• by Joe Mandese  @mp_joemandese, June 6, 2007

A fundamental shift appears to be occurring among the types of marketers that have been fueling growth in the U.S. advertising economy, and it appears to be making the ad industry more vulnerable to changes in the national economy. That's a conclusion top analysts at TNS Media Intelligence are leaning toward after analyzing more than a year's worth of advertising spending and general economic data, and it seems to be a major reason for a modest 0.3% decline in measured media ad spending during the first quarter of this year, according to TNS MI.

The chief culprit, says TNS MI Senior Vice President-Research Jon Swallen may not be the nation's largest advertisers, but the smaller ones, which have fueled much of the underlying growth in the advertising economy over the past several years.

"Over the past three years or so, while advertising growth has bee muddling along at 3% to 4% growth rates, we've seen a bifurcated market in which the top 50 or top 100 advertisers have been cutting back in spending, but smaller advertisers have been more than making up for that, and expanding their ad spend in upper single-digit and double-digit range," notes Swallen. "As money was leaving the top of the market, new money was coming in from the bottom of the market."

But after analyzing recent data that he termed both "discouraging and potentially revealing," Swallen says that impetus now appears to have been sucked out of the bottom of the market, and smaller advertisers - those ranked 100 and above - are now also cutting back on their ad spending growth, and he thinks it is because they are actually more sensitive to shifts in the general economy than big marketers who have also been cutting back.

"During the first quarter of this year, that support from those lower regions of the market vanished and advertisers outside the top 100 were flat," he cautions.

Here's how first quarter 2007 ad spending growth stratifies among U.S. marketers: The top 10 were down 8.0% from the first quarter of 2006; the top 50 (accounting for about a third of all U.S. ad spending) were down 1.4%; advertisers below the top 50 were up only 0.3%.

"Put those pieces together and it adds up to the overall market being down 0.3% during the first quarter," says Swallen, adding that while the smaller marketers have not gone negative, they had been "chugging along at plus 5% and plus 6%" growth rates, and the slowdown in their growth is what appears to be taking steam out of the overall U.S. advertising marketplace.

Swallen's theory is consistent with a view that the advertising marketplace is actually more of a so-called "long tail" market than has traditionally been discussed by the trade press and industry associations that tend to focus on the biggest players, and that much of its growth is coming from smaller advertisers and smaller brands being added to the marketplace, not necessarily from sustained growth at the top. In fact, an analysis of industry data shows that the Big 6 publicly traded agency holding companies - the kind that are most likely to represent the biggest national advertisers - account for only about a third of advertising spending.

Another theory is that this long tail advertising market is actually expanding rapidly, but is not necessarily being detected by traditional ad tracking sources like TNS MI, or big industry economists like Universal McCann's Bob Coen, because they are effectively unmeasured. For example, Swallen acknowledges that much of the growth in online spending is coming from search advertising, which TNS MI does not currently track, and much of which is coming not from big agencies and advertisers, but from small businesses.

While the long tail ad marketplace has been a big factor for online ad spending growth, new players are trying to harness the same resources for traditional media. SpotRunner, a company that lets small businesses create and buy TV advertising affordably and with the scale of big advertisers and agencies, has been backed by major agency holding companies like Interpublic and WPP, and plans to expand into other media soon. Google and eBay (see related story in today's MediaDailyNews) meanwhile have expanded into radio, TV and print advertising, giving smaller advertisers the ability to procure the kind of traditional media inventory that normally was processed through big ad agencies.

Swallen, meanwhile, sees another troubling shift taking place in the advertising marketplace, a pronounced cutback in the number of products and brands being advertised by big advertisers.

"We're seeing a cutback in the number of advertised products, particularly in the top 50 and top 100 companies," he warns. While there are seasonal variations in the advertising budgets of many brands, Swallen says the pattern he's begun to observe suggests something more fundamental is taking place.

"Among the top 100 advertisers in the first quarter of this year, the number of advertised products in any medium was at its lowest level in three years," he explains. "It's down 2% from a year ago. It's down 3% from 2005. And it is just slightly ahead of 2004 by two tenths of a point."

A third factor may also be contributing to the slowdown in advertising spending: A shift from higher-priced traditional media into more cost-effective online media. This theory has been championed by Swallen's boss, TNS MI President-CEO Steven Fredericks, and suggest that as big marketers begin shifting more of their advertising budgets into online media, they are recouping the savings and putting it on their bottom lines.

Ultimately, Swallen says the trends in the general economy are the most macro factor influencing ad spending growth, but that when you add up all the subtleties, the indications are that ad spending no longer is tracking higher than nominal growth in the U.S. gross domestic product, but is actually tracking at about the same growth as real GDP growth. That means slowdowns in the general economy are an anathema for expansion in the advertising economy.

Swallen says you can see this is recent revisions from major industry forecasters, and it has been a significant factor in TNS MI's own forecast revisions, a new one of which is expected to be issued next week. Meanwhile, Swallen says TNS MI's analysts will continue to mine ad spending stats from big and small marketers alike, and will continue to keep an eye on the GDP.