2008 Outlook: Online Political Advertising

01.08

Special thanks to Larry Shaw, Director of Research, Borrell Associates Inc. for his contributions to this report.

ACKNOWLEDGEMENTS Borrell Associates Leadership Team:

• Colby Atwood
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• Gordon Borrell
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• Kip Cassino
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• Peter Conti Jr.
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Table of Contents

Executive Summary

CHAPTER 1 – Following the money

• The big picture
• Political ad spending and consumption patterns
• Online political ad spending
• Types of online political ads

CHAPTER 2 – Who is capturing online political ad spending?

• Search and social networks
• Blogs
• Online video is gaining traction
• E-mail – popular but cheap
• Strategies for local media company Web sites

CHAPTER 3 – Candidate Web sites – beyond advertising

• Build that list
• E-cash machines
• Organize and inform
• Site development costs

Appendix A – Political estimates - Forecast and trends

Appendix B – 2008 US forecast

Appendix C – 2007 - 2012 US media spending summary and share forecasts

Appendix D – Delphi panel results: Online political marketing

Appendix E – Ad spending estimate methodology

Company Profile

EXECUTIVE SUMMARY

With a presidential election year upon us, political advertising once again promises to be an opportunity category for ad spending. But not in the way most people think. The key trend driving ad spending in the 2008 presidential campaign season is the number of candidates running for president. With no incumbent running for either party, the number of candidates in the primary process is more than double what it was in 2004. Republicans, Democrats and Independents are all vying for a place on the ballot. And that, of course, is driving a great deal of political advertising – $4.8 billion this year.

Broadcast television, cornering nearly 60 percent of total political spending, will still be the undisputed champion in the political advertising space and may see some follow-along ad dollars from online combo buys from the campaigns. With 95 percent penetration, TV is still the fastest way to reach the broadest audience of registered voters.

But there will be no corresponding bonanza for online media. We forecast online political ad spending will total $20 million in 2008, less than one-half of one percent of all political advertising. It is an odd phenomenon, especially given that online ads account for more than nine percent of total U.S. advertising.

Web sites will certainly play a role in the campaign process, but candidates are likely to spend most of their online budgets not on traditional display or video ads, but rather on search advertising. In fact, half that $20 million that we are forecasting this year will wind up in the hands of Google, Yahoo, and affiliated sites that are delivering their contextual advertising messages.

While the Internet is becoming more and more accessible, the 55+ demographic is still the hardest age group for the Internet to reach. It is also this group where a large percentage of likely voters reside, especially in some of the key primary states. Candidates will not abandon traditional media and risk losing this significant base of loyal voters.

While candidates will likely spend most of their money on broadcast TV, local stations should look at this as an opportunity to funnel some of that spending into multi-media packages. By utilizing their own Web sites – with online video and other forms of advertising – they can re-direct voters to a candidates’ Web site, where the campaign is investing a lot of volunteer hours and marketing effort, if not advertising dollars.

FOLLOWING THE MONEY

The big picture

Spending on political advertising across all forms of media in the U.S. will total $4.8 billion this year. More than 80 percent – almost $4 billion – will be placed in local markets on behalf of candidates and issues by their local campaign headquarters. In the case of the presidential candidates, who will spend the lion’s share of this money, these buys will be made under the direction of national campaign managers.

Television will once again capture the largest slice of the national, state and local political advertising pie – $2.9 billion (60 percent). Newspapers (17 percent), radio (10 percent), and cable TV (5 percent) will follow. Television is still the best medium to reach a large portion of the public in a short time. [Another relevant attribute of TV: it drives Web traffic better than newspapers, radio or out-of-home advertising. ]

National political advertising tends to follow a two-year election cycle. Presidential years tend to drive substantial growth, while off-presidential years with congressional and Senate races see less growth. The years in between, with local elections only, usually produce relatively little activity.

Last year, however, we saw a particularly large off-year cycle due to the substantial number of presidential primary candidates and the relatively early start to the race. Primary candidates got their sites up early and began fighting to capture the hearts and minds of voters.

Despite all the hoopla about reaching the younger voter, the core of any successful candidate’s support – especially in the critical primary races – is still in the older and more affluent population. Adults 55+ still make up the bulk of regular voters. With so many candidates in the 2008 primary process, it is important for each one to keep a focus on that regular-voter base early on, in hopes of solidifying a position as a front-runner for their party’s nomination.

