Global Media Merchant Bank Expects Gradual Economic Acceleration Through 2003 With Momentum Building In 2004

• Communications spending rebounded 3.3 percent to $608.7 billion in 2002, driven primarily by consumer spending on media such as cable & satellite television, filmed entertainment and video games. Growth in 2002 followed a year in which total communications spending declined for the first time in decades.

• The communications industry’s 5.5 percent compound annual growth in the 1997-2002 period outpaced that of the nominal GDP, which rose at a 4.7 percent rate in the period. Communications spending outgrew nominal GDP for four consecutive years until 2001.

• Communications will remain the fifth-fastest-growing sector of the U.S. economy in the 2002-2007 period, growing at a compound annual rate of 6.3 percent to $827.5 billion in 2007, compared with a nominal GDP growth of 5.6 percent during the same forecast period.

• All four macro segments of the industry - advertising, marketing services and specialty media, consumer end user, and institutional end user - are projected to outperform nominal GDP in the forecast period.

NEW YORK, August 11, 2003 While communications spending rebounded mildly in 2002, momentum strengthened in the second half of the year and carried over into 2003, driven primarily by accelerating growth in consumer spending on media such as cable & satellite television, filmed entertainment and video games, according to the annual Veronis Suhler Stevenson 2003 Communications Industry Forecast & Report. Although the 2003 Forecast concludes that spending on family-and teen-oriented electronic media was the primary driver of overall industry growth, expenditures in several key advertising categories, such as broadcast television and radio, also grew in 2002, signaling a gradual broad-based media recovery that continued through the first half of 2003.

The Communications Industry Forecast, published annually since 1987 by Veronis Suhler Stevenson, a leading global media merchant bank, is the most comprehensive source of consumer and business data specifically addressing the communications industry.

“Despite two difficult economic years and a momentary scare after the Iraq invasion and the SARS outbreak in Asia, we expect a gradual broad-based media recovery to be on track throughout the forecast period ending 2007,” said James Rutherfurd, executive vice president and managing director of Veronis Suhler Stevenson. “Fears that these socio-political events would stifle the emerging recovery were largely unfounded and by the end of the second quarter of 2003, it is clear that the communications recovery is on track and gaining strength with major upside potential from upcoming trends and events such as the Presidential election and Olympic coverage in 2004 and continued growth in entertainment media.”

Communications Spending Increases Steadily
Total communications spending increased 3.3 percent to $608.7 billion in 2002, driven primarily by an 8.2 percent surge in consumer media spending. The communications industry’s compound annual growth in the 1997-2002 period outpaced that of the nominal GDP, which rose at a 4.7 percent rate in the period. Communications spending outgrew nominal GDP for four consecutive years until 2001. Despite a contraction in 2001 and slow growth in 2002, communications was the fifth fastest-growing sector of the U.S. economy from 1997 to 2002.

Consumer spending on media grew at an accelerating pace for the second consecutive year in 2002, as end users continued to escape harsh economic and social conditions by indulging in additional cable & satellite television and Internet services, theatrical movies, home video rentals, and a cavalcade of new video games, according to Veronis Suhler Stevenson. Spending growth was buoyed by upswings in 10 of the 11 categories, including the largest, cable & satellite television, as well as consumer Internet, video games and a relatively new category, satellite radio. The consumer end-user segment includes spending on cable & satellite television, satellite radio, box-office films, home video, recorded music, newspaper circulation, consumer books, consumer magazine circulation, video games, interactive television and Internet access. Consumer spending on media increased 8.2 percent to $163 billion in 2002, expanding at a compound annual rate of 7.9 percent from 1997 to 2002. Total consumer spending on communications will rise at a compound annual rate of 6.6 percent from 2002-2007, reaching $224 billion.

