VSS Forecasts Solid Growth Across All Communications Sectors- First Time in 4 Years

Consumer-end user spending replaced advertising as the largest component of total communications spending
for the first time in recorded industry history

Advertising forecast to grow at fastest rate in 4 years,
increasing 7.2 percent in 2004

Industry Spending Patterns:

Public Company Performance:

Total communications spending increased 4.6 percent in 2003, representing the fastest growth since 2000, a trend that carried into the first half of 2004 as spending on communications paced upward for all four macro sectors of the industry, according to the annual Veronis Suhler Stevenson 2004 Communications Industry Forecast & Report. As the year progresses, momentum is expected to build with all four communications sectors – consumer end user, institutional end user, advertising, and specialty media and marketing services – posting solid growth for the first time in four years, led by the consumer and advertising sectors. Consumer spending continued to drive the overall communications industry in 2003, surpassing advertising as the largest of the four sectors for the first time in recorded industry history. The consumer sector grew faster than each of the other three sectors, as well as nominal GDP, for the third consecutive year.

"Despite the War in Iraq and a sluggish job market during 2003, the broad-based recovery in the communications industry gained momentum in 2003, driven primarily by another strong year for consumer spending on media and accelerating growth in advertising spending," said James P. Rutherfurd, Executive Vice President of Veronis Suhler Stevenson. "As a result of improving industry conditions and tighter cost controls, publicly reporting communications companies posted strong top and bottom line growth in 2003. The positive momentum continued through much of the first half of 2004, as the economy strengthened, job market improved and marketers began to show more confidence. Going forward, we expect the communications industry recovery to transition into a sustainable expansion from 2005 to 2008, as all four industry sectors outperform the broader economy."

The Communications Industry Forecast & Report, published annually since 1987 and 1984 respectively by Veronis Suhler Stevenson, a leading global media merchant bank, is the most comprehensive source of consumer and business data specifically addressing the media, communications and information industries.

Consumer Spending Largest Sector in Communications for First Time

Total communications spending increased 4.6 percent in 2003 to $648.3 billion, following growth of 3.7 percent in 2002 and a 0.7 percent decline in 2001. Total spending on communications grew at a compound annual rate of 4.8 percent from 1998 to 2003, slightly outperforming nominal GDP growth of 4.7 percent in the period. Overall, communications was the eighth-fastest-growing segment of the U.S. economy from 1998 to 2003.

Consumer spending replaced advertising in 2003 as the largest component of total communications spending for the first time in recorded industry history, according to Veronis Suhler Stevenson. Four of the 11 consumer market segments posted double-digit growth or better in 2003. Consumer spending on cable and satellite television services remained the largest segment of the consumer sector, increasing 7.1 percent to $51.1 billion in 2003. Consumer spending on home video and the Internet expanded at double-digit rates while satellite radio spending increased four-fold for the year. Total consumer spending on media rose 6.5 percent to $178.4 billion in 2003, accounting for 27.5 percent of all communications spending. End-user spending on communications grew at a compound annual rate of 6.2 percent from 1998 to 2003, outperforming nominal GDP in every year of the period. Consumer spending on communications is forecast to grow at a compound annual rate of 6.9 percent from 2003 to 2008, reaching $248.7 billion, driven by strong growth in the cable and satellite television, home video and consumer Internet segments.

In addition to consumer spending, institutional spending increased 4.0 percent to $153.1 billion in 2003, as growth accelerated for the first time in three years, driven by higher growth in business information services and television programming in both broadcast cable and television. Institutional spending is expected to increase at an accelerated rate of 5.7 percent in 2004 to $161.8 billion, fueled by higher growth in each of the four market segments. The largest, business information services, will post the highest growth for the second consecutive year at 6.5 percent, trailed slightly by 6.4 percent upside in television program spending and 4.4 percent expansion in professional, educational and training media. Institutional end-user spending, which include expenditures on communications information services by corporations, government and educational institutions, is forecast to grow every year of the forecast period and outpace GDP expansion in each of the years from 2004 to 2008. Each of the four broad sectors will post accelerated growth in the five-year period, as the overall institutional sector expands at a compound annual rate of 6.2 percent to $207.1 billion in 2008. The key trends of strong economic expansion, solid corporate profit growth, increased institutional budgets and innovations in the development, delivery and use of information services will drive this sector’s growth during the forecast period.

