FREEDOM AND SAFETY
There’s a rule of thumb in the advertising industry that ad spend follows any rise or fall in GDP. Over the last decade, as global GDP has risen 3-6% each year, the ad market has grown with it to around $646 billion USD in 2019. Pre-coronavirus, the ad market was forecast to grow to $865 billion USD by 2024.
Coronavirus has forced a rethink - the pandemic has led to an immediate drop in advertising spending. First quarter data from Publicis showed that year-on-year revenue in China was down 15%. Countries in Europe saw an average reduction of 9%; Germany and France fell 7% and 12% respectively.
The remainder of 2020 looks set to be challenging. According to the Interactive Advertising Bureau, almost a quarter (24%) of media buyers, planners and brands have paused spending until the end of Q2, while 46% indicated they would adjust their ad spend across the same time period. Three quarters expect the pandemic to have a bigger impact than the 2008 financial crisis.
However, there is a deviation to the principle that companies cut advertising budgets during a recession. In many countries, governments have emerged as advertising buyers to promote public health messages or support journalism. According to Brian Wieser, Global President, Business Intelligence at GroupM, “This is not going to make a huge difference considering the dominance of the US and China over the total market, but it is an interesting exception.”
Wherever consumer behaviour has shifted, advertising spend has adjusted in response. It makes little sense for advertisers to spend on media that have no audience. As confinement measures were introduced around the world, out-of-home and cinema advertising shrank almost instantly; print advertising also fell.
Meanwhile, in-home media usage went up. TV viewership has climbed, but digital consumption has increased even more: use of social platforms and streaming services have risen almost everywhere; gaming has also grown dramatically.
Advertisers have adapted by following consumers, which means prioritizing digital advertising. The online environment is favourable for “direct response” campaigns – those encouraging quick purchases by consumers – an attractive proposition for brands spending cautiously and looking to drive sales. In the first quarter, Facebook and Google saw better than anticipated first quarter revenues.
Does this imply that digital-first markets are better positioned to withstand the effects of the pandemic? In China, where consumers spend almost two thirds of their media time online, Tencent’s digital ad revenues in the first quarter increased by 32% year-on-year. As the country reopens, its ad market is predicted to grow by 8.4% – even after COVID-19 is accounted for, a figure still larger than the 8% ad growth forecast for the US pre-coronavirus.
Uncertainty about people’s spending and consumption patterns makes it hard to determine if China is a test case for the rest of the world. As Brian Wieser explains, “One could argue that many elements of human behaviour are going to change permanently. The products we want could be radically different in the future – so data that was used previously to inform advertising and marketing spend is not necessarily going to be useful.”
Outside China, the reduced spending by advertisers has affected prices. According to Alastair Shearly-Sanders, President of Amplifi at Dentsu Aegis Network, “There has been a general softening in all pricing with the simple economics of less money in the market, whether that is traded through auction or not.”
Brands advertise to raise awareness, increase sales and build loyalty, using media appropriate to each objective. In general, small- and medium-sized enterprises are more dependent on channels that drive customer engagement. Global brands, on the other hand, run multiple campaigns, including values-based marketing that builds association with consumers’ identities.
The pandemic has caused advertisers of all sizes to rethink the type of campaigns they should run. For many, this means focusing spending: in a survey, lifestyle advertisers reported that acquiring customers is now their priority, and other consumer categories are also adapting their marketing strategies. Media – such as TV – that work well for identity-based marketing may not be the priority in the near-term.
For others, however, focus means changing the message. IAB data shows that 73% of advertisers have modified or developed new assets since the start of the pandemic. Of these, over half (53%) are increasing messaging that emphasizes the mission of the company.
