Light and shadow: Will the bright advertising market avoid long-term erosion?
Advertising executives greeted 2012 with a dose of skepticism. But more than two months into the year, initial concerns about advertising growth potential in the light of economic uncertainty are making way for a more positive mood. Advertising bookings are holding up and evidence is mounting that the global advertising market will outperform economic growth in 2012. We forecast total advertising revenues to grow by 5.2 percent in 2012.
However, this is by no means an indicator of the structural health and solidity of the advertising market. Instead, it is a lucky escape owed to a one-off constellation of quadrennial events, advertisers’ cash reserves, and ongoing dynamism of advertising in Latin America, China and Russia.
Quadrennial events such as the U.S. presidential elections, London Olympics and the European Football Championship are generating incremental advertiser demand that will help advertising revenue growth in 2012 despite a weak macroeconomic outlook. Furthermore, in contrast to the 2008/2009 recession, advertising markets are exhibiting a greater resilience to macroeconomic uncertainty as advertisers have set aside large cash reserves and innovations in the product cycle are prompting brands to increase their marketing expenditures.
Suppliers of advertising inventory such as TV broadcasters at the end of 2011 had braced for a much tougher 2012, expecting the usual hesitancy from advertisers under adverse economic conditions. For decades, the advertising economy had repeated its old mantra that brands should behave in an anti-cyclical manner, increasing marketing spend when the economy was weak to boost their share of voice relative to competitors. However, given the futility of these calls for action in the past, few media owners had anticipated it would finally be different this time around.
Regional hotbeds such as China, Russia and Latin America are key drivers of 2012 advertising dynamism. Chinese and Russian advertising markets will grow by 11 percent each in 2012, helped by improved audience measurement and territorial expansion of major media companies into the Western regions of China and Eastern Russia. Latin American advertising markets will grow even stronger with Brazil leading the way, up 18 percent.
However, euphoria is not shared across all countries. In particular, Western European media owners are bracing for a challenging 2012, with the key market of Italy projected to decline five percent, and vital Spain projected to decline seven percent, in light of the Eurozone crisis. The German market will see slight growth and the U.K. will benefit from the London Olympics, climbing 1.8 percent in total.
The good news for Western Europe is that without advertisers’ cash reserves and the Olympics, matters would have been much worse. Fears of a repeat crisis reflecting depth and despair of the 2008 and 2009 drama may not have materialized. Nevertheless, the slight growth for Western Europe we are expecting for 2012 is attributable to a favorable composition of factors. This easily obscures more fundamental issues underlying the future growth potential of advertising in the mature Western European markets.
Put under increasing pressure from cost-controller and procurement directors, the marketing directors of big international brands will:
• continue to concentrate their marketing spending on emerging markets (at the expense of developed countries where they concentrate effort on “optimizing” their spend);
• continue to concentrate on digital media at the expense of traditional media, following audience trends;
• continue to concentrate on direct marketing and sales support at the expense of branding, thus favoring direct media such as paid-for keyword search at the expense of branding media (TV, magazines, etc).
Big international consumer brands are particularly important for television, as it is a medium with relatively high entry barriers. National and local advertisers will be affected, too, by the last two of those three behaviour trends.
Fundamentally, the television and other mass-media advertising ecosystems have thrived over the last 50 years through a symbiotic and mutually beneficial relationship of three parties: large consumer brands, mass media, and advertising agencies (creation, planning, buying). There is a risk today that this relationship breaks down as each party is struggling for its own short-term survival, to the long-term detriment of all of them.
Advertising agencies, for example, are put under enormous pressure by their clients. To keep global budgets whenever they face a new pitch, they have to cut commission rates and thus the effort spent on creation and planning, research and innovation. Agencies have traditionally made a good return on buying large-scale traditional media like national TV. But now commissions on trading volume are sometimes as low as one percent and agency remuneration is increasingly based on flat fees and performance fees. As a result, buying agencies must pressure advertising sales houses like never before.
Of course, media agencies were always supposed to be acting on behalf of advertisers to achieve the lowest possible cost-per-thousand from broadcasters, but, in effect, agencies have played for decades a moderating intermediary role. Now there is a risk that agencies/advertisers, currently in the driver’s seat and with the scale on their side, may force ad-funded broadcasters and other media properties to their knees, to the point where the latter can no longer finance the high-value content that they need to maintain their status. That would drive audience fragmentation further and jeopardize the very business model of generalist media.
Ad agencies would then sadly play a role in killing off one of their best cash cows: It is mass-media and broadcast TV in particular that have always provided the best margins thanks to economies of scale. In the long term, media-buying agencies must remain cost-competitive to prevent emergence from booking platforms operated by outsiders like Google. They must reduce overhead and research, at the risk of contributing to an impoverishment and commoditization of their traditional trade and skills.
It is not only agencies that might lose out in the long term. Advertisers may be harming their very business model if they jeopardize the mass media that built and maintain brand awareness on a national scale. Gradually reducing the level of investment on brand equity would expose the FMCG (fast-moving consumer goods) and retail brands—the Procter & Gambles, Marks and Spencers and L’Oreals—to the mounting pressure of low-cost retail brands and hard-discount retail chains. But of course, it’s only a long-term risk. In the short to mid-term, brands are only interested in maintaining their market share in relation to other big brands and are not too bothered by the financial situation of broadcasters and agencies: They just want them sleeker and more cost-effective, and would cut the middlemen if they were presented with a safe way to do it—all the more so as younger marketing directors who belong to the digital generation do not necessarily share the traditional cultural affinity with media and agencies, and have much less corporate power and visibility than their predecessors used to have 10 or 20 years ago. Marketers and procurement executives are now obsessed by measurable return on investment and rightly so, but the return on investment (ROI) of branding communication can only show in the long term.
Daniel Knapp is head of advertising research and Cyrine Amor is advertising intelligence analyst at IHS Screen Digest, a leading media-focused research, publishing and consulting company (www.screendigest.com).