Posts Tagged ‘Advertising’

January 5th, 2009

Sarkozy’s TV advertising ban and the BBC funding debate

French President Nicolas Sarkozy’s recent move to ban commercial advertising from state TV channels during peak time adds some colour to the debate about funding the BBC in the UK, albeit in reverse order. When recently asked whether the BBC should be allowed to carry advertising my answer was ‘no’, not because I share Sarkozy’s views on the beauty of ad free state broadcasting, but because such a move would be financially disastrous for the existing commercial broadcasters in the UK. Here’s why:

Firstly, adding the BBC to the commercial airtime market would be catastrophic for existing broadcasters, forcing many into financial ruin. According to Ofcom, the UK TV market was worth around £3.16bn in 2007. Broadly speaking, TV companies aim to take a share of advertising revenue that roughly matches their share viewing. The BBC took a viewing share of around 28.5% share of viewing in December (BARB). So if the BBC were to take a similar share of the UK’s annual TV spend then it would take around £900m in advertising revenue. But the market wouldn’t necessarily grow to accommodate this, in fact all the evidence suggests that the TV market is in terminal decline with Ofcom warning the market could actually dry up by 2020. So the BBC’s £900m would have to come from the existing (and declining) £3.16bn currently being taken by the UK’s commercial broadcasters. Unfortunately, the UK’s traditional terrestrial broadcasters are not in a position to be generous to the tune of £900m. They are enduring tough times. In the last financial year (2007) ITV reported profits of £188m (down 35% on 2006) and Channel Four lost £8.8m (down from £14m in 2006). So you can see that taking £900m revenue from existing UK commercial broadcasters would completely wipe out all existing profits and leave them staring at bankruptcy.

Secondly, the BBC’s potential advertising income falls way too short of its current licence fee income to be a viable alternative. The £900m the BBC might hypothetically generate from its 28.5% share of the TV advertising market is only around one third of the £3.2bn it currently receives in licence fee income. In fact, as we have seen, the total UK TV market is worth around £3.16bn, almost exactly the amount the BBC gets to run itself annually. Even if the BBC ad sales machine were so successful that it were able to generate a level income equating to double its 28.5% viewing share, that would still not be enough to finance the Corporation.

There has been a counter argument to these views stating that allowing the BBC to carry advertising would make advertising cheaper overall therefore encourage more advertisers to use TV and expand the overall size of the TV advertising revenue “cake”. But this is a fallacy for three reasons. First, advertising could not become cheaper because the broadcasters could not survive if their yield (£ income per viewer) and margins fell further; they wouldn’t exist so any cost reduction / market expansion arguments are rendered purely hypothetical. Secondly, there are cost entry barriers to TV advertising. TV commercials are expensive to make the availability of cheap airtime may not bring TV advertising into the reach of smaller advertisers. And thirdly, any ad budgets looking for a new home are likely to find a more than satisfactory reception on the Internet where short term tactical pay back is much higher than on TV.

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December 16th, 2008

UK advertising predictions 2009

I think 2009 is going to be a year of immense change in the UK media landscape. But it’s not going to be the same for everyone. I predict that it will be a bad year for the traditional offline players whilst newer digital players will find 2009 painful but manageable. For many traditional media owners 2009 will be about survival - particularly in print. There is no doubt that the UK media scene will look very different in December 2009 to how it looks in December 2008.

Before we get into the detail, I think it makes sense to divide my 10 predictions into two groups: “structural change” and “reality checks”. The “structural change” predictions deal with fundamental corporate realignments that will be forced upon businesses in order to survive in the UK communications industry. The “reality-check” predictions relate to businesses that will have to make significant changes in how they operate to remain healthy and be in good shape to meet the challenges of the next few years. So below is a summary of what I think will happen in online and offline marketing and media community in 2009.

Structural changes (1-5):

1. The full effect of the flow of advertising revenue from offline to online media in recent years will make a profound impact on the the UK media scene in 2009. Media owner denial about underlying structural shifts in our industry will evolve into acceptance and the adoption of a ‘change or die’ corporate mentality. On reaching this enlightenment, media owners will use the recession as an excuse to make the big changes they’ve been putting off for years. There will be ruthless cost-cutting, divestment, re-structuring and closures.

2. In print, some established brands will collapse. One national newspaper will close or be sold. But the worst pain will be reserved for regional and local media which will come under severe financial pressure because of the combined effect of the shift to online, the crisis in the housing market and reduced expenditure from advertisers, particularly car dealers and retailers. Regional and local directories like Yell and Thomson will also have a very difficult year. All in all I predict regional media will be in for a torrid year, and suffer worse perhaps than any other channel.

3. In broadcast there is also going to be serious financial trouble. Some smaller TV stations may suffer badly and probably collapse. ITV’s situation will get steadily worse. Sky will continue to feel the impact of Freeview through declining rates of subscription growth, but its subscription base will make it less dependent on advertising revenue and allow it to weather the recession in reasonably good shape. Problems will come for Sky if the recession goes on for more than a year and consumers think twice about re-subscribing. Regional radio will suffer badly because of its dependence on cars and retail.

