Some optimistic ad forecasts have been made in a vacuum, without taking into account the headwinds of real 17.5% unemployment, retailers' jagged recovery, media's struggling digital paradigm and the overall free-fall in ad spending. Despite the myopic assumptions of some industry executives and analysts, advertising's gradual upturn will not be business as usual. Here are five critical factors that will make future ad spending different than is generally expected:
1. The fortunes of retailers and advertisers are tied to the American consumer,and things don't look good short-term.
Not since the Great Depression has business shed so many workers so fast, creating more unemployed than available jobs. The number of Americans unemployed is not the nearly 10% calculated by applicants filing for unemployment. It also includes those whose unemployment benefits have been depleted, working part-time or on contract, and the people who stopped looking. That all-inclusive number of 17.5% represents more than three times as many people than were unemployed in late 2008.
How can the producers of products and services, as well as retailers (who are advertisers), be upbeat about holiday spending or a robust recovery in 2010?
Retailers are the single-largest contributor at online advertising (about 20%), the rebound of which is supposed to save the day. Holiday retail industry sales are expected to hit $437.6 billion this year, a 1% decline 2008 and significantly below an average of 3.39% holiday season growth over the past decade, according to the National Retail Federation. Online advertising will claw its way back above breakeven just like old media. Overall U.S. advertiser spending declined 15.4% the first half of 2009 and even online ad spending was down 5.3% (half of which is in search).
2. The absence of an individual consumer connection-specific value standard.
Television ratings and newspaper subscriptions will continue to decline while consumer use of digital media grows and becomes more fragmented. This diffusion of media consumption and the lack of compatible accountability across all digital platforms is a giant obstacle to creating new business models. A universal connection-specific measurement and value standard must be fashioned to leverage the interests, preferences, demands and demographics of individual consumers anywhere in the media spectrum.
The measurement methods and dictated values must be consumer centric, which is why old-fashioned bulk television ratings and newspaper-estimated readership have been rendered useless. Individual consumer connections are what content producers, distributors and advertisers seek to exploit. It will become the basic unit of value in the digital age. No one in media and industry support services, on Madison Avenue or in Hollywood or in Silicon Valley has figured this one out. In the search for a financial model, Twitter may help pioneer consumer-specific metrics if it decides to sell the real-time, content-sharing, personal preference user data to Google, Microsoft. Data mining is a controversial issue that must be reconciled by marketers, developers and content providers -- all of whom could plug into Twitter's new open platform.
3. The push to establish paid content models will take the edge off of falling advertising revenues and change media's overall revenue mix.
Just this week, Google founders Sergey Brin and Larry Paige asserted that content producers will not be the ones to impose and garner fees for what they produce. Instead, it will be Google and other aggregator gatekeepers.
Days later, News Corp. CEO Rupert Murdoch, who is leading the paid content charge, made a brash response at the World Economic Forum in Beijing. "If we do not take advantage of the current movement toward paid-for content, it will be the content creators who will pay the ultimate price and the content kleptomaniacs will triumph."
The need for sustainable new revenue sources is clear. Top 100 media company revenue fell last year by nearly 1% to $301.5 billion (the lowest growth rate since 1991), and fell another 4.3% the first half of 2009, headed for a historical full-year drop, according to Advertising Age.
Many more media companies are expected to join the dozen already filed for bankruptcy (mostly newspapers, magazines and broadcasters) due to free-falling advertising revenues and the inability to reduce legacy costs or debt loads fast enough. Major media has an estimated $300 billion in value at risk, according to Soleil Securities analyst Laura Martin, as long as it lacks viable, sustainable business models for new revenues.
4. There is no equilibrium in the destruction of old media value and the creation of new economic value right now.
The new revenues generated from nascent online, mobile and other digital platforms falls far short of the declining ad revenues from traditional venues, such as newspapers, magazines, television and radio. Rapidly changing consumer behavior ultimately will be the deciding factor. The best example is in book publishing, which is being radically reshaped by the exploding adoption of e-readers. One digital book is sold for every two print books purchased compared with a more than 4:2 ratio just last year. Digital-related companies such as O'Reilly Media's Tools of Change report digital books outselling print books more than 2:1 - a complete reversal of what it was 18 months ago.
5. As media-related transactions accelerate, companies will seek to reset their valuations on changing revenue projections which will be strongly influenced by emerging digital economics. This process will force companies to reconsider their allocations and reassess how consumers and other businesses spend. Revenue projections will reflect cyclical economics and disruptive systemic change, such as digital adoption. One of the difficulties of determining a valuation for a potentially merged NBC Universal and Comcast is trying to assign reasonable projections for NBC TV network, station and online advertising spending over the next three years.
When Google CEO Eric Schmidt declared that advertising's worst days are behind it, you must consider the source. The search giant that commands 71% of the domestic search market dominates online display advertising and is positioned to lead a nascent mobile ads market. As has been the case during its decade-existence, Google's recovery from the recession and its economic overall will be different from everyone else.
I cannot agree with you more. One other factor is credit and the fact that banks have stopped lending to small businesses or have reduced their credit significantly. This ties into unemployment because as long as small businesses cannot invest in expansion the umployment rate is not going down significantly. We need loans and credit lines for small businesses.
Absolutely! Thank you for your observation. There are so many moving parts to this economic disaster, recovery and transformation. The oversimplified treatment of it is misleading and dangerous. The good news is that once we make the effort to truly understand what is happening, there is a better chance of designing more constructive solutions and new business models better suited to the digital age.
Diane, there is a high place for you in the Federal Reserve, etc., whether they know it or not.
Well-said, Diane! And what a well-written post.
May I add that I love your work.... the Bogusky-edited Media Issue was a tremendous issue, we need MUCH MORE content like that.
The changes in the first half of 2010 will make 2009 look like easy street.
Many thanks for your kind words.
Now if we only can move this dialogue into action, we're all good!