 markets. Since most of Lamar’s signs are outside of the largest cities, the company is more interested in studies of the top 100 markets.
• The economic recovery is broad-based and is bolstering billboard sales all the way out to Main Street in smaller and medium-sized towns.
• Occupancy has been rising at Lamar every month in 2004, and prices are rising as well. Since the last quarter of 2003, Bulletin prices are up 3% to 5% and Poster prices are up 1% to 2%.
• All of the company’s debt has been refinanced in the past two years. With interest rates at the lowest point in decades, it was possible to reduce interest rates on both fixed and variable-rate debt.

The company also reported that “visibility” of future revenue and earnings is better than it was in 2001 and 2002. This means that advertisers are buying space further out in advance, allowing billboard companies to see revenues that will be collected in future quarters. Expenses can be minimized with advance sales because truck routing can be more organized and other efficiencies are possible.

Lamar has nine regional managers throughout the U.S. and those managers west of the Mississippi River have reported the strongest market demand. Same-store revenue in the Rocky Mountain States was up 12.7% in 2003, and it was running 16.4% ahead for the first five months of 2004. The increases are being achieved on the existing boards because there is little new inventory available either through new builds or through acquisition. Very little capacity is being added, although the company continues to look for small and medium-sized operators to acquire. Future growth is likely to come mostly through rate increases and maintaining occupancy at high levels.

Property owners have become more sophisticated in recent years and are asking for higher land rents. Lamar has staggered maturities in its lease portfolio, with 10% to 12% of billboard sites requiring renegotiation each year. The company has been more active recently in buying permanent easements from landowners in order to fix the cost of sites.

Lamar, like the other major billboard companies, sees the future of the industry in the deployment of digital billboard faces. This technology essentially creates a video billboard that can have the message changed as often as every six seconds in some cases. State regulations establish minimum display periods, but changeable message signs are the future of the outdoor industry. Lamar has installed digital faces on some of its signs to test certain features (and the demand by advertisers), and they are pleased with the results. Although the cost of a digital sign is much higher than conventional billboards, Lamar has plans to install more digital units each year.

Additional information and financial details are available at the company’s website www.lamar.com.

Revenue and earnings at Obie Media Corporation (Nasdaq: OBIE) were strong in the second fiscal quarter ending May 31, 2004. In a conference call with securities analysts on July 15, 2004, the company reported billboard revenue for the quarter at $2,092,556, compared to $1,581,634 in the same quarter last year. Management attributes the 32% increase to stronger demand for its higher-income signs. These include Walls, and Bulletins along the interstate highway system. Billboards account for only part of Obie’s overall sales income. The company generates over 80% of its revenue from other outdoor media, referred to as “Transit”, which includes bus wraps, bus benches and shelters, etc. Total revenue for the company was $11,887,892 in the second quarter of 2004, compared to $10,635,314 in the same period of 2003.

The growth in sales from the billboard division is consistent with the experience of other billboard operators this year. Lamar Advertising reported at a securities analysts meeting last month that some of their regions are achieving growth rates of 15% to 18% year-over-year. Many of Lamar’s billboards in the West are in non-metropolitan markets similar to those in which Obie Media operates. Lamar and other billboard operators report higher occupancy this year compared to 2003.

Occupancy for Obie Media’s overall billboard plant was reported to be around 85% at the end of May, versus 70% at the same point in 2003. Management attributes the higher occupancy to stronger sales efforts and the improving national economy. More than 95% of this year’s revenue capacity for Obie’s billboards has already been sold, or reserved by advertisers.

Revenue from the company’s billboards is expected to continue strong in the next few years. Obie Media is in the process of erecting new billboards in central Oregon and Washington pursuant to an agreement to locate new signs on railroad right-of-way. As the signs are built out over the next two years, overall billboard revenue will grow faster than the existing signs could produce. In addition, management is looking to acquire more signs through acquisition. The possible tuck-in acquisitions combined with the new boards on railroad right-of-way could significantly expand ad revenue. It is also possible that the new signs could help to widen profit margins. New advertising revenue can usually be added to an existing plant without a commensurate increase in fixed overhead expenses.

For further information, the company’s website is www.obie.com.

According to our database of transactions in billboards, prices declined for the second straight year in 2003. The average multiple of gross effective income dropped from 5.73X in 2002 to 5.12X last year. Declines were also observed for the past two years in the median multiples.

Billboard prices peaked in 1998 according most measures, but prices were also high in 2000 and 2001. Either one of those years may have been the recent high point in prices, depending on whether the average or the median multiple is used. The median reached its recent peak in 2000 and the average hit its high point in 2001.

The declines in 2002 and 2003 are the result of various factors. First, spending on advertising has been weak since the recession began and investors have not been eager to buy billboards. Until buyers see that ad spending will be strong, they are likely to remain reluctant to commit capital to buy more signs. The outlook for ad spending has resulted in a general decline in price multiples for these assets. The second reason for lower multiples is that the major billboard companies have not been aggressive acquirers. Clear Channel and Viacom have not shown much interest in increasing their inventory, and Lamar has slowed the pace of its acquisitions. When the largest buyers become more cautious, prices tend to decline.

Lower prices are not logical considering changes in the capital markets. The cost of borrowed capital has been declining for the past few years and is at the lowest point in decades, as evidenced by mortgage and other lending rates. This would seem to push prices for billboards higher because buyers can borrow money so cheaply. However, even low borrowing rates cannot overcome the tepid outlook for revenue growth.

The number of transactions has also been declining. Our database includes 35 transactions in 2000 and 37 the following year. By comparison, the number dropped to 17 in 2002 and just 14 have been collected for 2003. While there are obviously more transactions occurring than included in our database, the change in numbers is a good indication that fewer deals are being done.