Enterprise: Ad Forecasters Claim Happy Days Aren't Here Again

After one of the worst downturns in decades, the economy may finally be recovering from the steep recession that began in fall 2007 -- or maybe not.

In mid-April, economists at the nonpartisan U.S. Bureau of Economic Analysis declined to say whether the economy was still in recession. Even the most optimistic forecasts predict only modest economic growth in the coming years. And that's doubly true for the advertising industry.

Recent forecasts from Magna, ZenithOptimedia and others all point in the same direction. In April, Magna predicted total U.S. ad revenue growth of 2% in 2010, rising to an average annual growth rate of 3.5% per year from 2010-2015.

ZenithOptimedia was even more conservative, with its April forecast of a 1.5% decline in total ad spending in North America in 2010, followed by 1.8% growth in 2011 and 3.0% growth in 2012.

These figures are particularly modest considering that they follow a huge drop from 2008-2009. In terms of dollars, Magna forecasts total U.S. ad revenues of about $165.5 billion in 2010, compared to about $190 billion in 2008. ZenithOptimedia pegs 2010 U.S. ad spending at $154.5 billion, compared to $180 billion in 2008. At this rate, both forecasts predict it will take about four years to return to pre-recession levels.

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This is virtually unprecedented in U.S. history. In the past, ad-spending declines linked to broader recessions were almost always followed by major rebounds as the economy rallied. But a new dynamic is clearly at work in the advertising industry, with the rise of the Internet bringing greater efficiency, but not necessarily more overall spending.

The trend is evident when you compare year-over-year growth rates in U.S. gross domestic product and ad spending. In the past, changes in ad spending mirrored the underlying economic trend in a straightforward way. When GDP grew substantially, ad spending usually grew even more: In percentage terms, ad revenue outpaced the overall economy every single year from 1970-1990. After the recession of 1991-1992, it again outpaced the economy by a substantial margin during the 1990s.

However, the old rule of thumb doesn't seem to be holding true in recent years.

graph 1

After the recession of 2000-2002, overall advertising spending failed to rally as it had during earlier periods of economic expansion. Instead of outpacing the overall economy, changes in ad spending tracked closely to changes in GDP, even during the mid-decade boom years -- suggesting that marketers were exercising more precise control in their allocation of ad budgets.

They were able to do this, in large part, because of the rise of the Internet, which allows them to make continuous, rapid adjustments in ad spending in response to changing economic conditions. What's more, competition from the Internet has forced traditional media companies to implement similar "just-in-time" delivery systems, offering advertising clients quicker turnaround and greater control of campaigns in general.

graph 2

These trends are evident in the rapid growth of online advertising -- both in dollar terms and in its share of overall ad spending. While it has experienced huge growth in simple dollar terms, the Internet's percentage share of ad spending has increased even faster, suggesting it is absorbing dollars from other media.

In other words, despite all the talk from publishers about integrated, multiplatform, or cross-channel advertising campaigns (in which online offerings somehow drive traditional media ad sales) it seems online growth has come at the expense of traditional media.

graph 3

The Internet isn't the only newcomer to enjoy rapid growth at the expense of other media over the last decade or so. For example, it appears that cable TV has sapped broadcast TV dollars as it grew from a local ad medium to a competitor on a national scale.

--This is the first in a multipart series looking at the prospects of different media during an economic recovery. Subsequent articles will focus on print, broadcast and digital media and what these trends hold for the future of traditional media.

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