In contrast, growth of institutional spending on media decelerated for the second consecutive year, as the slow economy forced corporations and government agencies to slash budgets for training, travel, conferences, magazines and instructional materials. The institutional end-user segment includes spending on television programming; professional, educational and training media; business-to-business magazine circulation and trade show exhibition space, and business information services. Institutional spending on media inched up 1.6 percent to $140.2 billion in 2002, pushed by strong showing by television programming. Institutional expenditures rose at a compound annual rate of 5.6 percent from 1997-2002, and is projected to expand at a compound annual rate of 6.5 percent from 2002-2007, reaching $191.8 billion, powered by continued growth in television programming expenditures.

The communications industry is expected to hold the position of the fifth fastest growing sector of the U.S. economy for the 2002-2007 period, growing at a compound annual rate of 6.3 percent to $827.5 billion in 2007. Growth will be driven by a broad recovery in all four macro segments of the industry - advertising, marketing services and specialty media, consumer end user, and institutional end user - with consumer spending remaining strong throughout the forecast period and advertising recovering at a gradual pace with stronger upside in 2006 and 2007.

Advertising, Marketing Services, and Specialty Media Begin to Recover
Meanwhile, total expenditures on advertising rebounded in 2002, fueled by growth in broadcast television and radio throughout the year. Advertising spending was bolstered by several other categories that began to show upside again in the fourth quarter following two years of industry recession brought on by an economic downturn, technology market meltdown and dramatic corporate cutbacks. Total expenditures inched up 1.6 percent to $305.6 billion in 2002, after dropping 5.7 percent in 2001. The story was similar in the specialty media and marketing services categories, which also began to rebound in the second half of 2002 after suffering for almost two years, according to Veronis Suhler Stevenson.

The advertising segment consists of broadcast television, cable & satellite television, radio, newspapers, consumer and business-to-business magazines, the Internet, yellow pages, outdoor and box-office advertising. The market posted a 1.2 percent gain in 2002 to $171.1 billion, following an 8.0 percent decline in 2001. Growth was fueled by the television and radio segments, which were quick to recover from declines in 2002, growing 6.9 percent and 6.3 percent, respectively, and by box-office advertising, a small and relatively new advertising instrument that jumped 22.4 percent. Advertising expenditures grew at a compound annual rate of 4.3 percent in then 1997-2002 period. Going forward, total advertising expenditures is expected to grow 3.8 percent to $177.6 billion in 2003, and a compound annual growth of 6.3 percent from 2002-2007.

The marketing services and specialty media segment includes consumer promotions, business-to-business promotions, direct mail, public relations, event sponsorships, and promotional spending in other media (interactive advertising and promotions, and trade-show fees, sponsorships and advertising). Spending in the marketing services and specialty media segment increased 2.2 percent to $134.5 billion, outpacing growth in the advertising sector by a slim margin. None of the market segments posted declines in the year except for trade-show fees, sponsorships and advertising, but growth was sluggish for most of the remaining sectors. Marketing services and specialty media spending grew at a compound annual rate of 4.5 percent from 1997 to 2002. Upsurges in event sponsorships and direct-mail spending will drive 5.5 percent growth in marketing services and specialty media to $141.9 billion in 2003. The market is expected to grow at a compound annual rate of 6.0 percent from 2002-2007.

“The advertising recovery, however, is expected to be slower than the one that followed the 1991 recession,” continued Rutherfurd. “The chief reason is that the industry in 1991 benefited from technological advances that spawned new industries in which advertisers purchased space and consumers bought subscriptions. The additional dollars generated by these new media and markets had not existed before, which, in turn, bolstered the media recovery in the early 1990s.”

TV Viewing, Consumer Supported Media Continue To Grow
According to the latest figures from Veronis Suhler Stevenson, consumers spent 3,599 hours using media in 2002, an increase of 1.8 percent over the previous year as consumers continued to indulge in more creative and escapist media. Consumers spent the most time with television in 2002 as they continued to increase cable & satellite television viewing. Next to television, radio commanded the most attention from consumers climbing 4.3 percent in 2002 as a result of longer commutes and the emergence of satellite radio. Consumers spent less time with broadcast television, recorded music, consumer magazines, daily newspapers and home videos.