This older demographic is still the least likely to use the Internet. More than half of people age 55 or older spend less than an hour per week online. Put another way, half of the people who don’t use the Web at all are over age 55.

Campaign managers have been slow to invest heavily in paid Internet ads for their candidates for a couple of key reasons:

• The jury is still out regarding the Internet’s effectiveness for reaching and targeting the undecided. There is a fear that their message may end up going to an un-intended recipient. Consultants would need to be convinced of the accuracy of this type of direct advertising reaching and persuading the intended targets before they would find sufficient value to devote much money toward it.
• Candidates have to make a broad impact in a short amount of time. “One of the biggest things working against online advertising is its reputation and lack of control,” says Shawn Riegsecker , CEO of Centro.net, which acts as a rep firm for local media Web sites. “Nobody wants to take a chance with Internet. Planners and consultants have limited chances to hit a home run, and they know they can with television.”

In addition to the $20 million we project for 2008 online political advertising, we also expect to see $15 million directed toward online promotions and public relations for candidates. While this spending is not advertising in the strict sense, it does contribute to getting the candidates elected. Examples of “non-advertising” political marketing expenditures include costs for viral e-mail marketing campaigns, press releases, yard signs and lapel buttons. Much of the market-value price of these services is donated or steeply discounted.

Types of online political ads

On top of being a drop in the bucket compared to television’s take, this year’s online political advertising budgets will not be spent the way most advertisers allocate their online spending when they are targeting consumers.

Only about a quarter of political online ad spending will be for standardformat – i.e., banner– ads, compared with about 44 percent for all U.S. online advertisers.

Paid search will capture about half of all political ad spending, with most of that being placed by local campaign offices to reach people in the surrounding areas. Spending for e-mail and streaming video ads is still too small for our model to measure at the local level, but nationally they complete the final quarter of the political ad spending pie.

One form of online advertising that we expect to perform strongly for the first time in 2008 is streaming video. With household broadband penetration now above 50 percent for the U.S., as opposed to 22 percent in 2004, online video is much more accessible to voters. YouTube and Google Video have become especially popular with the younger age groups. Parties and candidates are compelled to try building attention and grass roots support among this enthusiastic and outspoken demographic. We expect streaming video to capture about $4.7 million in the 2008 campaign season – almost a quarter of the total.

The value of online video ads in the political sector is small in part because production and distribution costs for the required quality level are very low – and there is plenty of volunteer labor available to make it even lower. The technology for generating professional video spots is no longer limited to sophisticated studios and TV stations. Anyone with camcorder, PC and basic video-editing skills can develop a fairly savvy spot and post it on the various video-sharing sites. Many news media are already picking these up and are promoting them on their sites as well – for free.

WHO IS CAPTURING ONLINE POLITICAL AD SPENDING?

This year, candidates are using online video, blogs, forums and other interactive tools on their sites to communicate with voters in ways they never have before. Candidates are also, for the first time, using social networking sites to communicate with prospective voters, especially younger people who tend to frequent these sites – and who may be a crucial constituency in a close race.

Search and social networks

Search and social networks will be the main beneficiaries of the $20 million going to online media. Most of the $10 million in political ads that will be going to paid search this year will wind up in the form of contextual ads sold and served by one of the major search ads and placed on Facebook, YouTube, MySpace, and various blogging sites.

To stimulate keyword advertising, both Google and Yahoo have hired experts to head up political advertising efforts and have been working with campaigns such as those of John McCain, Hillary Clinton and Mike Huckabee, whose contextual ads routinely appear on keyword searches involving political issues.

Several sites have popped up to cover the campaign with news, columns, blogs and streaming video. One of them is Politico.com, a site launched in January 2007 by the owners of Allbritton Communications, which operates local TV stations, including the ABC affiliate in Washington, D.C.

Politico was launched with an eye toward a tidal shift in how voters find out about candidates and election issues. Others have jumped on the bandwagon more recently – including LIN Television, which is creating separate political sites in each of the markets where it owns stations, and Scripps, which created RedBlueAmerica.com for political news and public comments. The aim of these sites is to branch out from all-encompassing mass media Web sites to offer a clearly identifiable niche site focused exclusively on politics.

