• by Joe Mandese  @mp_joemandese, June 16, 2008

The downturn in the U.S. advertising economy may be far more protracted than any since Madison Avenue began tracking its growth--and the chief factor, ironically, may be one of the fastest-growing sources of media spending: Online.

At least that's what advertising economist Jon Swallen is predicting from a slew of data indicating that the downturn is only partly due to cyclical economic issues such as sagging consumer spending. A bigger and much more fundamental change that will slow advertising growth into the foreseeable future, he says, is the accelerated shift of advertising budgets from expensive and highly inefficient traditional media such as TV, newspapers and magazines into much more cost-effective digital, and largely unmeasured, "below-the-line" media options.

"Some of what we are seeing continues to reflect that shift from traditional to digital media," said Swallen, who as senior vice president-research at TNS Media Intelligence has been closely monitoring which factors have been contributing to the slow growth on Madison Avenue. Last week, Swallen released an analysis of first-quarter 2008 ad spending across the major media, which showed a relatively tepid growth of just 0.6%.

While that is an improvement from 2007, it's not enough to suggest that demand for media is rebounding. Most troubling of all, 2008 is a so-called "quadrennial" year: a once-every-four-year phenomenon in which two big advertising events--the U.S. presidential election and the Summer Olympic Games--have historically been a boon to the advertising economy.

While those cyclical events may yet provide some stimulus later in the year, they are being offset by general economics--especially the downturn in consumer confidence and consumer spending amid spiraling food and energy costs, the residual effects of the credit crisis and ebbing real estate values.

While those cyclical patterns will eventually play out, Swallen is predicting that the more fundamental shift toward a digital media economy will continue to dampen advertising growth for some time to come, shaving at least a couple of percentage points off historical U.S. advertising expansion.

"I think we are starting to realize that our expectation for what constitutes normal growth in advertising has been diminished from earlier in this decade," Swallen said. "We used to think of 3% to 4% growth as our birthright. Now 3% may be the high end of what we can expect."

In fact, Swallen recently completed an analysis looking at what he terms the "core advertising economy"--the amount of underlying growth that occurs after factoring out special events such as the Olympics and elections. The outlook for that is even more lackluster.

"It looks like we're in a period now where zero to 3% growth is the normal parameter, rather than the historical 3% to 5% growth," he said.

Other advertising economists are expected to weigh in with their predictions soon, including Interpublic analysts Bob Coen and Brian Wieser. Coen, who has served as the ad industry's chief source for advertising spending estimates for decades, has historically tracked the industry's growth relative to the growth of the U.S. gross domestic product. Advertising generally has matched or exceeded the growth in U.S. GDP in all but the worst of economic times. But TNS MI's Swallen says that historical patterns, including the so-called rebound effect the ad industry has had coming out of economic recessions, may no longer apply.

"There are some things that are different about this slowdown," he said, adding: "The advertising economy is a subset of the general economy. What's different about this economic cycle is that it is consumer-led. The last big turndown that we had in 2001, post-9/11 and the dot-com bust wasn't so much of a consumer-led slowdown. There were other economic factors. This one feels different. What we're in right now is a period in which consumers are stressed and strained by rising food prices, rising fuel prices, a crunch on credit, and a feeling that things will get worse before they get better. Without a rise in consumer spending, that [disincentivizes] marketers from ramping up consumer ad spending."

Meanwhile, Swallen said marketers have begun adjusting how and where they spend those constrained marketing dollars, with more going toward more efficient digital media--especially things like online search--and to unmeasured forms of media that are dampening the inflation of historically high-priced traditional media. In fact, the major TV networks are crowing that they managed to preserve the volume of advertising commitments in the recently completed 2008-09 prime-time upfront advertising marketplace. But they only managed to do so by packaging more inventory--including some high-demand online video advertising--into the mix they sold to advertisers to get to those levels.

The picture for other forms of traditional media, especially print, is even more dire. Swallen predicts the epic shift away from newspaper advertising spending won't bottom out anytime soon. And even consumer magazines, which have seemed relatively immune to the ill effects of the advertising economy, are facing an uncertain future as marketers push for greater "flexibility." That's anathema to consumer magazines, many of which are published monthly and require advertisers and agencies to commit far in advance of their publishing cycles.

"That's one of the things that have contributed to a slowdown in first-quarter magazine spending," Swallen observes, citing a minuscule 0.2% rise in consumer magazine ad spending during the quarter. "It's that hesitancy of advertisers to wait as long as they can to commit their funds that is hurting magazine publishers."

First Quarter Advertising Growth Among Major Media vs. Q1 '07

Television +1.7%

• Network TV +0.8%

• Cable TV +4.1%

• Spot TV -2.4%

• Syndication - National +11.2%

• Spanish-Language TV +4.4%

Magazines +0.8%

• Consumer Magazines +0.2%

• B-to-B Magazines -3.2%

• Local Magazines -2.1%

• Sunday Magazines +17.1%

• Spanish-Language Magazines +14.2%

Newspapers -5.2%

• Local Newspapers -5.0%

• National Newspapers -6.2%

• Spanish-Language Newspapers -5.3%

Internet Display +8.5%

Radio -4.5%

• Network Radio +12.0%

• National Spot Radio -3.1%

• Local Radio -7.2%

Outdoor +2.5%

Free-Standing Inserts +8.8%

Total +0.6%

Source: TNS media intelligence. Figures are based on the TNS media intelligence StradegyTM multimedia ad expenditure database across all TNS MI measured media, including: Network TV (6 networks); Spot TV (101 markets); Cable TV (52 networks); Syndication TV; Hispanic Network TV; Consumer (PIB) Magazines (220 publications);Sunday Magazines (6 publications); Local Magazines (27 publications); Hispanic Magazines (26 publications); Business-to-Business Magazines (352 publications); Local Newspapers (144 publications); National Newspapers (3 publications); Hispanic Newspapers (55 publications); Network Radio; Spot Radio; Local Radio; Internet; and Outdoor. Figures do not include public service announcement (PSA) data. Spot TV figures do not include Hispanic Spot TV data. Magazine media includes Publishers Information Bureau (PIB) data. Internet figures are based on display advertising only. Local Radio includes expenditures for 33 markets in the U.S. FSI data represents distribution costs only.