What is meant by “Outdoor” Advertising?

The term “outdoor” advertising meant billboards in the old days, before advertising became so ubiquitous and increasingly aggressive. People could actually choose to spend a day without encountering some form of advertising.

With the growth of advertising across many media in the past few decades, the term “outdoor” expanded to include many ads other than just billboards. Ads appeared outdoors on beaches, a tear drop banner outside of businesses, in airports, on the sides of trucks, on gas pump handles, and even in restroom toilet stalls. The term “outdoor” became so broad that the meaning was no longer clear.

The Outdoor Advertising Association of America, Inc. (OAAA) recently addressed the issue of terminology in their weekly Outdoor Outlook.
“A few years ago, the Hecht study showed there was confusion among advertisers in the multiple terms our industry uses to name itself: ‘outdoor,’ ‘out of home,’ ‘nontraditional,’ ‘place-based,’ and ‘ambient,’ to name a few. Many advertisers, the largest worldwide media companies, and Wall Street analysts define “out of home” as media that reaches consumers when they are outside of their homes. Outdoor and radio are dominant “out of home” media forms – yet the term “outdoor” has become the prevailing expression to characterize visual out of home messages while radio represents the audio dimension. The confusion was understandable.”

The OAAA is now using the term “outdoor” to describe one major segment of the broad spectrum of out-of-home ads, but the term is still broader than just standardized billboards. The four major formats covered by the category “Outdoor” are Billboards, Street Furniture, Transit, and Alternative Outdoor media. Two other categories cover the remaining types of media outside the home: Out-of-home, and Non-traditional.

The “Billboard” format includes 8-Sheet Posters, 30-Sheet Posters, Wrapped Posters, Bulletins, Spectaculars, and Wall Murals. All but Wall Murals are the types of signs that most people refer to as billboards. Most of the signs in this segment are aimed primarily at street and highway traffic, although pedestrians and building occupants certainly view the messages too. “Street Furniture” includes bus shelters, bus benches, newsstands & news racks, kiosks, public telephones, shopping malls, and in-store. This is obviously a very broad array of ad media, but they all have certain characteristics in common: they tend to be smaller than billboards and many are seen by pedestrians rather than motor traffic. The title “Transit” includes busses, subway and rail, airports, truckside, and taxis. These media are all focussed on the mobile consumer that is outside the home. The title “Alternative Outdoor” covers a broad range of advertising that does not fit into other categories. This segment includes stadiums, airborne, marine vessels, recreational resorts, rest areas, parking meters, gas pumps and bike racks. The common thread to all of the media now classified as Outdoor is that the target of the message is not at home watching TV, reading magazines or the newspaper, or connected to the Internet.

The new definition for “Out of Home” is intended to specifically include radio and what is referred to as “place-based TV.” Radio has three specifications: drive time, in-office, and in-store. While these distinctions might not have been top of mind for most consumers, the distinctions are intuitive to most advertisers. Place-based TV is a category that includes schools, airports, sports bars, and elevators. This category is a good example of the vast reach of advertising as we begin the Twenty-First Century. Finally, the title “Nontraditional” has been given to a variety of other media including napkins, cup sleeves, cleaner bags, postcards, and wild posting.

This is no longer your father’s “outdoor” industry. And more changes certainly will come. What about radio messages that are narrowcast to cars passing a billboard? What about holographic messages appearing in the air, a la Princess Leja with her message for Obi-Wan Kenobi? No one knows where it all will end because creativity is infinite. Going forward from 2002, at least the industry is establishing terminology that should reduce confusion about existing forms of Outdoor, Out-of-home, and Non-traditional media.

Lamar Advertising Company reported that revenue was up 6% in the second quarter and earnings were also in positive territory. Quarterly revenue reached $202,529,000 compared to $191,788,000 in the same period of 2001. The figures include income from acquisitions in the past 12 months. When revenue is examined for billboards that have been owned for a year or more, revenue was up 1.7% in the first quarter of 2002 over the same quarter last year.

Also during the latest quarter, Lamar spent $32 million acquiring smaller billboard businesses, paying about equally with cash and its common stock. This brings total acquisitions in the first half of the year to $115 million. Management reports that its acquisition prices are equal to approximately ten times “forward EBITDA”, referred to as 10X. This price multiple is based on management’s estimates of how much EBITDA (earnings before interest, taxes, depreciation and amortization) would be generated in the year following the purchase. The overall group of acquisitions involved the payment by Lamar of about one half cash and the other half common stock of the company. Many of the acquisitions were made with stock that was trading near $40 per share. With the stock price down below $30 during July and August 2002, new acquisitions may require the issuance of more shares. However, Lamar has a strong war chest of cash generated by its high cash flow. Cash at the end of the first quarter totaled $55 million.

