Media Recession or Structural Change?

The question posed is that whilst there will undoubtedly be an upturn in media spend – will advertisers spend with media owners and agencies or will this extra spend be kept in house by the advertisers as they contact customers through more direct channels?

Looking at the traditional model for advertising and then how over the last two years advertisers spend has shifted, we can identify some of the implication of the spend shift for advertiser, media owner and ad agency.

What we find is that media spend is increasing, but its being spent in different places, and there are sensible reasons for this.

Traditional Advertising Model

Companies place adverts in the appropriate media and these either generate direct response or push people to purchase product through brand recall. Until recently this model has not changed significantly with the number of advertising channels staying fairly static and each channel being dominated by a small number of media owners.

This dominance of channels has boosted advertising value while the number of advertisers has grown. Hence the overall advertising market, shown below, grew from 8,859 million in 1992 to £17,006 million in 2002 – 92% growth over 8 years.

Shifting advertising spend graph.

(Source: The Advertising Association)

In 1998 the internet started to arrive on the scene and the hype helped fuel the advertising boom year of 2000. Whilst the internet has now been recognised as a legitimate channel in its own right (albeit somewhat smaller than the hype led us to believe) it has also brought two interesting disciplines to advertisers. Firstly, companies have grown used to the internet’s instant accountability and are beginning to introduce the same levels of accountability to their other more expensive channels. Secondly, companies have realised they can use the internet as a cheaper and more efficient way of communicating and dealing with their customers compared to the cost of traditional advertising.

Shift in Advertising Spend

After the dot com boom that reached its apogee in 2000 came the crash and the media recession. If you read the commentators since 2000 it would seem that the Media industry has been having a torrid time. However, when the figures are looked at in more depth some interesting trends appear.

In 2001 media spending declined overall by 2.7% and then grew by 1.1% in 2002 to a total of £16,734 million. Within these figures there is a definite shift away from traditional mass broadcast media (national newspapers and TV) towards more targeted responsive media (DM and the internet) as the following figures show:

Change in spend graph.

(Source: The Advertising Association)

What the graph above shows is that advertisers have been moving away from the large scale broadcast mediums dominated by a few media owners, towards more targeted mediums.

Furthermore, within the figures, no account is made for the additional spend made by advertisers on fulfilling some of the direct mediums (such as the cost of building web sites, implementing CRM systems, data cleaning for mail shots etc). Thus, if these costs were taken into account the change in where spend has been directed is even more pronounced towards the direct and targeted routes.

This shift in spend is also reflected at agency level because spend has been taken from the areas that have been dominated by large full service agencies (focussing on TV and national media) into areas that either need specialists (DM or the internet) or do not actually require an agency to be involved (such as directories).

Thus, although there might be a media recession this has been seen within national media, television and the business press. Advertisers have been moving away from these areas because they are becoming increasingly blunt instruments compared to other more efficient and cheaper channels available to them.

Implications for Advertisers, Media Owners and Agencies

If there is a structural change happening with a move away from traditional broadcast media to targeted direct media, the implications for advertisers, media owners and agencies is significant.

  • AdvertisersA focus on accountability means that advertisers have become more aware of what does and does not attract and retain customers.

    Their overall spend is actually increasing although they are committing less spend on “straight” advertising when they can get a better return from other channels. With a reduction of spend in traditional media advertisers have also benefited from falling advertising rates as media owners have tried to attract advertisers back to their media properties.

    For example, one Mediahawk client has been reducing direct advertising spend over the last three years but has actually had to increase the number of staff they have for fulfilling enquiries. This is because they are becoming more efficient at targeting their advertising and utilising channels that provide the response they need.

  • Media OwnersIf a media owner is unable to provide sufficient response from their audiences and a strong understanding of who their audience is, they will find that advertisers will move increasingly to media or channels where they can get this information.

    Media spend has already shifted and it is not enough to provide an ABC audit of circulation and expect advertisers to come flocking. Media owners will have to work harder to justify why advertisers should advertise with them.

    We will start seeing major companies pooling their databases of end users and the cost of maintaining and running the data (think of the Nectar Card). These databases (especially in B2B markets) will be of better quality than those currently owned and provided by media owners. This will take a further slice of the advertising pie away as the co-owners target users through direct mail, email and the internet and utilise their own data rather than that sourced from a media owner.

  • Media AgenciesIf advertisers are more aware of results – then they are able to reward media agencies using performance related bonuses based on agreed metrics.

    The benefit for clients is that this will ally their agencies closer to their needs rather than the agencies areas of specialisation.

    Agencies will be expected to be more project focussed, which affects the large full-service agencies who will find it difficult to cover their high fixed cost base. There will be a rise in the existence of specialist boutique agencies that fulfil a client’s project needs and move on to the next project.

In Conclusion

Behind the advertising spend figures of the last couple of years, we believe we are in the middle of a fundamental structural change.

This structural change is demonstrated by advertisers shifting budget towards targeted response channels which provide clearer purchaser profiles often using internal data.

The challenge for media owners and agencies alike will be to find ways to prove both their relevance and worth as advertisers increasingly reward them through their performance.

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