Politico’s mission statement offers this perspective on the climate faced by news organizations in the age of the Internet: “We believe that this moment of anxiety and upheaval in our business is also one of creative possibility. The publications best positioned to take advantage of this potential are no longer the general audience, mass-market news organizations that dominated the previous generations. The future, we are betting, belongs to those who organize themselves around specialized coverage and speak in fresh and revelatory ways to a specialized audience.”

In sync with the proliferation of niche sites for everything from cars to pets, we expect sites like Politico.com to grow in importance over the years. Voters will likely wind up using these sites frequently, in addition to search engines and the candidates’ own Web sites, to look for information that will inform or support their decisions and viewpoints.

Online video is gaining traction

Online video will play a new and growing role in influencing the electorate this year. The proliferation of broadband access during the past four years has made online video viewing practical and more widespread. While innovative use of online video is common among the presidential candidates – such as McCain and Paul’s channels on Veoh, Hillary Clinton’s HillCasts, “Mitt TV,” and Guiliani and Obama’s channels on YouTube and BrightCove, respectively – there are few technology or cost barriers for candidates in lesser races to employ video as well.

According to a Harris Poll in December, four out of five adults who use the Web have watched a video online. Of that 81 percent, more than one-third have watched political videos, and more than one-fourth have seen a news story about a campaign or candidate.

There’s a small, subtle trend in the numbers worth noting: When we break out viewers of online political videos by party affiliation, we find that Independents are slightly less likely to have viewed any of the politically oriented videos. With a premium placed on recruiting independent voters, campaign managers’ reluctance to buy a lot of online commercials may be well-founded.

E-mail – popular, but cheap

Despite the popularity of direct mail advertising among political candidates, we don’t expect its electronic sibling, e-mail advertising, to reap any financial rewards from candidates. Direct e-mail is primarily used to re-target voters who have already established themselves as supporters. Candidates don’t have the time or money to target and persuade an unidentified electorate using this method. While e-mail advertising will be an important part of campaigns for reaching loyal voters and party supporters, the costs for getting messages out to those groups are low. E-mail can be developed by volunteers and sent out to free or inexpensive lists campaigns already have available. When it comes to addressing individually targeted voters, campaign managers still favor still the print component of direct advertising, where a candidate’s message is guaranteed to reach the mailbox of the targeted voter, whose qualifications and political affiliation can be determined quite accurately.

The online political ad spending trend may be reminiscent of a turtle crawling on sand, but it is indeed moving forward. It began with the presidential election of 2004, when candidates started using the Internet for the first time to create grass-roots interest and to offer an easy way for voters to get information about, communicate with and contribute to candidates.

Strategies for local media company Web sites

It is unlikely that many local media sites will have a shot at the search advertising that national candidates are buying, since a local site cannot deliver the audience size and technology interface that the major search companies can.

The best opportunities that local sites have to capture political ad revenue are with banner ads for state and local candidates. There is indeed some money being spent at the local level – approximately $2.5 million – on this type of advertising. On one hand, if this money were spent equally among all markets according to population, a market the size of San Diego (1 million households) might get $25,000 in political banner placements. But with amounts this small, the spending is very uneven – which means that an enterprising local Internet salesperson and an innovative local campaign manager can make some interesting things happen. Plus, it will help if the candidate is locked in a tight race.

Local media companies will need to show candidates programs that they already have in place the take advantage of whatever mass audience they have and that reach people who already support them.

One of the most important things that local media companies can do to capture campaign spending is to prove that the Internet can be as effective as television on a cost-per-point basis. Then they need to prove that they can deliver on that claim with reports that show the actual performance of that advertising.

We believe the biggest beneficiaries of any online advertising aimed at persuading undecided voters will be the TV networks and local stations. This is not only because of the natural affinity of campaign managers to wage battle via TV commercials, but also because TV networks and stations have been working hard to improve both their sites and advertising capabilities. In 2008 they are in the unique position of being able to offer candidates a multimedia campaign with TV ads and related campaigns on their Web site. While simply streaming a TV ad on the Web may be better than nothing, most candidates will soon be insisting on a more imaginative use of the online medium.