The communications industry is expected to be the fifth-fastest-growing sector of the U.S. economy in the 2003-2008 period, expanding at a compound annual rate of 6.4 percent to $884.2 billion in 2008. Growth will be driven by a broad recovery in all four sectors of the industry, with consumer spending remaining vigorous throughout the forecast period and the advertising segment posting solid gains as well.

Advertising Growth Expected to Reach Four Year High in 2004

The advertising sector is expected to grow at the fastest rate in four years in 2004, following two years of gradual recovery from the impact of the 2001 recession. Key advertising market drivers in the first half of the year were the improving economic and employment outlooks, strengthening local markets, record political campaign spending, and the influx of Olympics-related spending. Total spending in this sector is projected to grow 7.2 percent to $188.5 billion in 2004, after growing 3.2 percent in 2003, increasing 1.2 percent in 2002 and declining 8.4 percent in 2001.

Solid growth in the advertising sector in the first half of 2004 came on the heels of another year of modest recovery in 2003, growing 3.2 percent to $175.8 billion. While the growth rate was modest, it represented acceleration over the rate achieved in 2002. Recovery was evident in many of the markets comprising the advertising segment, which consists of broadcast television, cable and satellite television, broadcast and satellite radio, newspapers, consumer and business-to-business magazines, the Internet, yellow pages, outdoor and movie screen advertising. The advertising segment’s gain in 2003 can be attributed to expansion in the cable and satellite television, outdoor and consumer Internet markets.

The specialty media and marketing services segment also is expected to expand at a solid rate in 2004, growing 5.1 percent to $148.1 billion for the year, as key segments continue to move through recovery and into expansion mode by late 2004. Spending in the specialty media and marketing services arena increased 4.6 percent to $141.0 billion in 2003, surpassing growth in the advertising market by a slim margin. Strong growth in direct mail and event sponsorship spending fueled the gains.

Media supported by consumers continued to grab market share from media supported by advertisers

According to the 2004 edition of the Veronis Suhler Stevenson Communications Industry Forecast & Report, consumers spent 3,663 hours using media in 2003, an increase of 1.6 percent over the previous year. Consumers spent the most time with television in 2003 as they continued to increase cable and satellite television viewing. Second to broadcast and cable television viewing, radio commanded the most attention from consumers climbing 1.2 percent as a result of longer commutes, the emergence of satellite radio and increased time spent with niche formats, such as Hispanic and all-news. Consumers spent less time with broadcast television, recorded music, consumer magazines, daily newspapers and home videos.

Media supported by consumers continued to grab market share from media supported by advertisers in 2003. Time spent with advertising-supported media accounted for 56.4 percent, or 2,064 hours, of the total, while consumer-supported media accounted for the remaining 43.6 percent, or 1,598 hours. Consumer-supported media gained nearly 7.5 share points between 1998 and 2003. Driven by time spent with the Internet, home videos, and videogames and increased media multitasking, the average consumer’s time spent with media will expand at a compound annual rate of 2.1 percent in the forecast period to 4,059 hours in 2008, more than 11 hours per day or 78 hours per week. Average time spent with consumer-supported media will continue to gain share from time spent with ad-supported media in the forecast period. By 2008, consumer-supported media will account for 45.9 percent of the total time spent with media, while ad-supported media will represent 54.1 percent of the total.

Results at publicly reporting communications companies support solid industry expansion in 2004

Not one communications segment recorded a decline in adjusted total revenues, operating income or operating cash flow in 2003. Adjusted total revenues for publicly reporting communications companies rose 9.7 percent to $361.2 billion in 2003, reflecting the continued recovery in the overall communications industry from the 2001 recession, as market spending and corporate revenues in all four sectors of the industry increased year over year.

The robust profit gains from the revenue recovery and cost-cutting measures were exhibited in operating income margins and returns on assets in 2003. The adjusted operating income margin for the communications industry increased 6.0 percentage points to 14.9 percent in 2003, and rose 3.0 points from the 1999 level, while the operating income return on assets almost doubled to 6.4 percent in 2003 from 3.3 percent in both 2002 and 2000.

