• by Diane Mermigas , October 8, 2008

The wheels will come off the advertising wagon--even for national network television--in 2009 unless advertisers, agencies and media companies connect with beleaguered consumers. The continued shift of dollars to the Internet and digital mobile, while imperative, is no panacea for the spending pullback on Main Street and Madison Avenue.

Unlike past recessions, ad-supported media has nowhere else to go for substantive future growth. The television, radio, newspaper and magazine markets they come back to in 12 to 18 months will be permanently weaker. Major advertiser categories such as automotive and financials will be radically changed.

That pragmatic reality will begin to sink in as all ad-supported media digests the impact that deteriorating economics will have on overall marketing spend and their bottom line. Even major traditional media players (CBS, Time Warner, News Corp. and Walt Disney) will feel the pinch. Some form of TV contributes 60% of their collective revenue exposure and nearly half of the time consumers spend with media. Even in an election and Olympics year, overall national ad spending is expected to decline 1.2% to $167.9 billion--and all local advertising is expected to decline 2.8% to $116.4 billion, according to revised estimates from Barclays Capital.

The spending pullback by consumers and advertisers will become more critical by the first quarter of 2009, when networks could experience ad cancellations as high as 25%, similar to the dot.com crash and 9/11 in 2000-2001. Cancellation options due in late October for first-quarter 2009 might typically see spending cutbacks of 6% to 8% around particular ad campaigns. "Significant late-season cancellations could create downward pressure in pricing for the 2009-2010 upfront, pushing any recovery well into the future," Barclays analysts say.

The dire outlook for advertising by professional prognosticators is beginning to catch up to this column's recent warnings: Barclays cut its forecast for total U.S. advertising spending to negative 4% in this election-Olympics year to $284.3 billion, and at least another 5.5% in 2009 to $268.56 billion. Broadcast network ad revenues will decline 2.5% in biannual 2008, and will decrease another 8% in 2009. Even cable could realize negative growth for the first time in a decade. Although top advertisers have shifted about $170 million from network and spot TV to cable, Barclays cut its cable forecast to 3% growth in 2008 and only 1.8% growth in 2009.

Local TV stations temporarily buoyed by election-year spending may collectively grow revenues nearly 4% this year, but they remain the most vulnerable media outlet, facing at least an 8% decline in 2009. Newspapers will continue to suffer more than all other media, with ad revenue forecasts for a 16.5% decline in 2008 and further 12% decline in 2009.

The flow of dollars from newspaper classifieds is evident in a 5% growth in online classifieds (like Craigslist and Yahoo HotJobs) to $3.5 billion in 2008, representing 14% of overall domestic online spending. The Internet (led by search and Google) continues its double-digit growth, but a much slower 17% increase to $24.8 billion in 2008 and a more modest 14% growth rate in 2009.

While the flow of traditional ad dollars to the Internet is becoming more demonstrative, an accelerated shift of dollars to digital mobile smart phones is inevitable during the 18 months it will take to dig out of this recession. Already, a 15% reduction in radio budgets has been shifted to the Internet, where advertisers are demanding and getting performance pricing and effective behavioral targeting.

Barclays' adjustments came the day after ZenithOptimedia again reduced its forecast for overall domestic ad spend to 1.6% in 2008 and virtually flat for 2009. More revised slash-and-burn forecasts from other experts are expected. However, the unprecedented changes in digital technology and their impact on turbulent economics are an entirely separate matter--and not the kind of substantive change factor that media and advertising executives have begun to consider.

During this recession, advertisers are likely not only to pull back their traditional marketing spending, but to move some of the dollars left on the table to less costly, more targeted and more measurable digital media. In what ultimately could be a profound redistribution of ad dollars, advertisers will increasingly have little option but to follow consumers to digital interactive platforms and devices-- especially in tough times.

Just look at what they are leaving behind in television. Ratings collectively continue to plummet: the Big 4 broadcast networks' initial viewing this prime-time season is down 21% from just five years ago in adults ages 18 to 49. Metrics behind the pricing of ad time and audience delivery remain painfully imprecise. Although media companies and their advertisers are planning cost cuts to offset lower income in 2009, they have no recovery strategy.

Media companies that are unprepared for "no business as usual" will find economic recovery to be more of a struggle. In fact, some won't make it that far. A protracted decline in ad revenues will change the way they operate and what assets they can retain to their overall market cap and stock price. This eventually will result in an industry-wide consolidation, distressed sales and reshuffling major players.

Such prospects give new meaning to a recent observation by WPP CEO Martin Sorrell: "The smell of fear is incredible. ... the next 15 months are not going to be easy."