“Consumers are increasingly using two or more media simultaneously with the plethora of media choices and competition for attention accelerating,” said Rutherfurd. “The result is a media generation that is consuming more information in less time than ever before.”

Media supported by consumers continued to grab market share from media supported by advertisers in 2002 gaining nearly 10 points between 1997 and 2002, although the latter still commands a larger share of total time spent with media. Time spent with advertising-supported media accounted for 57.8 percent, or 2,081 hours, of the total while consumer-supported media accounted for the remaining 42.2 percent, or 1,518 hours. The average consumer’s time spent with media will expand at a compound annual rate of 1.5 percent in the forecast period to 3,874 hours in 2007.

Below is a summary of Veronis Suhler Stevenson’s 2003 communications industry highlights and forecasts across various segments:

Broadcast Television
Advertising spending on broadcast television increased 7.6 percent to $41.8 billion in 2002 boosted by record spending on political campaigns and the 2002 Winter Olympics. But, this increase follows a substantial 13.2 percent decline in advertising spending in 2001.

Advertising spending on broadcast television, including networks and stations, is projected to grow at a compound annual rate of 4.5 percent from 2002 to 2007, reaching $49.5 billion in 2007.

Cable & Satellite TV
Spending on cable & satellite television increased 10.2 percent to $76.9 billion in 2002. Cable & satellite television’s annual spending growth has outpaced that of the nation’s economy since 1995, and the industry has been one of the most consistently fast-growing media segments over the past five years.

Spending on cable & satellite TV is expected to reach a combined $110.5 billion in 2007, rising at a compound annual rate of 7.5 percent in 2002-2007.

Radio Broadcasting
Radio broadcasting expenditures from advertising and satellite radio grew 6.4 percent to $19.4 billion in 2002. Radio advertising spending grew 6.3 percent to $19.3 billion in a year in which many media segments were negatively impacted by a slow economy and soft corporate earnings. Satellite radio spending expanded fortyfold to $19.4 million as subscriber levels increased significantly.

The improving economy and advertising market are expected to fuel a growth at a compound annual rate of 9.4 percent to $30.4 billion by 2007.

Entertainment
Fueled by record box-office spending and growth in interactive entertainment, overall entertainment expenditures grew 6.0 percent to $87.2 billion in 2002. The only segment of the entertainment market to experience a disappointing year was recorded music, which fell 8.2 percent to $12.6 billion in 2002 as downloadable music and file-sharing continue to impact music sales.

Entertainment expenditures in film and interactive entertainment is projected to grow at a compound annual rate of 7.3 percent from 2002-2007, reaching $124 billion as America continues to seek out family entertainment.

Consumer Internet
Total spending on consumer Internet grew 21.5 percent to $18.9 billion in 2002, driven primarily by more people increasingly willing to pay for online content and broadband access, a trend that is likely to continue. The online advertising market, however, declined 16.3 percent to $6 billion in 2002, down from $7.2 billion the prior year.

Consumer Internet expenditures is expected to grow 15.1 percent to $45.3 billion from 2002-2007 growing at an 11.4 percent compound annual rate in that forecast period.

Newspapers
Newspaper spending, including advertising and circulation, was essentially flat at $62.2 billion in 2002 due to a depressed job market and the lingering advertising recession. Despite a 4.0 percent rise in weekly newspaper advertising, a 0.5 percent decrease in daily newspaper advertising resulted in a slim 0.1 percent gain in total advertising spending to $50.8 billion for 2002. Total circulation spending, including weeklies and dailies, increased a slight 2.0 percent.

Spending in the newspaper market will achieve a compound annual growth rate of 5.6 percent from 2002-2007 reaching $81.7 billion. Total advertising will rise at a compound annual rate of 6.3 percent from 2002-2007 and total circulation spending is projected to increase at a compound annual growth rate of 2.1 percent from 2002-2007.