Newspapers may also see some trickle-down of local online ad spending. They may not have cross-media ties that are as strong at the broadcasters, but their Web sites typically get far more traffic from a far more engaged audience. Newspapers are traditionally thought of as sources for in-depth information. Most newspapers also offer voter guides during the election season in addition to detailed candidate coverage. Leveraging the capabilities of their sites and advertising systems has brought them the secondhighest amount of political ad revenue after the search vendors. Metro newspaper sites also have opportunities to capture political ad spending from candidates who cannot afford meaningful print coverage – especially in the context of an online voter’s guide.

CANDIDATE WEB SITES - BEYOND ADVERTISING

Traditional media will remain the powerhouses in terms of the share of the political ad spending they capture, but the 2008 election will be the clearest demonstration yet that the Internet’s importance to political candidates goes far beyond what they pay for online advertising.

While campaign managers still prefer to use television to sway undecided voters, a candidate’s Web site provides vital support. Political consultant Michael Bassik of MSHC Partners Inc. puts it this way: “The Internet is still perceived [by campaign consultants] as a cash register and collection bank for e-mail addresses.”

With a large number of hats in the ring in the 2008 presidential primary process, candidates are looking for ways to stand out and solidify themselves with specific demographic groups. The Internet now reaches more than two-thirds of all adults. Half of all adults have broadband access and are able to view candidate speeches and video advertisements – compared with one-fourth of all adults during the last presidential campaign.

The popularity and multimedia potential of the Internet hasn’t gone over the candidates’ heads – or at least the heads of their campaign managers. From presidential campaigns down to local contests, the Web is acting as a funnel to attract people at the wide end and capture e-mail addresses and contributions at the narrow end.

As the 2008 presidential campaigns heated up toward the end of 2007, those usage patterns accelerated. Although candidates are still relying on traditional media – TV in particular – as the primary way of reaching voters, those ads will include URLs that invite potential voters to candidates’ Web sites. Because of the vast amount of information these sites typically provide, direct mail and newspapers, where candidates have historically delivered longer-form campaign messages, are most likely to feel their impact.

Build that list

Capturing a visitor’s email address is a critical step. When campaigns have contact information on site visitors – regardless of how those visitors came to the site – they can start re-marketing the candidate to them to ensure that they remain in the camp, and that they vote. This involves sophisticated segmentation and targeting capabilities with roots in the direct mail industry.

E-cash machines

Web sites enable candidates to capture thousands of small donations with minimal cost. Of the $17 million that Barack Obama raised in the second quarter of 2007, nine months ahead of the primaries, almost two-thirds of it ($10 million) came from online contributions – and 90 percent of those were in amounts of $100 or less.

Organize and inform

Every major presidential candidate’s site has information on the candidate’s stands on issues, plans and proposals, accomplishments, press releases and recent news. They all offer contribution mechanisms, volunteer forms and information for organizing at the local level. Every one of them offers videos at the site and a link to more videos on YouTube. They all have e-mail channels to communicate with the campaign and some offer text-message updates. None of them provide instant messaging opportunities, though – apparently there is a limit to how “in touch” they are willing to be with the electorate. You can even download a screensaver from Mitt Romney.

The point is that a full-featured Web site is now an essential element to every serious campaign. But having a site, even one that attracts many visitors, is not enough to ensure a candidate’s success. Ron Paul’s tremendous focus on generating grass-roots support online has certainly delivered the goods. Paul has a whopping 37.9 percent share of political site traffic, according to Hitwise – twice that of his next-closest competitor, Mike Huckabee. Yet Paul was unable to garner a favorable rating from even 1 percent of those surveyed in a Gallup Poll in mid-January 2008.

A successful political Web site manages the “sales funnel” that converts information seekers into supporters and volunteers

APPENDIX A Political estimates - Forecast and trends

APPENDIX B 2008 US forecast

2008 Forecast Calculated from 2007, Q3 Data
Market: US Totals

This forecast borrows elements of economic forecasts from Woods & Poole for this market, and compares the extracted values to those computed for the nation. All are then correlated to 10-year national trends for media spending, retail sales, and business earnings. The results are shown in the tables on the left. Compare these forecasts to the 5-year forecast provided, to see which expected trends have already begun, and which are yet to start affecting your market.