The company’s billboard occupancy improved in the second quarter of 2002 compared to the previous year. Occupancy of 30-Sheet Posters had dropped from about 66% in 2000 to 64% in 2001, due to the weak economy. A slowly improving economy and lower prices boosted the occupancy level back to 66% in the second quarter of 2002. During most of the 1990s, occupancy of Posters was in the low- to mid-70% range. Bulletins have traditionally had higher occupancy levels in the mid-80% area. These larger signs held up better in the recession, declining to about 75% occupancy in 2001. They were at this same level at the end of June 2002. Management also reported that renewals of expiring contracts for Bulletins are still running about 90%, which is the normal level. Approximately half of the company’s Bulletins are highway signs and half are referred to as “general coverage.” Highway contracts are typically written for 12 months while general coverage is more often a 6-month period.

The blend of local and national advertisers has also remained stable for Lamar. About 86% of the company’s revenue comes from local accounts and about 14% from national advertisers. Local advertisers include hotels and motels that use highway permanent paints (Bulletins) to attract customers from highways. The company’s largest national customer is increasing its spending significantly with Lamar in order to expand awareness with highway travelers. Cracker Barrel Restaurants increased spending 17% at Lamar this year versus last year. The next largest customers, all increasing or maintaining spending levels, are McDonalds Corp., NexTel, Holiday Inn, and Miller Brewing.

During a conference call with securities analysts on August 8, 2002, a participant asked if the company was taking down any signs to better manage its inventory. The caller suggested that some billboard operators are paring their plant to limit the number of signs that are difficult to sell. Management at Lamar stated that such culling is not necessary because inventory is managed daily. Signs are lost to eminent domain takings, traffic pattern changes, and various other events that require removal or relocation. Lamar does not pursue any planned thinning of its existing plant.

The outlook by management is not particularly bullish for the outdoor advertising business during the remainder of 2002. The hoped for recovery envisioned in early 2002 has given way to concern that the economy is not in a sold rebound phase. This is evident in the swooning stock market, which tends to foreshadow economic trends. Revenue and earnings at Lamar are expected to be in “positive territory” during the third quarter of the year, although the growth rate may not be strong. The remainder of the year is difficult to forecast at this point. However, management continues to be optimistic that the long term future for Lamar and for the outdoor advertising industry will be positive.

Sees Better Advertising Market Ahead

On July 15, 2002, Obie Media reported that earnings are holding up fairly well and the weak advertising market may have bottomed out. The company reported flat revenue from billboard advertising for the first six months of its current fiscal year that ends November 30, 2002. During the six months of 2002, the company reported billboard revenue of $3,690,378. This is essentially unchanged from $3,654,487 in the same period of 2001. However, billboard income became a larger percentage of total revenue this year because the transit side of their business dropped sharply. Obie had an early termination of a major transit contract with the City of Chicago. With that revenue no longer coming in, the billboard side of the business rose from 13% of sales to 19% of sales. Since the company continues to focus on growing the transit business, billboards are unlikely to be a higher percentage of revenue in the future.

In the second quarter of 2002, total gross revenue was down from $18,758,619 in 2001 to $12,185,180 this year. The drop was due to the discontinued Chicago contract. The Operating Loss during this three-month period increased from $23,850 in 2001 to $205,400 this year. This decline was also due to the loss of the Chicago business. If the effects of the Chicago contract are removed, management reports that earnings actually improved this year. The improvement can be seen in earnings before interest, taxes, depreciation and amortization (EBITDA), according to Gary Livesay, Vice President and Chief Financial Officer.

Getting to the EBITDA line, I want to talk a little bit about that for a moment. The EBITDA for the three months ended May, was approximately $314,000 compared to $482,000 a year ago. And I’d like to point out that, if we factor the Chicago operation out of the three months ended May last year, we would actually have reported an EBITDA loss of $288,000 for the second quarter a year ago. So, approximately a $600,000 improvement, excluding Chicago, on a quarter-to-quarter basis from a year ago. And on a year-to-date basis, the six months, we reported an EBITDA loss of $315,000 this year, versus $92,000 last year. And again, factoring out the impact of the Chicago operation, we would have reported an EBITDA loss of $434,000 last year, or about a $120,000 improvement in that situation this year.

Looking at overall spending in billboard and transit media markets, Brian Obie, Chairman and Chief Executive Officer believes better times lie ahead.

We – as an industry, I think we’re experiencing certainly a bottoming out of the national business, large national customers. Maybe a slight up-trend, perhaps more later in the year, than there has been in the first six months, at least that’s what we’re experiencing as a company. We see some encouraging signs in that regard, for the future. The first six months were just okay, we’re a little more optimistic about what’s ahead and what’s based on contracts in the door.

