• by Joe Mandese  @mp_joemandese, August 2, 2004

In a milestone that signals a fundamental shift in the economics of the media industry, consumers now spend more money on media than advertisers do. The shift, which occurred during 2003, but is just now coming to light via a report released Monday by investment banker Veronis Suhler Stevenson (VSS), reflects that advertising no longer is the primary business model for most media content, consumers are.

In 2003, U.S. consumers spent $178.4 billion buying or accessing media content, nearly three billion more than marketers spent advertising on media outlets to reach consumers, making consumer "end-user" spending the most significant contributor to communications industry revenues for the first time ever. While consumer media spending trends have been on a trajectory to surpass advertising for years, the fact that advertising is now a bit player could have a fundamental impact on the way advertisers, agencies, and media companies think about their business models.

Most interesting of all, the 2004 Communications Industry Forecast & Report, released by VSS, shows that this tipping point occurred even as advertising was rebounding from the effects of its industry downturn, and that despite healthy rates of growth this year and for several years to come, consumer end-user spending will grow at faster rates over the next five years.

On the bright side, advertising will outpace the growth of the two other sectors of communications industry spending: specialty media and marketing services; and institutional end-users.

Sources Of Communications Industry Revenues

                      Marketing     Consumer   Institutional  
       Advertising     Services     End-User
End-User  
2002    $170.4 bil   $134.8 bil   $167.5 bil      $147.2 bil  
2003    $175.8 bil   $141.0 bil   $178.4 bil      $153.1 bil  
2004    $188.5 bil   $148.1 bil   $191.3 bil
$161.8 bil  
2005    $198.4 bil   $156.4 bil   $204.2 bil      $171.8 bil  
2006    $211.7 bil   $165.8 bil   $218.0 bil      $183.0 bil  
2007    $223.8 bil   $176.4 bil   $232.8 bil
$194.2 bil  
2008    $241.1 bil   $187.4 bil   $248.7 bil      $207.1 bil  

Source: Veronis Suhler Stevenson's 2004 Communications Industry Forecast & Report, PQ Media.

The shift in media spending dominance was likely inevitable given the progression of other media industry economics tracked by VSS, especially the amount of time consumers devote to various kinds of media. The VSS report has served as a chronicle of another fundamental shift, showing that consumers increasingly are spending more time with media that are predominantly paid for by consumers themselves than with media that are mainly supported by advertising dollars.

In 1998, the current base year of VSS' 2004 report, ad-supported media accounted for nearly two-thirds (63.6 percent) of the time consumers spend with media. By 2003, advertising's share of consumer time had eroded to 56.4 percent and by 2008, VSS predicts it will dwindle to just 54.1 percent. Given the fact that time spent with consumer-supported media is growing at more than twice the rate of ad-supported media, it is conceivable that advertising could become a minority of the time consumers spend with media within a decade.

Consumer Time Spent with Media

         *Media with             **Media  
         Significant           Supported  

Advertising       Predominately  
             Support        by Consumers  
1998          63.6%               36.4%  
2003          56.4%               43.6%  
2008          54.1%
45.9%  

Source: Veronis Suhler Stevenson's 2004 Communications Industry Forecast & Report. *Broadcast TV, radio, daily newspapers, consumer magazines. **Cable and satellite TV, cinema, home video, interactive TV, recorded music, video games, consumer Internet, consumer books.