APPENDIX C 2007 - 2012 Online Media Forecast Market: US Totals

Methodology

This forecast uses information from BLS, Woods & Poole Economics, and Dun & Bradstreet to estimate online media spending by ad category during 2012, five years from now. The forecast mechanism is a five-step process:

1. We draw Woods & Poole forecasts for market economic growth. Since these forecasts do not supply point estimates for 2011 or 2012, we calculate and normalize forecasts from the trend data to meet the 2004-2014 growth estimate.
2. We apply these forecasts to BLS forecasts for job growth by industry for the 2004-2014 period. The result is a 2012 forecast for employment growth by ad category.
3. We apply the forecast from Step 2 to the latest Dun & Bradstreet market counts for each ad category. The result is a 2012 forecast of employees per ad category in the market.
4. The Borrell model uses ad spending per employee as a major input, so we generate a media forecast for the market in 2012.
5. We then join the media forecast to the employee forecast, creating a compatible estimate for ad spending in 2012.

APPENDIX D Delphi panel results: Online political marketing

STATEMENT 1: Political candidates spend more on online advertising than on any other medium.

ProbabilityTime to occurrence

• 0-20% 31.0% 1-2 years 12.0%
• 20-40% 36.0% 3-5 years 31.0%
• 40-60% 18.0% 6-10 years 33.0%
• 60-80% 13.0% 11-20 year 16.0%
• 80-100% 2.0% 20+ years 8.0%

According to the panel, it is unlikely that online media will be capturing the largest chunk of campaign ad dollars anytime soon. Two-thirds of the panelists believe there is less than a 40 percent chance that political candidates will spend more for online advertising than for any other medium. If it does happen, it won't be for another five or ten years. This may reflect a perception that the targeted ad campaigns required to take advantage of the niche-audience nature of the Web are less efficient than broadcast media.

STATEMENT 2: Candidate Web sites become focal points for the campaign. Each candidate has his or her own Web site with blogs, forums and video to communicate with voters and the media.

ProbabilityTime to occurrence

• 0-20% 5.0% 1-2 years 37.0%
• 20-40% 7.0% 3-5 years 51.0%
• 40-60% 20.0% 6-10 years 9.0%
• 60-80% 33.0% 11-20 year 2.0%
• 80-100% 35.0% 20+ years 1.0%

Nearly 7 of 10 panelists feel that the candidate Web sites will be a focal point for campaigns and nearly 90 percent see this happening within 5 years. Candidates are already using their sites as vehicle to recruit and organize volunteers, solicit donations, and interact with voters. With the help of volunteers they are developing highly informative Web sites with blogs, forums, video and other interactive features.

STATEMENT 3: Presidential candidates spend the majority of their online ad budgets for the production and distribution of online video

ProbabilityTime to occurrence

• 0-20% 26.0% 1-2 years 18.0%
• 20-40% 31.0% 3-5 years 47.0%
• 40-60% 27.0% 6-10 years 22.0%
• 60-80% 14.0% 11-20 years 8.0%
• 80-100% 2.0% 20+ years 5.0%

While nearly 6 of 10 panelists think it unlikely that presidential candidates will make online video the key item on their list of marketing expenditures, they agree that if it happens, it will happen within five years.

A host of inexpensive tools makes it easy for campaigns to create and post online video on their own sites and the news media will likely pick that video up or link to it when covering the candidates. As the line between television and the Web continues to blur, we may see skepticism about this possibility diminish.

STATEMENT 4:Online campaign guides are the norm for voters to obtain information on candidates, surpassing usage of printed voter guides, the newspaper and the television as the primary sources of candidate information.

• 0-20% 8.0% 1-2 years 13.0%
• 20-40% 23.0% 3-5 years 51.0%
• 40-60% 22.0% 6-10 years 27.0%
• 60-80% 32.0% 11-20 years 5.0%
• 80-100% 15.0% 20+ years 4.0%

The panel seems favorably inclined to the notion of the Internet replacing printed voter guides. Nearly half the panel said this has a 60 percent or greater probability of occurrence. Nine out of 10 panelist see it happening in the next 10 years and nearly two-thirds see it happening in the next 5 years. With Internet access now common and broadband penetration on the rise, the Internet is more frequently becoming the "go to" resource for information about just about anything, including election information.

STATEMENT 5: Polling goes to the Web. The last political poll moves from phones to the Internet.