Advertising, specialty media and marketing services, and institutional end user posted accelerated annual growth in 2003, while growth in consumer end user spending decelerated year over year, the consumer sector still grew faster than the other three sectors. Most industry segments enjoyed adjusted profit growth in 2003 as the communications recovery accelerated into expansion by year’s end, driving up spending on both advertising and non-advertising media. Growth was also driven by scale economies afforded through the integration of hundreds of acquisitions in the 1999-2003 period, as well as substantial budget reductions and cost-containment measures instituted to combat the ill effects of the recession.

The adjusted value of industry assets rebounded 4.2 percent in 2003 to $864.9 billion, following two consecutive years of declines driven by slowed acquisition activity, restructuring, revaluation of assets and the shutdown of faltering assets. The adjusted value of assets increased at a compound annual rate of 9.6 percent in the 1999-2003 period, mostly due to heavy acquisition activity in 1999 and 2000.

Below is a summary of Veronis Suhler Stevenson's 2004 communications industry highlights and forecasts across various segments:

Broadcast Television

Advertising spending on broadcast television increased 2.3 percent to $42.1 billion in 2003, tracking a gradual improvement in the economy. The rate of growth was slower than the 8.4 percent gain in 2002 due to the lack of political advertising and Olympics-related spending.

Total spending on broadcast television advertising, including networks and stations, is projected to increase at a compound annual rate of 5.6 percent from 2003 to 2008, reaching $55.4 billion in 2008. Growth will be driven in even years primarily by political campaign spending and Olympics-related advertising.

Cable & Satellite Television

Total spending on cable & satellite television increased 8.4 percent to $83.5 billion in 2003, driven by stronger than expected advertising revenues and a 10.4 percent increase in license fees. High single-digit growth in cable & satellite television advertising in 2003 signaled the end of the ad pullback that followed the events of September 11, 2001. Spending on cable & satellite television advertising increased at a strong rate of 10.6 percent for the year to $16.3 billion.

Total spending on cable & satellite television is expected to reach a combined $122.2 billion in 2008, rising at a compound annual rate of 7.9 percent in 2003 to 2008.

Broadcast & Satellite Radio

Radio broadcasting expenditures from advertising and satellite radio increased 1.3 percent to $19.7 billion in 2003. Total spending on broadcast radio advertising increased a slight 1.0 percent to $19.6 billion in 2003, lagging nominal GDP expansion for only the second time in more than a decade. Spending on satellite radio grew 392.7 percent to $95.1 million in 2003.

Total broadcast & satellite radio spending is forecast to grow at a compound annual rate of 7.9 percent from 2003 to 2008, reaching $28.8 billion in 2008.

Entertainment

Strong and sustained growth in the filmed entertainment market in 2003 offset disappointing results from recorded music and interactive entertainment, as spending on entertainment media grew 5.3 percent to $89.9 billion in 2003. Growth in the filmed entertainment market was driven mainly by home video growth in 2003, fueled by strong growth in the DVD segment, which grew 13.8 percent to $33.1 billion in 2003. While box office spending slipped 0.3 percent to $9.9 billion in 2003, the spending total was the second highest in movie industry history.

Driven by stronger growth in the filmed entertainment and interactive entertainment segments, total entertainment spending is forecast to increase at a compound annual rate of 7.3 percent from 2003 to 2008, reaching $127.8 billion in 2008.

Consumer Internet

Total consumer Internet spending increased 16.1 percent to $30.7 billion in 2003, driven primarily by a sharp rebound in advertising expenditures following two consecutive years of declines, as well as continued strong growth in Internet access and content spending. Online advertising spending increased 20.2 percent to $7.3 billion in 2003, due to increasing use of keyword search advertising, which more than offset declines in banner ads and other forms of graphical image advertising.

Overall spending in the consumer Internet market is expected to grow at a compound annual rate of 11.4 percent from 2003 to 2008, reaching $52.7 billion by 2008, as economic expansion drives up advertising spending, Internet households grow and consumers become more willing to pay for online content.

