Commentary

Depression-Era Digital

  • by , Op-Ed Contributor, November 26, 2008
The economic news, you don't need me to tell you, is not good. The Dow has lost 26% of its value in the last three months (and that's after this week's rally.) Retail sales are dropping, home values are falling, jobs disappearing.

 

Many of us in the digital space are hoping that we are somewhat insulated from the broader economic malaise. For example, while Internet advertising growth may slow in 2009, digital media is still the place where the grass is greener. (Just ask the  newspaper publishers and radio broadcasters. )

But the extent to which the Internet has gone mainstream--and Main Street--means that it is inevitable that the effects of an economic slowdown will be felt online. One place where we're seeing that slowdown already is in eCommerce.

American consumer spending overall was down 3.7% in the third quarter; and if not for inflation, consumer spending would have been down for all of 2008 versus a year ago. Consumers have faced soaring gas prices at the pump, and (as a direct result of higher gas prices) at the supermarket.

Food and gas are not big eCommerce categories; they are staples. Our chairman, Gian Fulgoni, makes the point that eCommerce expenditures are driven by disposable income. So when inflation confronts consumers offline, there is a negative effect on disposable income available online. Not surprisingly, this effect is greatest in households earning under $100K. In an analysis of online spending from August through October 2008, comScore shows that expenditures among persons from households earning under $50K are down 3% year-over-year; among $50K-$100K households, spending was essentially flat (+1%.) The upper income group ($100K+) increased spending by 14%-- which seems robust until we realize that non-travel eCommerce spending overall was up 21% in 2007.

Interestingly, though, eCommerce is not an upper-income phenomenon. Our data show that fully two thirds of eCommerce dollars come from people in households earning under $100K. And among these consumers, as of October, about 60% expected to be spending less during the winter holiday season this year than last.

And indeed these consumer expectations have become manifest. We reported yesterday that for the first 23 days of November, eCommerce sales are down 4% from the corresponding time last year. We're forecasting that holiday online retail spending (November-December) will be flat year over year, which in this economic climate sounds like great news. But holiday online retail spending was up 19% last year.

As belts tighten to the point of asphyxiation, I expect to see ad dollars migrating online. One agency media researcher recently told me he thought the economy would force consumers to make hard choices about what paid media they needed, truly needed. He speculated that newspapers would lose subscribers ("Why take the paper? I read it online!") and that Internet technology would soon make pay cable channels and satellite radio dispensable ("I can stream Netflix right to my plasma.") "But nobody," he said, "will cancel their Internet access." And I think he's right.

As advertisers migrate dollars online, the temptation to pay for performance (of the immediate, trackable-by-click variety) will be great. I hope they can avoid that temptation. In a study with comScore and Tacoda, Starcom found that 6% of the online population accounts for over half of all clickthroughs. This would not be a good time for advertisers to be targeting, effectively, 6% of the online universe. To make matters worse, the clickers' demos are not what most marketers would find attractive. Online branding advertising, on the other hand, can have a profound and far-reaching impact.  I've written in this space before that among consumers exposed to an ad, clickthrough drives only 10% of subsequent site visits and only 14% of incremental sales. In other words, 90% of the traffic and 86% of the sales attributable to advertising exposure accrue through viewthroughs.

So in this season of Thanksgiving, I am thankful to be working in online metrics. I am thankful that we know advertising works, and I am thankful that we know online advertising works. I'd like to move beyond thankful to optimistic, but for today I think I'll stick with thankful and count my blessings.

And this holiday season, by all means, count yours.

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