• 0-20% 17.0% 1-2 years 13.0%
• 20-40% 19.0% 3-5 years 41.0%
• 40-60% 16.0% 6-10 years 33.0%
• 60-80% 35.0% 11-20 years 10.0%
• 80-100% 13.0% 20+ years 3.0%

The panel seems favorable but mixed on this statement. Five of ten panelists feel that polling going exclusively online has a 60% or higher probability. The panel indicates that if it happens, it will occur within the next 10 years.

There is still a large percentage of voters in the older demographic. While that age group is the least likely to have Internet access, it is the most likely to vote. Pollsters realize the importance of reaching out to that group and will probably continue to use the phone to do so, at least for now.

STATEMENT 6: The first state primary is conducted online. Because of the enormous savings realized, other states soon follow suit

ProbabilityTime to occurrence

• 0-20% 34.0% 1-2 years 8.0%
• 20-40% 27.0% 3-5 years 20.0%
• 40-60% 21.0% 6-10 years 38.0%
• 60-80% 12.0% 11-20 years 23.0%
• 80-100% 6.0% 20+ years 11.0%

The panel feels that online primaries are not very likely to happen anytime soon. More than 6 out of 10 panelists say that the probability of this is 40 percent or less and 7 of 10 don't see it happening any sooner than 6 to 10 years from now or more.

The Internet still isn't available to the entire voting public and until that happens the likelihood of online voting, even for a primary, is a ways off as it leaves out a good chuck of the older voting population. Current concerns about security with electronic voting systems would be magnified for online voting systems.

STATEMENT 7: The first laws regulating the way political campaigns can use the Internet are passed.

ProbabilityTime to occurrence

• 0-20% 11.0% 1-2 years 12.0%
• 20-40% 12.0% 3-5 years 60.0%
• 40-60% 17.0% 6-10 years 20.0%
• 60-80% 34.0% 11-20 years 6.0%
• 80-100% 26.0% 20+ years 2.0%

Six in ten panelists feel that there is a good chance of the legislatures regulating the way the Internet is used in political campaigns. They also see this happening soon, with 72 percent saying it will happen in the next 5 years. Although the Web is a new medium, society will expect it to meet the electionrelated standards that have been set for other media – with appropriate modifications.

STATEMENT 8: More voter registrations are received online than by any other method. Voter registration lists with email addresses included become public domain.

ProbabilityTime to occurrence

• 0-20% 16.0% 1-2 years 4.0%
• 20-40% 28.0% 3-5 years 36.0%
• 40-60% 28.0% 6-10 years 40.0%
• 60-80% 20.0% 11-20 years 15.0%
• 80-100% 8.0% 20+ years 5.0%

The panel leans away from online voter registration becoming the method of choice and for voter email address lists becoming public domain. Nearly half the panel think this has a probability of 40 percent or less. Six out of ten panelists don't see this happening for at least 6 to10 years or more The public is still very cautious about the security of personal information on the Web. Placing voter registration information in the public domain triggers concerns about spam and the further erosion of personal privacy.

STATEMENT 9: The Internet surpasses Broadcast TV and Radio as the primary method for receiving election results

ProbabilityTime to occurrence

• 0-20% 16.0% 1-2 years 4.0%
• 20-40% 28.0% 3-5 years 36.0%
• 40-60% 28.0% 6-10 years 40.0%
• 60-80% 20.0% 11-20 years 15.0%
• 80-100% 8.0% 20+ years 5.0%

The feeling that the Internet will surpass Radio and TV as a primary means of receiving election results is mixed. However, more than an third of the panelists, 38%, think that there is at least a 60 percent probability of this happening in next 5 years. Television is still the best way to reach the broadest audience of people in the shortest amount of time. Until the Internet becomes as accessible and far-reaching as TV, it's unlikely to be used as the primary mechanism for up-to-the-minute election results.

STATEMENT 10: Candidates abandon direct mail in favor of targeted e-mail to distribute targeted campaign information.