Unilever, one of the world’s largest advertising buyers, is adapting on both fronts. According to Conny Braams, Chief Digital and Marketing Officer, “Unilever is guided by three beliefs: brands with purpose grow, companies with purpose last and people with purpose thrive. The pandemic will not waiver our commitment to purpose-led business, nor will it change how we position our brands. More broadly, we are witnessing a change in consumer behaviour. We know that life in the time of coronavirus is increasingly a life lived online which has led to an acceleration of digital adoption and e-commerce. Time spent with certain media channels has increased during lockdown, so we are adapting to these changes, shifting to a greater focus on in-home channels versus out-of-home.”
The power of brands to choose where to advertise means that media reliant on advertising – or overexposed to certain categories – may suffer. Analysis shows that all media are affected, though for obvious reasons, travel and retail media are experiencing the worst.
Digital news publishers have been particularly impacted. Brands avoiding associations with coronavirus-related content are withdrawing spend and blocking keywords across programmatic channels on news websites. The New York Times reported a fall of 15% in ad revenue during the first quarter, and smaller providers are equally hard hit – one estimate from the UK suggests that 75% of local providers could shut following a drop in ad income.
The pandemic is likely to shape the advertising industry in the long-term. Businesses are prioritizing survival for now, but in the future will have to find new ways of brand-building. The change in people’s media and consumption habits will force a rethink of how best to do so.
As Brian Wieser describes, “Companies will find that there’s never been a better time to pitch ideas that involve real transformation. People will be more open minded and we’re going to see businesses find ways to push transformation even faster. For corporate decision-makers this is going to be radically cheaper than it was a few months ago.”
The second transformation is the decrease in the value of Pay-TV to the benefit of ad-supported streaming video services. Over the past decade, advertising on Pay-TV (subscription services covering linear and digital television) has increased. This is in contrast to the medium’s decrease in viewing hours across almost every age group, and the widespread adoption of smartphones and tablets that make it less likely that consumers devote attention to adverts on TV.
Some TV viewing has moved to other distribution platforms, notably Over-the-top (OTT) providers. As a result, many of the largest media companies have increased investment in their OTT services in recent years; this trend appears set to continue, with coronavirus accelerating consumers’ growing preference for D2C content. Combined, these factors are likely to expedite large brands’ shift away from Pay-TV.
That said, TV-style advertising is far from over. There is clearly consumer demand for ad-supported streaming video services – evidenced by their proliferation around the world. Their so-called lean-back TV environment, alongside the targeting that digital media offers, is perfect for attracting advertisers that would once have looked first to Pay-TV.
Thirdly, as confinement measures relax and out-of-home advertising grows back, these typically offline channels will accelerate their shift to digital. This will increase pressure on the advertising industry to improve how it measures return on investment across different media, devices and platforms.
Alastair Shearly-Sanders outlines the challenge: “Clients and agencies have always sought the best way to invest. Any move towards business outcomes and what constitutes value to the advertiser will need to be managed as effectively as before. We expect to see brands focus more on bespoke strategies that align to revised business objectives, and so will seek out more flexibility in the way they procure media.”
It is likely that technology companies, with analytics and ad auction technologies, have a head start about how to do this compared with other players in the industry. Indeed, the expectation is that digital advertising will continue to grow in the future. Conny Braams outlines Unilever’s position: “The current trend of online shopping will continue in the medium- to long-term, with e-commerce becoming an increasingly important channel within the marketing mix.”
As outlined above, direct response marketing has been prioritized by many advertisers, many of which rely on it for revenue generation. As ad spend reduces in general, spending on digital platforms has reduced more slowly. In the longer-term, this may strengthen the position of digital platforms in two ways. First, they appear to be suffering less relative to others in the advertising ecosystem, enabling them to emerge faster and stronger from the crisis. Secondly, they own behavioural data collected during the pandemic. In an industry where all players are trying to understand consumer habits, this will give platforms a competitive edge going forward.
Finally, research shows that half the money brands spend with online publishers is lost in the programmatic advertising supply chain – and 15% is unattributed. This underlines problems with the media industry’s business model, where a “publisher’s paradox” can see traffic increase, but not revenue. These challenges are exacerbated by the pandemic and suggest that greater transparency in the value chain is required.