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The new admen

The advertising business isbecoming less cyclical—andmore concentrated

As ever more marketing drifts online, the digital giants’conquest of adland looks unstoppable

Jun 25th 2020 editionBusiness

Jun 25th 2020

Sombre piano music? Check. Footage of desertedstreets? Check. Maudlin voice-over lamenting

“uncertain times”? Check. Seeking a televisioncommercial �t to air amid a pandemic, brands fromat&t to Budweiser sent for their �nest admen. Allseemed to come up with the same cliché,proclaiming: “We’re in this together.”

This is a hard year for advertising, and not just on thecreative front. Global ad spending is expected to be10% lower than in 2019, according to Groupm, theworld’s largest advertising �rm by billings. Thepandemic led advertisers to trim marketing budgets,deprived sellers of ad space, such as cinemas, ofaudiences, and left the admen with no work. RishadTobaccowala, an adviser to Publicis Groupe, theworld’s third-biggest agency, likens it to an asteroidstrike: “The Earth will go on. But some dinosaurs willdie.”

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As the dust settles, a reshaped advertising world isemerging. The buyers are lying low but look ready tosplurge. Most of their money will for the �rst time goonline. O�ine-ad sellers, long in decline, and thecreative agencies, whose middleman business isbeing pinched from both sides, face gradualextinction.

Despite a slump like no other, ad spending may fallby less this year than the 11.2% drop that followedthe �nancial crisis in 2009 And whereas most of the

the �nancial crisis in 2009. And whereas most of theadvertising dollars pulled during the recessions of2001 and 2009 never came back, this time they mayreturn to pre-pandemic levels as early as next year,believes Mo�ettNathanson, a research �rm (seechart 1 ). How come? In a word: internet.

In 2001, when Google was a startup and MarkZuckerberg in high school digital advertising made

Zuckerberg in high school, digital advertising madeup 5% of America’s ad mix (see chart 2). In 2010advertisers spent twice as much on print and radio asonline, even as people were spending more timewith computers and smartphones than withmagazines or radio. Eventually, companies that

pulled radio and print commercials in thesedownturns realised they didn’t need them.

They are more reluctant to trim online adverts.Whereas old-school formats are taking theircustomary beating this year—print advertising willfall by 32%, expects magna, a research arm ofInterpublic, another big agency—digital will be �at,or even tick up. The internet draws in newadvertisers and persuades existing ones to spendmore. Smaller �rms that cannot pay for priceytelevision clips can a�ord to experiment online. The100 biggest advertisers on American network tvaccount for more than 70% of ad sales but in searchand on Facebook the top 100’s share is 26% and 20%,respectively. Companies are also diverting their“below the line” marketing budgets—for things likedirect mail and in-store promotions—online. Theanalytics o�ered by technology giants haveencouraged buyers to keep running commercials

encouraged buyers to keep running commercialsuntil the return on investment shows signs ofdecline. And the growing number of �rms that onlyexist on the internet cannot easily cut online ads. Forthem, digital advertising is “the new rent”, says MarkShmulik of Bernstein, a research �rm. Online

retailers save on physical shopfronts but mustmaintain a visible virtual presence, recession or not.

Meanwhile, everyone is at the mercy of a near-duopoly. Two landlords, Google and Facebook,control 60% of worldwide digital-ad real estate.Investors long for Google to introduce ads to its Mapsapp. Their calls may grow louder as Google’s netadvertising revenue in America is expected to fall by4% this year, according to eMarketer, a research �rm.Facebook could put more on Instagram. WhatsApp,also part of Facebook, is “the most under-monetisedapp in existence”, says Bernstein.

MatchmakersThere is one �nal—and vital—reason for theresilience of digital-ad spending. Whereas a decadeago it bore little relation to people’s actual mediahabits, today it is closely aligned with how theywhile away their time, notes Mary Meeker of Bond

Capital, an investment �rm (see chart 3).

Those habits’ further evolution will also favourdigital ads. Mobile screens have overtaken tv as the

biggest grabber of people’s attention. Even before thepandemic more Americans were cancelling cable-tvcontracts each year. Now cash-strapped consumersare switching en masse to cheaper streamingservices such as Net�ix. In the next few years tvadvertising, which has held up reasonably well, “will�nally start to crack”, predicts Mo�ettNathanson.

As more ad dollars migrate online, an even biggerwodge will end up with Google and Facebook, whichlast year hoovered up 90% of new online adspending, according to Bernstein. They are on trackto increase their share of the worldwide digital-adbusiness to 70% or so within a few years, and stillhave ample capacity to display more ads (see chart4).

If the �ood of online ad spending continues,however, current digital-advertising space may reach“a point of saturation”, warns Andrew Lipsman ofeMarketer. Ads will then seep to other digital media.

One is gaming, which has come a long way since1993 when Electronic Arts showed pitch-side ads in

1993, when Electronic Arts showed pitch side ads inits �rst “fifa” football game. Last year King, which

makes the “Candy Crush” games, took $150m in netad bookings. Today gaming �rms make ads moreengaging by, say, letting players earn power-ups inexchange for watching a commercial. King claimsthat consumers are 18% more likely to remember anad they see in “Candy Crush” than one viewed whilestreaming or using social media. JonathanString�eld, head of marketing at King’s parentcompany, Activision Blizzard, recalls how six orseven years ago he had to persuade scepticaladvertisers that Facebook, where he worked at thetime, was a serious place to market their brand. “Thisreally feels like history repeating itself [withgaming],” he says.

Video-streaming, if anything, looks ready for an evenbigger bonanza. Net�ix insists it will never runcommercials. But other streamers, includingDisney’s Hulu and nbcUniversal’s Peacock, arealready supported by advertising. As the streamingwars heat up, subscription-based services maydecide to sell commercials in order to fund theirinvestment in new content.

Then there is Amazon The e-empire is still a distant

Then there is Amazon. The e empire is still a distantthird in digital ads but growing fast. It has bitten o� a

chunk of Google’s search business: more than half ofall online product searches now happen onAmazon.com. Its advertisements are particularlye�ective: shoppers come to the site ready to buy andits purchase-history data allow it to target consumersminutely. It has yet to run commercials on its PrimeVideo service. But if it does, advertising dollars willpour in, says Mr Lipsman. A viewer shown an adcould place an order on Amazon without leaving theapp—or, with voice control, lifting a �nger. MrLipsman expects Amazon to sell commercials onPrime Video within two or three years. Its two big-tech rivals hope, with Facebook Shops and GoogleShopping, to crack retail faster than it can expand inadvertising.

The tech giants are stealing business from theadmen, too, by making it easy for advertisers tocreate their own ads. In Britain only 13% of onlinesearch adverts and 44% of online display ads gothrough the �ve largest agencies, which handle mostof tv advertising, according to Enders Analysis, aresearch �rm. The share prices of the big �ve—wpp

(which owns Groupm), Omnicom, Publicis,

Interpublic and Dentsu—have been �at or sliding forat least three years; all have dived in the pandemic.

The agencies are �ghting back, o�ering more dataanalytics and pitching themselves as broader brandconsultancies. Since 2006 Publicis has spent $15bnbuying specialist �rms in those areas. MrTobaccowala estimates that only 35-40% of thegroup’s business is now conventional advertising.Consulting �rms have expanded in the oppositedirection; Accenture has acquired more than twodozen advertising agencies in the past ten years. MrTobaccowala believes his industry can dodge theasteroid. “Agencies are like cockroaches and not likedinosaurs,” he says. “We scurry around, we �gure outthe new world.” Nowadays this counts as optimism.

7

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