ProbabilityTime to occurrence

• 0-20% 12.0% 1-2 years 7.0%
• 20-40% 29.0% 3-5 years 35.0%
• 40-60% 22.0% 6-10 years 41.0%
• 60-80% 25.0% 11-20 years 17.0%
• 80-100% 12.0% 20+ years 0.0%

The panel seems mixed about the idea of candidates abandoning direct mail in favor of targeted e-mail campaigns. Only a little more than a third say this is a strong probability. The majority (73 percent) of panelists see it happening in 3 to 10 years, if it does. There is still a sizable group of voters to be reached that don't or can't receive directed e-mail. Candidates also receive favorable cost concessions from the USPS. This along with the fact that much of the labor involved in direct mail comes from volunteers gives candidates little reason to shy away from this affordable and effective form of marketing.

APPENDIX E

The statistical model underlying Borrell Associates’ advertising spending and revenue estimates was developed by Ad Audit Services Inc. beginning in 1990. Borrell Associates Inc. acquired AdAudit Services, and today we provide local advertising estimates to most of the nation’s largest newspaper companies, several television networks, various ad agencies and telephone companies, and national marketing companies

Borrell‘s estimates cover ad spending for virtually all media types, from newspapers to out-of-home to television, with a particular focus on the Internet and emerging media.

Borrell Associates focuses the online portion of its advertising model on individual markets through Ad$pend, WebAudit and customized reports that are designed to help managers turn the model’s raw numbers into actionable information.

The model is based on the concept that advertising expenditures are essentially equal to advertising receipts at the national level. The heart of the methodology is the manner in which these totals are allocated among individual counties.

The model is therefore founded on two databases:

• Database 1: An estimate of all media ad spending by all 12 million U.S. companies, by Standard Industrial Code (SIC).
• Database 2: An estimate of online ad receipts by all U.S. online media companies

The Borrell model recognizes that ad revenue that is spent by advertisers located in one market may go outside the market in a variety of media. Similarly, a portion of ad spending from any other market may end up in the market we’re trying to measure. Therefore, the model separates ad spending that is coming into a market from ad spending that is going out of the market. This enables us to measure ad spending that is:

• Generated and spent in a given market
• Directed to a market from elsewhere
• Generated in a market but spent elsewhere.

We compile Database 1, Media Ad Spending, from primary sources that include the IRS, Dun & Bradstreet, TNS, Interactive Advertising Bureau, AdRelevance and JupiterMedia. There are also more than 30 secondary sources, including industry association reports and surveys as well as articles from a variety of magazines such as Editor & Publisher and Advertising Age.

We then adjust the preliminary version of the Spending database in two ways:

1. To fit a market’s specific media demand pattern according to Nielsen, SRC and other sources.
2. To be based on per-employee revenues, rather than on total company revenues.

The per-employee basis is an important aspect of the Borrell advertising model. As businesses get larger, the absolute level of their media spending increases, but the per-employee amount of their media spending actually drops. The per-employee metric adjusts for company size and is therefore more reliable. This adjustment in turn is modified according to the characteristics of the market being studied.

Database 2, Advertising Receipts, is based primarily on Dun & Bradstreet data and the annual reports and 10ks of media companies. Numerous secondary sources include reports from industry and trade associations such as NAA, market and IAB, plus surveys and articles from various magazines and online sources, such as Media Week and Advertising Age.

After we compile and adjust the databases, we compare them with estimates generated by companies like McCann Erickson, Veronis Suhler and Jupiter. Discrepancies are analyzed to ensure that differences are due to differences in theory or methodology rather than data error.

When the two databases agree, the spending estimates are distributed by SIC among all U.S. counties. This process involves three steps:

• Step 1: Allocation. Estimates are allocated to each county using the weighted values of several variables, including retail sales, number of households, Internet usage, median income, population and median age.
• Step 2: Replacement. Whenever possible, allocated estimates are replaced by actual known information. Typically, 10 percent of the estimates are replaced.
• Step 3: Recalculation. After replacement, the sum of the estimates will no longer foot to the original national totals. So, all un-replaced estimates are re-indexed and recalculated.

The process outlined to this point produces estimates of ad spending directed to each county. At this point we still don’t know how much of that spending is local – that is, spending that is generated by advertisers that are based within the market being studied.

To estimate this final piece of the puzzle, we take the ad spending generated in a county (from Database 1) and add to it the amount spent nationally to reach that county, and then subtract the amount spent by local companies on national media. This leaves us with the media spending directed to the county. This methodology has produced the local ad spending reports that Ad Audit Services – and now Borrell Associates – clients have relied on for years. Management consulting firm Booz Allen said, “It’s the only methodology that could work.”

