The Great Outdoors

Excerpted from Fortune Magazine

It's hip, it's high tech, it's a hot media stock play. No, it's not an Internet startup--it's the billboard business.

Consider the billboard, for so long the working-class grunt in the glittering media universe. When Lady Bird Johnson wanted to beautify America, she launched a campaign against billboards. Ted Turner inherited his father's billboard company but dumped it after getting into television. When tobacco and liquor advertisers were forced off the airwaves, they took refuge on billboards.

"Pollution on a stick," the medium's been called.

Lifelong billboard guys like Arturo "Arte" Moreno and Karl Eller have heard all the wisecracks--but now they're enjoying the last laugh. As the executives running the nation's two biggest billboard companies, Outdoor Systems Inc. and Eller Media, they are leading an eye-popping revival of the billboard industry, the oldest and simplest media business around. Spending on outdoor advertising--which includes bus shelters, subway posters, street furniture, stadium displays, and mall and airport signs as well as traditional billboards--is growing by nearly 10% a year, faster than newspapers, magazines, and broadcast TV, though not as fast as cable or the Internet.

This year, advertisers are expected to spend about $4.8 billion on out-of-home media, twice what they'll spend advertising online. More important, an industry once known for pushing cigarettes, beer, and Burma Shave, and for delivering the most prosaic messages--EAT AT JOE'S, 6 MILES AHEAD--has become hip. Image-conscious marketers like Gap, Calvin Klein, Apple, and Disney are paying $100,000 a month or more for attention-getting displays in New York's Times Square and along Sunset Strip in Los Angeles. Even Internet trendsetters like HotBot and Excite rely on billboards to stay visible in the real world.

It's quite a turnabout for an industry that thrived before television but then was spurned by Madison Avenue. "Outdoor used to be known as the beer, butts, and babes medium," says Andrea MacDonald, president of MacDonald Media, a New York agency that specializes in out-of-home advertising. Now, she says, "everything's changed. Other media are fragmenting, new technology has made us more creative, and advertisers are seeing billboards in a new light."

Investors who anticipated the billboard renaissance have profited handsomely. The 52-year-old Moreno, who began as a billboard salesman, took Outdoor Systems public on April 24, 1996, with little notice from Wall Street; the stock price has grown by 1,460% since then, making it one of the top IPOs of the late 1990s, right up there with Yahoo and Amazon.com. Lamar Advertising, the nation's third-largest billboard firm, went public a few months later; its stock has grown by 335%, easily outpacing the market.

As for Karl Eller, the industry's 70-year-old senior statesman, he sold his Eller Media firm to radio operator Clear Channel Communications in 1997 for a then-record $1.15 billion. "Since the outdoor companies got access to the capital markets, their values have gone through the roof," says Tom Vanderslice, an investment banker who specializes in media at CIBC World Markets. Suddenly, billboard companies that had traded at no more than ten times cash flow in private deals were being valued at multiples in the mid-teens by the public markets, setting off a wave of consolidation.

Since 1996, the Big Three of billboards--Outdoor Systems, Eller, and Lamar--have spent more than $5 billion to gobble up dozens of mom-and-pop operators, as well as the outdoor divisions of big companies like Gannett and 3M. Together they control about 40% of the revenues generated by the 400,000 or so billboards across America; as industry giants, they can operate efficiently and provide one-stop shopping to national advertisers.

Like other rising stars of the information age, billboards have gone high tech. Digital technology developed at MIT has transformed the way billboards are made. Until the 1990s, most billboards were hand-painted on plywood. Quality was inconsistent; worse, when paint faded and wood chipped, billboards became eyesores. Today, computer-painting technology has all but eliminated the old-fashioned sign painter, and plywood has given way to durable vinyl that can be cut to any size, then rolled into tubes for easy shipping.

Huge graphics can be produced more quickly and at lower cost, and digital printing ensures faithful reproduction--so that Levi's blue jeans, say, look precisely the same everywhere. Interestingly, Metromedia Technologies, the company that brought computer painting to the market, is owned by billionaire John W. Kluge, who's been a major force in the billboard business for four decades. From 1959 to 1986, Kluge owned Foster & Kleiser, then the nation's biggest billboard operator, and Metromedia is now the world leader in large-scale imaging. Other innovators are adding three-dimensional structures, digital tickers, and continuous motion to outdoor ads.

Broad social trends also favor billboards. Americans are spending fewer hours at home, where TV, cable, magazines, newspapers, books, and the Internet all clamor for attention. People are spending more time than ever in their cars--daily vehicle trips are up 110% since 1970, and the number of cars on the road is up by 147%--and for most people the only media options in a traffic jam are radio and billboards. Billboard salesmen like to say that they reach consumers when they're on their way to spend money at the supermarket or the mall.

Finally, there's the cost factor: Billboards are the cheapest way to reach mass audiences. Prices vary widely, of course, but advertisers typically pay a CPM--that's the cost per 1,000 viewers--of about $2 for billboards, compared with $5 for drive-time radio, $9 for magazines, and $10 to $20 for newspapers or prime-time television. (The billboard equivalent of Nielsen is the Traffic Audit Bureau, which occasionally sends out spotters to count passing cars.) While most advertisers are still local--the motel beckoning a weary traveler--national sponsors are increasingly using the medium to build their brands.

