• by Joe Mandese  @mp_joemandese, December 4, 2007

U.S. and worldwide ad spending, while expanding in some regions and certain media sectors, is undergoing a protracted slowdown as the corporate world struggles to improve profitability. As such, advertising is being seen as an increasingly discretionary expense, and one that must be justified with greater measures of accountability and ROI, some of the industry's leading economists said Monday during the opening session of UBS' media conference in New York this week.

"The thing that seems to be happening with advertising is that it is being crunched down," Bob Coen, senior vice president-director of forecasting at Universal McCann, and Madison Avenue's de factor bean counter for the past half century said while making yet another downward revision in his outlooks for final 2007 and anticipated 2008 ad spending totals.

Coen said some of the slowdown is attributable to advertising budgets being shifted to other forms of marketing that are not traditionally tracked as advertising spending, but that the biggest factor has been pressure on corporate profitability.

Noting that corporate profitability has dipped from double-digit margins a few years ago, to only about 3.9% this year, and a forecast of 3.3% next year, Coen said advertising cutbacks are being driven by "the stress" marketers are feeling to keep their profits up.

"I don't think they're going to open up and spend like crazy," Coen said, revising his U.S. ad growth estimate for 2007 down to just 0.7%, and projecting a modest 3.7% gain for 2008, an Olympics and election year that should see above average growth, but which instead will continue to fall below the growth in the U.S. gross domestic product.

"We're really seeing advertising as a percent of GDP slip again. And it will probably slip again in 2009 again, because we won't have the Olympics and elections," Coen noted, alluding to tough comparisons in 2009 to the incremental ad spending stimuli in 2008. "So the advertising industry right now is not too great," he concluded.

Coen offered a brighter scenario for overseas markets, particularly in developing markets in Asia and Eastern Europe, as did ZenithOptimedia CEO Steve King, who offered a slightly more optimistic tone than Coen, but also predicted a relative slowdown in the major industrialized markets such as the U.S., Western Europe and Japan due to the pressure on corporate profitability.

But King also cited underlying shifts in the infrastructure of the media marketplace, particularly the changing dominance of geographic regions, as well as the fundamental change in the "technology" of media that has given consumers ultimate control over what, when and where they consume media and advertising content.

To illustrate that point, King updated an analysis he presented last year of the top five media companies based on their stock market valuations. Google, at more than $200 billion in value, currently dwarfs all of the next four top media companies combined vs. 1996 when traditional media companies like Time Warner, News Corp. and Viacom dominated the industry (see table below).

In a potentially troubling note, Universal McCann's Coen said so-called dot-com brands - marketers who utilize the Internet to conduct commerce, but who spend money in offline media to drive traffic online - have been slowing down and 2007 will mark the first time the category has reduced year-over-year spending since the dot-com crash in 2001.

Projecting that dot-com brands would spend a total of $4 billion on media in 2007, Coen said that would mark a 4% decline from 2006.

Coen attributed the slowdown in dot-com spending to the same drive for increased profitability that other marketers are experiencing, and the fact that such brands are becoming more rigorous in how they budget advertising and the prices they pay.

"As we move from a seller's market to a buyer's market the dot.com brands are not adverse to taking advantage of the pressures on the sellers," Coen said, noting that the slowdown in advertising growth and the pressure for increased accountability is putting acute pressure on media price inflation. As an example, he cited the most recent results for the network advertising marketplace. The date, reflecting the first eight months of 2007, shows total revenues for the networks falling 1%, but the amount of commercial time sold rising 4%. As a result, Coen estimated that the average cost per commercial minute has declined about 5% over this period. "It can't decline forever," he concluded.

Toward that end, Dave Poltrack, chief research officer for CBS Corp., predicted the Big 4 broadcast networks would have a strong 2008 advertising marketplace, buoyed by strong demand in both the current scatter marketplace, as well as next summer's 2008-09 upfront advertising marketplace. Poltrack said the demand would be heightened by the appeal of the Summer Olympics Games, as well as stabilization in the shift of TV audience currency from old program ratings to newer average commercial minute ratings. He also said the networks are benefiting from the incremental value of online video advertising sales.

Top Media Company Valuations
-----------1996------------		------------2007------------
Time Warner	$23 billion	Google	$207 billion
News Corp.	$19 billion	News Corp.	$63 billion
Viacom	$15 billion	Time Warner	$60 billion
BskyB	$12 billion	Yahoo	$34 billion
Gannett	$10 billion	DirecTV	$27 billion
Source: ZenithOptimedia analysis of companies that derive 50% or more of their revenues from media.