All Borrell ad spending estimate reports come with a caution: Patterns of ad spending are constantly changing as technology and marketing evolve. We update our data continuously. The reports provide an estimate of the market’s local online spending patterns at a point in time. Tracking changes in these patterns over time will yield another dimension of understanding and value.

COMPANY PROFILE

Borrell Associates is a research and consulting firm that helps online publishing companies develop and implement successful strategies to maximize their advertising revenue – with an emphasis on local online advertising.

We uncover the advertising potential in a local market by drawing on primary research, a comprehensive model of ad spending and receipts, and the extensive career experience of our principals and associates.

Simply put, we help media companies make money.

Consulting Services

Strategic Guidance, Tactical Counsel - Our retainer clients draw on all of the firm’s resources to help develop their strategic thinking and unravel tactical challenges. Borrell principals and associates are available by telephone and on site under flexible arrangements designed to suit needs as they arise. Our retainer clients receive a subscription to all of our reports as part of their engagement fee.

Presentations - We conduct presentations for executive management, industry seminars and trade conferences. We tailor each presentation by tying our “big picture” analysis into actionable intelligence about a specific market or industry. These presentations are challenging, insightful and filled with facts about the future direction of new advertising formats.

Sales Training - Our seasoned sales experts use our research and data to train sales managers and account reps. We show them where to focus resources for maximum ROI and how to build compelling, fact-based sales presentations that close new business. We offer guidance on sales recruitment, compensation, staff structure, rates and marketing materials.

Customized Research - We conduct specialized research on topics requested by our clients. Past projects include white papers on developments in specific industry segments, Web site design evaluations, site user surveys and competitive analyses. Our annual survey report, What Local Media Web Sites Earn, includes current financial operating results from more than 2,700 local sites, which gives us valuable benchmarking data and helps us identify and quantify trends for our clients.

Market Analyses

Ad$pend™ Report - This report provides comprehensive estimates of advertising spending across 11 major media types (newspapers, TV, billboards, online, etc.) by each of the top 100 business categories in a market . Conversely, the report also presents the amounts that each medium receives from each of the business categories, with a summary of their relative shares of total ad spending. Both views give separate estimates of spending by advertisers located inside and those located outside the market.

WebAudit™ Report - Our clients get a detailed look at their local online ad market on both a strategic and a tactical level with this report. It includes local online ad shares by type of site operator (pure-play, newspaper, etc.) and comparison of their site with its peers. A WebAudit report helps managers identify and size strategic sales opportunities by comparing the local spending patterns of individual business categories and major vertical market segments (Auto, Jobs, General Merchandise, etc.) with U.S. norms and analyzing the differences. Ad reps can use the report to strengthen their presentations and enhance their role as consultants in the sales process.

Media Usage and Demographics - We provide a snapshot of local media usage – including newspapers, coupons, online services, and overall broadband and Internet usage – in a defined market. This report also illustrates levels of online spending by consumers on key items such as clothing, computer software, books, etc. We use a combination of Scarborough Research’s data (updated twice a year) and the MOSAIC cluster segmentation. (Highlights from these are included in a WebAudit report.)

Customized Market Reports - Our researchers can generate special reports that look at the status of – and trends in – a variety of market segments. For example, we have developed detailed trending analyses of local automotive ad spending in multiple markets for a network of cable companies and have provided deep segmentation of ad-spending data by business size for a national portal.

Industry Reports

We publish 10 to 12 reports per year that document and analyze major trends in local online advertising. Reports include annual revenue benchmarking for local media sites, updates on the automotive, real estate and recruitment verticals, and an annual outlook published in early fall designed to provide budget guidance for the next year. These reports are available for purchase individually, but our annual report subscribers realize substantial savings and enhance the distribution of these reports within their organizations. Our retainer clients receive all of our reports as part of their engagement fee.

Interactive Media Panel

We regularly consolidate the current thinking of more than 400 online advertising executives using an iterative polling technique modeled after the popular Delphi system. Results from this panel inform some of our forecasts and provide our clients with a unique perspective on advertising trends. Participants get an early look at all survey results and can suggest directions for future research.

For more information visit www.BorrellAssociates.com,
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