• by Joe Mandese  @mp_joemandese, July 31, 2006

At a time when the U.S. and world advertising marketplace should be expanding to keep up with the general economy, the rate of advertising expansion is being kept in check by a surprising source: The Internet. That's the conclusion of what may be the first global forecast from a major media buying group to look at both advertising and marketing services. The study, "This Year Next Year Worldwide" from WPP Group's GroupM unit, suggests that the rapid expansion of supply of online advertising opportunities is helping to satiate demand from marketers, keeping media price inflation in check for the overall advertising economy, especially in major markets such as the U.S.

"At this late stage of the economic cycle one would normally expect media growth to have run well ahead of GDP as healthy profits finance excess demand for diminishing media reach," the GroupM report says, noting, "One thing stopping this is the growth of the Internet in developed economies. Its audience is growing even faster than its incoming tide of advertiser money, so it is actually getting cheaper. At the same time it is attracting cash from the big but fragmenting and hence inherently inflationary media, whose valuable reach is in shortening supply."

The report indicates that TV remains the No. 1 growth driver for the global advertising marketplace, but that the Internet has become the second biggest contributor. On a global basis, the Internet will account for 21 percent of the world's ad spending increases in 2006 vs. 52 percent for TV. In developed markets such as the U.S., the Internet is actually the dominant factor. According to GroupM, the Internet will contribute to 37 percent of ad spending growth in 2006 in North America. TV, by comparison, will contribute 33 percent of North American ad spending growth, followed by newspapers (11 percent), magazines (9 percent), and outdoor (6 percent). Radio, the most lackluster of any major medium, will contribute only 3 percent of the North American ad expansion this year (see related story in today's MediaDailyNews).

The role of the Internet as an advertising growth engine is even more pronounced in Western Europe, where it will contribute 44 percent of the region's ad spending growth this year. In developing markets, the Internet is much less of a factor, according to GroupM, contributing only 4 percent of the growth in "emerging Europe," and 3 percent of the growth in Latin America.

Worldwide media-based ad spending is projected to rise 6.1 percent to $367 billion in 2006, according to GroupM's estimates. That's modestly slower than the rate of growth of marketing services such as PR, direct marketing, promotion and sponsorships, which are slated to rise 6.3 percent this year to $306 billion.

GroupM says the expansion of marketing services would actually be faster, as well, except for the role of the Internet, which has displaced money that would ordinarily have gone into non-media activity.

"It is usually assumed that marketing services are growing faster than media advertising. Our figures suggest this is indeed the case in North America. But not in Europe, where direct marketing - the main element - is holding rather than gaining share," the media agency network explains, noting, "The most likely reason for this is internet substitution for costlier direct mail - and nearly everywhere internet is categorized as a 'medium' rather than the marketing service which it increasingly is."