Mr. Obie went on to confirm that the billboard side of the business is basically even with last year. “We were ahead a little bit in the first quarter (through February 2002), just slightly behind in the second quarter, just marginally. But, pretty much flat with last year.”

Like other companies with billboards, Obie Media has had more stable revenue from its rural and small town locations that carry ads from local businesses. National advertising expenditures tend to be much more volatile. According to Mr. Obie,

Our local business on the billboard side, because it’s tourist highway oriented, a lot of it is tied with long-term contracts, seem to be holding up well. The national in the first six months fluctuated a great deal. It got stronger late in the quarter, in the month of May, as did the transit side.

While many people in the outdoor advertising industry have been hoping for increased advertising spending, there is not much hard evidence that there is a bright light at the end of the tunnel. The federal government revised economic data that showed Gross Domestic Product actually declining in three quarters during 2001. Prior reports had indicated that negative GDP occurred only in one quarter last year. The revised figures now qualify the downturn as an official economic recession (two or more consecutive quarters of declining production). And the medium-term outlook is not good according to The Economist magazine. That highly regarded publication sees worldwide ad spending declining through 2003 at a minimum.

More billboard owners and government agencies are reaching agreements on sign relocations and trade-offs. Both sides are looking for compromise solutions instead of digging in for a fight to the death over billboard takes. While it is not possible to solve every disagreement outside of court, the trend appears to favor negotiation over litigation.

The State of Arizona recently reached an agreement with a major national billboard company to provide a long-term lease on State owned land in exchange for the removal of signs at a new freeway interchange. Initially it appeared that the State would have to pay fair market value to compensate the sign owner for signs taken to complete a highway project. The State was willing to listen to alternative solutions, in part because government budgets are tight nationwide. The sign company owned another billboard across town that was on land owned by the State. The billboard owner proposed that they receive a long-term lease on the State-owned land in exchange for the two display faces being removed for the new interchange. After an analysis showed that the values would be equal, agreement was reached. The sign company lost two faces, but gained a long-term lease for two faces at another location. Both parties were satisfied, and the State saved a significant amount of money.

The City of Redondo Beach, California reached a similar accord with Viacom Outdoor. The City was interested in removing 17 faces in town, and Viacom was interested in obtaining new exposure on the nearby Interstate highway. CalTrans approved new permits for two signs on the freeway and the nine billboards in the city will come down. Although the agreement took more than two years to negotiate, both parties are satisfied with the result. The City achieved its goal of aesthetic improvement, and the sign company obtained billboard sites with commensurate traffic counts.

These are just two examples of the trend toward more cooperative efforts between the billboard industry and government authorities. However, the trend faces certain obstacles. The biggest hurdle in most negotiations is obtaining the requisite permits for new or modified billboards from the appropriate authorities. In most cases, new sites require permission from various levels of government ranging all the way from state agencies to neighborhood groups. Permission is often difficult to obtain because many cities and towns do not want new billboards erected within their jurisdictions under any circumstances. However, billboards are more acceptable to many people if they are located on the freeways instead of in town.

If the trend toward more cooperative agreements continues, billboard owners and condemning authorities will be able to save significant time and expense that would have been spent on litigation.

The City of Los Angeles recently voted to ban billboards and begin to get a handle on how many signs are in the city. The City does not know the number of billboards in its jurisdiction, and some signs have been in existence for years without permits. Los Angeles is now faced with the job of hiring inspectors, undertaking the very large job of developing a complete inventory of existing billboards, and then removing all illegal non-conforming signs. The project is likely to take years to complete.

The problem of uncontrolled billboards stems from years of neglecting to enforce ordinances already on the books. Now, officials do not even know the magnitude of the work that lies ahead. Many signs in Los Angeles have no permit sticker posted anywhere on the sign, so it is impossible to know if a valid permit exists without time consuming research. In most cities, a permit must be prominently displayed on the pole supporting a billboard. Most cities inspect signs at least once per year to assure that the signs remain in compliance with all regulations. Some jurisdictions inspect more often than annually. Many billboards in Los Angeles have also been changed and modified without obtaining the proper approval. For instance, some signs known as 30-sheet Poster Panels have been retrofitted to become Premier Panels, or Stack Wraps, that double the size of the advertising faces from 300 square feet to 600 square feet. Since no permit is posted on most signs, it is difficult to determine if the conversion was done legally.

After years of weak enforcement of existing sign codes, some billboards are even erected in the front yard of residential properties. In other cases, billboards are in a position that encroaches on the exiting right of way. Some signs may be taken down because they are illegal for a wide variety of reasons.

Taking inventory of the number and legal status of all billboards is now going to be a large and difficult job. Other cities can take a lesson from Los Angeles and keep up with the job each year. They can pay more attention to sign control regulations before signs grow into a costly and time-consuming job.