Last year, Ford made what is said to be the biggest single buy in billboard history, a multiyear deal with Outdoor Systems worth about $50 million. Other buyers aim for narrower targets. Startec, a global telecom company buys posters outside ethnic food markets to sell its international phone service to immigrants. "I'm running Russian copy in a New York neighborhood, Filipino in San Francisco, Arabic in Detroit," says media buyer Andrea MacDonald. Buyers and sellers agree that demand is so strong that the industry probably won't be hurt by last year's federal tobacco settlement, which forces cigarette ads off billboards; tobacco now accounts for less than 10% of industry sales.

While billboard operators would love to raise their rates, well-managed companies can generate robust cash-flow margins of 40% to 50% at today's prices because, unlike competing media, they don't spend money on news or entertainment. "We're a pure advertising medium," Eller says, with a contented smile. An industry historian putting the best face on things, writes that billboards convey "an advertising message directly, without the distractions intrinsic to newspapers, magazines, radio, and television." (Hmm. Shall we stop writing now, to end this distraction?) No billboard operator will ever have to hire a reporter, fire an outrageous deejay, or ante up $13 million an episode to keep ER. Who says content is king?

It all sounds like a simple route to media moguldom of a sort, but it's not. Just ask General Electric, Gannett, and 3M, which floundered when they tried their hand at billboards. Better yet, ask Karl Eller and Arte Moreno, who are neighbors in Phoenix, the nerve center of the global billboard industry. These barons of billboards have a lot in common. Both are Arizona natives who are nuts about sports: Eller helped start the Fiesta Bowl; Moreno owns a small piece of the Arizona Diamondbacks.

Both got into the business right after college: Eller as a "leaseman" in 1952, renting land for Kluge's Foster & Kleiser; Moreno as a salesman for Eller, 20 years later. ("My first commission check was $2.25," Moreno recalls "I should have saved it, but I needed the money.") And both have a passion for billboards. "It's a business that, once you get into it, you just can't get it out of your blood," says Eller. Moreno agrees, saying, "It's a fun business, a people business. Lots of entertaining, going to ballgames or the theater."

Don't, however, expect to find Karl and Arte sharing a skybox anytime soon. They were once close, but they are no longer on speaking terms. Neither cares to explain why, but the ill will apparently dates back to a 1992 deal involving Eller, Moreno, and Gannett, where both had worked. They've fought fiercely ever since over acquisitions and ad dollars.

It's fitting that Eller is a Phoenician because his career has risen from the ashes a couple of times. He built his first company, Combined Communications, into a media conglomerate of billboards, radio, TV stations, and newspapers before selling it to Gannett for $373 million in 1978; less than six months later, he left after trying to dislodge the CEO, Al Neuharth. Eller resurfaced as president of Columbia Pictures before it was sold to Coca-Cola, but then struggled as CEO of the Circle K convenience-store chain, which went bankrupt on his watch. Practically broke, he returned to billboards in 1992, persuading Gannett to sell him 350 "faces" in Phoenix in 1992. From that modest beginning he built Eller Media, now a unit of Clear Channel. He remains CEO of the unit, which generated about $865 million in revenue and $376 million in operating cash flow in 1998, analysts say.

A soft-spoken man who gets to work most days by dawn, Eller says the business is trickier than it appears.

"There's a big skill set," he says. "I know what it takes to lease a billboard location. I know what it's like to fight ordinances in a city. I know how to really sell the concepts and creative to the advertiser." Focus is a key. Gannett, a newspaper company, treated Outdoor as a stepchild, as did 3M, which got into the industry to promote a reflective tape that was supposed to embellish billboards at night. Even GE Capital, which financed the purchase of Foster & Kleiser from Kluge, paid too much, backed the wrong executive, and lost money for years. Recalls GE's Jack Welch: "I told the board we'd better be careful if we were buying from John Kluge."

Meanwhile, Moreno, a hard-charging Vietnam veteran, had quit his job at Gannett in 1984 to join forces with Bill Levine, the Phoenix restaurateur who started Outdoor Systems. They increased sales from less than $500,000 to $90 million in a decade through aggressive salesmanship and dozens of small acquisitions. That gave them the heft to issue stock and take out big bank loans to buy the Gannett and 3M outdoor units, for a total of $1.7 billion.

"Leverage is the American way," Moreno says with a chuckle. By cutting overhead and raising prices, they ratcheted up margins in a hurry. "Arte's a master operator," says James Marsh, Prudential Securities' media analyst.

For 1998, analysts say, Outdoor Systems will report revenues of about $780 million and operating cash flow of about $370 million. The company's surging stock price and generous grants of options have made many of its 1,500 employees wealthy.

Moreno's stake is worth about $800 million, but he remains a down-to-earth guy who opens his own mail, has no secretary, and is called Arte by all around him.

Both Outdoor Systems and Eller are expanding abroad, with Outdoor Systems moving into Mexico and Eller focusing on Europe. Both are also eyeing Chancellor Media's billboards, which are up for sale. Moreno bought a sports marketing company to sell arena signage last year, and he's already the country's biggest seller of ads inside malls. Indeed, the latest trend in out-of-home media--as you've surely noticed--is to surround us with messages.

A GE Capital-backed company called Media Vehicles plasters billboards on big trucks. Alvern, a Norwegian firm, sells ads on gasoline nozzles at 20,000 service stations across the U.S. Ads can be found on the sides of shopping carts and taxicabs, in the restrooms of hip urban bars and in the air above sports events like the Super Bowl, which this year hired its own air-traffic controller to guide the passing blimps. Remember when the Russians launched a rocket into space with the Sony logo on it? Not even the sky is the limit for the billboards of tomorrow.