Newspaper

The newspaper market ended 2003 on a promising note, posting a minor rebound into positive territory after two consecutive years of difficult market conditions. Total newspaper spending, including daily and weekly advertising and circulation, grew 2.1 percent to $63.6 billion in 2003. Total newspaper advertising spending increased 2.2 percent to $51.9 billion in 2003, as higher preprint spending in the retail sector and double-digit growth in utilities advertising in the national segment was diminished by the third consecutive year of decline in classified advertising. Total circulation spending ticked up 1.8 percent to $11.7 billion in 2003, due to price hikes that offset declining unit circulation.

Total newspaper spending will grow at a compound annual rate of 4.7 percent in the forecast period to $79.8 billion in 2008, as advertising expenditures increase at a 5.3 percent compound annual rate and circulation spending grows 1.7 percent.

Business-to-Business Media

Business-to-business magazine spending dipped and trade shows grew slowly in 2003 as spending remained about level at $19.7 billion. The minimal spending gain in 2003 indicated the market had stabilized after declining 9.1 percent in 2002 and 12.4 percent in 2001.

Business-to-business media growth is expected to accelerate over the forecast period as the economy transitions from recovery to expansion. The overall market is expected to grow at a compound annual rate of 4.0 percent from 2003 to 2008 to $23.9 billion, compared with a 2.0 percent decline in the 1998-2003 period.

Business Information Services

Spending on business information services grew 6.1 percent to $64.4 billion in 2003, driven by strong gains in the marketing information services, payroll and human resources, and economic and financial categories. Growth in the overall business information services market represented a marked improvement in 2003, compared with 0.1 percent growth in 2001 and 2.3 percent growth in 2002. This segment’s growth outpaced nominal GDP expansion of 4.8 percent in 2003, returning the market to pre-2001 growth trends.

Total spending on business information services is expected to grow at an accelerated rate in 2004 and continue pacing upward throughout the rest of the forecast period, expanding at a compound annual rate of 6.8 percent from 2003 to 2008, reaching $89.6 billion in 2008, compared with a compound annual growth rate of 4.6 percent in the 1998-2003 period. Growth will be stimulated by ongoing economic improvement that will spur spending on new information products and services featuring value-added components, such as Internet interface capabilities and tools that enable analysis, manipulation and delivery of data.

Professional, Educational and Training Media

Total spending on professional, educational and training media declined 0.9 percent to $36.9 billion in 2003, as continued contraction of the outsourced corporate training market offset the growth of the other sectors. The professional market grew 5.6 percent to $14.4 billion in the year, with sound growth across all three market segments. The K-12 instructional materials market increased 3.5 percent to $4.1 billion in 2003, rebounding from a 5.0 percent decline in 2002, boosted by a number of textbook adoptions postponed from 2002 to 2003, and additional funding from federal sources. Spending on college instructional materials grew 3.6 percent to $4.6 billion in 2003, spurred by moderate enrollment growth and modest price hikes. Spending on outsourced corporate training dropped 9.2 percent to $13.8 billion in 2003, following a steeper decline of 21.1 percent in 2002. Outsourced corporate training was the only market in the overall segment to contract in 2003.

Total expenditures on professional, educational and training media will increase at a compound annual rate of 5.7 percent from 2003 to 2008, reaching $48.8 billion in 2008, driven by strong economic expansion, rising enrollments and increased corporate budgets. Demand for more digitized content will also drive growth in the forecast period.

For more information on the Veronis Suhler Stevenson Communications Industry Forecast & Report, visit www.vss.com. The 2004 edition sells for $1,995, 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 and has completed over 640 transactions since its inception in 1981. The firm has acted as a financial advisor across the full spectrum of media, communication and information segments and provides the following services: private equity, mezzanine debt investment and mergers & acquisitions advisory services. VS&A Communications Partners III, LP is the third private equity fund managed by Veronis Suhler Stevenson. Capitalized at over $1 billion, it is one of the largest private equity funds dedicated exclusively to investments in the media, communications and information industries. The VSS Private Equity buyout funds have invested in 33 platform companies and over 159 add-on acquisitions, across multiple media segments; the realized and unrealized enterprise value of these investments total approximately $7 billion.

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