Consumer Books
Spending on consumer books rose 5.2 percent in 2002 to $18.8 billion, fueled by strong spending gains in the adult hardcover and adult paperback segments, which grew 8.0 percent and 8.7 percent, respectively.

Total spending on consumer books is expected to grow at a compound annual rate of 2.8 percent from 2002 to 2007, reaching $21.6 billion in 2007.

Consumer Magazines
Total spending on consumer magazines was flat at $21.1 billion in 2002, as advertising spending and circulation continued to suffer. Consumer magazine advertising spending began to recover in 2002, declining only 0.9 percent to $11 billion after sinking 10.3 percent in 2001. Circulation spending was up 1.1 percent to $10.1 billion in 2002 due to price increases.

Overall, spending on consumer magazines is expected to grow at a compound annual growth rate of 4.2 percent from 2002-2007 reaching $25.8 billion in 2007. Advertising spending is expected to grow at a compound annual rate of 6.2 percent in the forecast period, and circulation spending will rise 1.8 percent on a compound annual basis, reaching $11 billion in 2007.

Business-to-Business Media
Spending on business-to-business media, including magazines and trade-shows, declined 8.7 percent to $19.2 billion in 2002 as the weak economy continued to suppress spending on advertising in business-to-business magazines. Advertising spending fell at double-digit rates for the year, led by a 27.8 percent plunge in technology advertising. Meanwhile, subscription spending slipped 2.6 percent to $ 2.1 billion driven down by sizeable declines in paid subscribers to technology publications.

With the anticipated gradual economic recovery, increased corporate earnings and additional business spending on business-to-business media is projected to rise at a compound annual rate of 4.8 percent from 2002-2007, reaching $24.2 billion in 2007.

Professional, Educational and Training Media
Total spending on professional, education and training media dropped for the first time in more than a decade in 2002 as the lagging impact of the economic recession and corporate and government cutbacks hampered growth in this segment. Professional, Educational and Training Media expenditures dropped 7.6 percent to $37.2 billion in 2002, driven by a double-digit decline in outsourced corporate training expenditures and a less severe drop in spending on elhi instructional materials. Spending on college learning materials, however, showed solid growth in this segment driven by continued enrollment growth.

With expected gains in college instructional materials and professional publishing and services, total spending on professional, educational and training media is projected to grow at a compound annual rate of 5.4 percent from 2002 to 2007, reaching $48.3 billion.

Business Information Services
Spending on business information services rose 1.9 percent to $48.1 billion in 2002, primarily due to growth in marketing spend. The business information services market experienced compression in 2002 as a result of consolidation, layoffs, and reduced spending generally related to the difficult economic climate.

As economic growth improves and more jobs are created, total spending on business information services is projected to increase at a compound annual rate of 5.7 percent from 2002 to 2007, reaching $63.6 billion in 2007.

For more information on the Veronis Suhler Stevenson Communications Industry Forecast & Report, visit www.vss.com. The 2003 edition sells for $2,495 which includes the Communication Industry Report’s five-year summary of financial performance data for the publicly reporting companies with supporting excel charts, all on CD-ROM. To order, call , ext. 8538.

About Veronis Suhler Stevenson
Veronis Suhler Stevenson is a leading independent merchant bank dedicated to the media, communications and information industries. Veronis Suhler Stevenson has completed over 600 transactions since its inception in 1981. The firm has acted as a financial advisor across the full spectrum of 13 media industry segments and provides the following services: mergers & acquisitions advisory services and private equity investment. VS&A Communications Partners III, LP is the third private equity fund managed by Veronis Suhler Stevenson. Capitalized at $1 billion, it is one of the largest private equity funds dedicated exclusively to investments in the media, communications and information industries. Together with Fund III's predecessor funds, VS&A Communications Partners has invested in 31 platform companies across multiple media segments; the realized and unrealized enterprise value of these investments total approximately $6 billion.

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