The return of Advertising

There are two surprises, says Sir Martin Sorrell, chief executive of WPP, the world’s biggest ad agency. The first is the health of the American advertising market, which has benefited from government stimulus. The second is the recovery of old media.

But not all old media. Advertising is still leaching out of newspapers, particularly regional ones. It is returning only slowly to magazines. Billboards are faring better. Yet the greatest old-media winner is television—in most countries the main advertising medium. In December 2009 GroupM, which is part of WPP, predicted that spending on British TV would fall by 0.2% this year. It now forecasts growth of 11.6% (see chart), roughly reversing last year’s drop. Other market-watchers are even more optimistic about the box.

The resurgence of the 30-second commercial has revived companies that had been in crisis. Early in 2009 it looked as though ITV, Britain’s largest free-to-air commercial broadcaster, might go bust. ITV is now much healthier: its advertising revenues shot up by 18% in the first half of this year. At CBS, an American broadcast network, turnover from ads rose from $4 billion to $4.5 billion in the same period. Shares in both companies have more than tripled from last year’s lows, although they are still well below pre-recession peaks.

“Usually advertising lags other economic trends,” says Joe Uva, chief executive of Univision, America’s biggest Spanish-language broadcaster. “This time it led, in both directions.” Mr Uva detected weakness in local TV advertising as early as the summer of 2007, as a rash of housing foreclosures broke out in states like California and Florida. The national recession arrived half a year later. By the spring of 2009, with consumer confidence still depressed, local advertising began to come back. Helped by the World Cup, Univision’s TV revenues were 28% higher in the second quarter of 2010 than a year earlier.

A rebound effect is at work: car dealers and banks that stopped advertising in 2008 have decided they cannot stay out of the market for ever. Yet there is no inherent reason why a drop in advertising must be followed by a rise. Just look at newspapers, where a painful fall in advertising in 2008 was followed by another steep drop in 2009, with a further fall expected this year. Television is recovering more strongly than other media because it has two distinct, and growing, advantages.

First, its power to monopolise attention is undiminished. Many newspaper readers have moved online, where they are worth less to advertisers. Not so TV viewers. In the first quarter of this year the average American spent 158 hours per month in front of the box, according to Nielsen, a research firm. That was two hours more than a year earlier. By comparison, he spent just three hours watching video online and three-and-a-half hours watching it on his mobile phone. Keith Weed, the head of marketing at Unilever, a huge consumer-goods firm, is excited by the potential of online and mobile video. But for now, he admits, “it doesn’t have the same presence” as television.

That is in the most technologically advanced markets. Elsewhere TV simply dwarfs other platforms. Most estimates suggest less than 30% of Chinese regularly use the internet, whereas 93% watch TV. In Brazil, TV advertising was worth 15 times as much as internet advertising last year. So healthy is its growth in emerging markets that ZenithOptimedia, a media agency, believes television’s share of world advertising will rise from 38% in 2008 to 41% in 2012. Companies that want to make the emerging middle class aware of their brands inevitably turn to television. That is its other big advantage.

As Laura Martin, an analyst at Needham & Company, an investment bank, observes, the internet now competes fiercely for the kind of advertising that is carried on the radio, in newspapers and in many magazines. Campaigns to persuade people to consider one product over another, or actually to go out and buy something, are well-suited to digital outfits, with their superior ability to track and segment audiences. Mobile ad platforms know where people are. Google can hit customers when they seem to show an interest in products. Such marketing is also measurable, which appeals to firms when budgets are tight. In the past four years the share of American online advertising spending that is bought on the basis of performance has risen from 41% to 59%, according to the Interactive Advertising Bureau.

The danger from friends

Search engines and online banners are not nearly so good at making people aware of new products. Nor do they offer emotional experiences. Television’s ability to build brands by surrounding adverts with gripping content is unsurpassed. Online video is still not a serious competitor, partly because viewers are less tolerant of ads, partly because much of it is poor. Yet some websites are closing the gap.

Many companies are experimenting with social networks, where people are more engaged. Pages dedicated to products have multiplied, with some achieving almost television-like scale. Disney’s “Toy Story” film franchise has 5.6m “likes” on Facebook. Although firms may buy advertising on social networks, much of their activity would not appear in a spending chart. “You don’t buy it. You do it,” says Stewart Easterbrook, the British boss of Starcom MediaVest. Yet companies are beginning to see social networks as an alternative means of building brands through discussions, which makes them a threat to TV advertising. Mr Weed of Unilever forecasts a drift from paid advertising to “earned” media, including Facebook.

Technology companies can hurt media firms in a number of ways. Silicon Valley has not just created strong competitors for advertising money, such as Google. It has also created free competitors, such as Craigslist, which has thoroughly disrupted the classified-advertising business. The danger for media firms is that Facebook will turn out to be a potent combination of the two.