May 13, 2009

Advertising kiosks fail to deliver projected revenue for city's coffers

Cleveland case study on 165 kiosks intended to fund themselves (and the city) via ad dollars. Several negative factors have combined to prevent the kiosks from hitting those numbers but also when advertising like this will prove a viable business model. [picture included]

A unique outdoor advertising program that Cleveland leaders hoped would pour millions of dollars into downtown and neighborhood development is on pace to fall far short of expectations set a decade ago.

The arrangement with Omni Media, a private company that in 1999 won rights to install 9-foot-high display kiosks on street corners in exchange for sharing ad revenues, did not deliver one dime to the city until 2006.

Since then, royalties have averaged $63,000 a year, or about half of what Omni executives said the city could receive after the kiosks' first year.

If Cleveland ever is to collect the more than $3 million in riches originally projected, the city's annual share of ad sales for the 165 kiosks must hover around $180,000 between now and 2023, when the deal ends. One of the program's early cheerleaders is not optimistic.

"I think a lot of people overestimated the revenues," said City Councilman Joe Cimperman, whose ward includes downtown, where roughly half the kiosks are located.


A major reason for the slimmer-than-projected returns is that Omni's contract has allowed the company to deduct certain expenses, including the up-front design and production costs, from the royalties owed. Omni also erected 30 fewer kiosks than originally pledged. Making matters gloomier is the recession, which executives blame for a 13 percent dip in royalties this year.

Even so, Cimperman and others do not consider the partnership with Omni a disappointment. The city has not spent any money on the deal. And in addition to displaying the paid ads, the lighted, three-sided kiosks feature maps of surrounding neighborhoods and tourist attractions.

"In terms of the product . . . it's exactly what we hoped for," said Robert Brown, a longtime city administrator who today serves as Mayor Frank Jackson's planning director.

"We are accomplishing something the city was once considering paying for," Brown added.

Cleveland signed a pact with Omni Media in 1999 that called for the company to pay the city a 10 percent royalty on all gross revenue generated by curbside kiosks. But the agreement also allowed Omni to deduct certain expenses, such as start-up costs and debt. The city expected to make millions of dollars over 25 years but did not receive anything until 2006. Here is a breakdown of payments, with amounts based on ad revenue from previous years.

2006 $37,136
2007 $72,841
2008 $76,158
2009 $66,560

Michael R. White was mayor in the 1990s, as new sports venues and the Rock and Roll Hall of Fame and Museum sprouted downtown. City officials desired wayfinding tools to help tourists and suburban visitors. But most plans would have required taxpayers to foot the bill.

The Omni deal, modeled after one in Montreal, allowed Cleveland to be the first U.S. city to use curbside kiosks. White championed the program and, as Cimperman recalled, led a "full-court press" to get the legislation approved by the council.

White did not respond to a request to comment for this story.

The mayor and the council set up the deal so that the royalties would benefit the city's Storefront Renovation Program, which assists retail property owners throughout the city.

Under terms of the contract, Omni was to pay the city a 10 percent royalty on all gross revenues generated by the kiosks. Another clause guaranteed the city an additional 35 percent of any gross exceeding $1 million, beginning in the fourth year after installation of the 70th kiosk.

It took Omni two years to build and install the first kiosks. The company's first full year of sales was not until 2002, said Sandra Gallucci, Omni's sales manager and head of development.

For the next three years, Gallucci said, Cleveland's cut of the proceeds was canceled out for three reasons: Uncollected debt; money deducted to design and produce maps; and revenues lost because of kiosks being displaced by construction.

In addition, Omni and the city amended the contract to allow for fewer kiosks.

Brown said the up-front costs of maps and signs alone accounted for about $175,000 -- more than the city was entitled to under terms of the royalty agreement.

Omni determines royalties based on the previous year's numbers. The city caught up in 2006, when the storefront program received $37,136. The amount jumped to $72,841 in 2007.

But the six-figure paydays once considered a starting point have yet to be achieved.

"The idea of ad revenue on the sidewalk, I don't know that it was ever fully vetted in a town like Cleveland," said Cimperman, who remains a strong supporter of the partnership.

Recession threatens to keep royalties down, at least in the short term.

"It's an industrywide challenge, but we've tightened our belts like most small businesses in town and will rebound," Gallucci wrote in an e-mailed response to questions.

"Regarding royalty projections, we're proud to have paid the city more than a quarter million dollars in just our first four years of payments," she added.

Brown stressed that the Omni deal has been good for the city, which with a new convention center and medical merchandise mart on the horizon hopes for more downtown tourists.

But were the company's royalty projections unreachably high?

"I really can't comment," Brown said, "other than to say the facts speak for themselves."

Posted by staff at May 13, 2009 12:42 PM