4. Online will not be exempt from any pain (see also 6,7,8) but it will be display advertising networks that have to bear the brunt of it. The whole area of blind networks delivering view based conversions will come under increased scrutiny. These advertising / business models will be under the magnifying glass of both advertisers and investors. Ad revenues will decline and investors will start to duck out. This will cause a shake out in online display advertising networks; some will fold and the lucky ones will be taken over.

5. On the agency side of the business, some traditional agencies could run into serious financial trouble and some may even go under - particularly those with an over-dependence on automotive and retail brands. As usual in a recession, those agencies able to prove a causal link between their activity and sales are likely to suffer less than those agencies who can’t.

Reality-checks (6-10):

6. The business models of social media stars like Facebook will come under increased financial scrutiny as brand owners realise it’s very difficult to communicate in these environments and investors realise it’s therefore very difficult to make money. Some social media sites will be bought up by bigger online and perhaps offline players seeking to broaden their offering.

7. Microsoft may concede it can’t win in paid search and may even surrender and divest from it. Even if this doesn’t happen, watch out for other significant online and offline investments from Microsoft.

8. Google will show signs of maturity and will be forced into making a big move to maintain momentum and investor interest. Anticipate something like a big traditional media owner purchase, the takeover of a big social media player or more mobile developments.

9. There will be significant shedding of non-core corporate assets across the board. More companies will lose patience with their seedlings and turn out the light. Rather ironically from a corporate point of view, traditional media businesses are likely to close their digital businesses. This will reflect the fact that the dominant business model in these companies cannot yet monetise online and digital profitably.

10. Consumers will be lackadaisical about very high speed broadband. As the revelations about high speed actually being slow speed gain more momentum, offers of higher speeds will be met with increased cynicism. As a result, take-up will be slow and providers may run into problems. Those companies betting that offering even higher speeds will add new life to a maturing market may lose.

Despite all this, here’s to a Happy Christmas and 2009.

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December 1st, 2008

Advertising Frequency and Diminishing Marginal Utility

Economists have a concept called Diminishing Marginal Utility. This means that each additional time a consumer consumes something they get less satisfaction from consuming it. So, if I have one coffee, I find it very satisfying, two could be OK, but by the time I get to three I’m not getting much additional satisfaction, infact, I’m going off coffee pretty fast. And if I were to drink ten coffees I’d feel like I was being tortured.

Now let me apply this thinking to the world of TV advertising and in particular, sponsorship. In the UK, quality drama is a favourite for sponsorship. One of the reasons for this is that these programmes attract a high quality loyal audience who make an appointment to view. Certain drama strands can be sponsored heavily in a cross-programme deal covering different programmes in the same genre. Whilst this may appear to present great media value it can mean over-exposure for both brands and consumers. Seeing a break bumper a couple of times is fine, but seeing the same branded break bumper ten times in the same evening can seem like drinking that tenth cup of coffee.

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January 21st, 2008

Press ad revenue will fall by £1.6bn - at least

WARC and the Advertising Association have predicted that UK press advertising spend could fall by £1.6 billion by 2019. This recent forecast is at least realistic and possibly an over optimistic scenario for press. At the Newspaper Society Conference in 2000 I identified a stratum of media communication that was dangerously exposed to competition from the Internet. It’s that layer of product and service based advertising - where to go, where to find it, how to do it - often locally. In short, it was press “small ads”; fractionals, classified ads and directory entries. These areas of press are under attack from three sides:

1. Consumers aren’t using press for news in the way they used to
2. Consumers are finding product information in online search when they need it, not in fractional press ads when media planners think they need it
3. As a consequence of item 2, advertisers are finding far greater product sales efficiencies in areas like online search. Some advertisers are spending £500k per month in search - and that is most likely from the very product sales budget that would have gone to fractional and small ads in press and directories.

I thought I’d add some media forecasts of my own for 2019:

1. The media world will look as different in 2019 as a motorway now looks when compared to a dirt track.
2. Many magazines and newspapers will have gone completely, the established brands will continue to exist online with lower circulation ‘feature and comment’ magazines in print.
3. Most TV will be delivered via Broadband Internet.
4. Viewers will schedule all their own entertainment on an on demand basis; the job of TV scheduler will cease to exist.
5. The boundaries between print and TV will fuse with much cross-media consumption and ownership
6. Consumers will organise their own news and TV programme schedules in a framework that looks like today’s RSS readers.
7. The provider of the new “universal reader” will probably be the new Google but they are unlikely to develop this “universal reader” as most companies only have one huge hit and they’ve had theirs.
8. The use of personal devices like ipods will become all pervasive; and they’ll do far more; you’ll be able to turn your oven on with it.
9. The decline in press ad revenue will be greater than £1.9bn by 2019.

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November 7th, 2007

Can Facebook take adrevenue from Google?

So Facebook’s founder Mark Zuckerberg has declared that “The next 100 years start today, and it’s going to be different.” Well both points are certainly true when isolated from the immediate context of his comments. But are they true for the audiences he is specifically addressing?

By saying that the next 100 years start today, young Mr Z. must surely be waving a derogatory digit at Google. From Google’s perspective, the next 100 years began in autumn 1997 when Backrub was renamed and made available to Stanford students. Mr. Z. thinks he’s onto something bigger and better than Google. And maybe he is. But the reality is that nobody can say for sure. Why? Well that’s because Google’s adrevenue model is proven and Facebook’s is not.

To date, Google’s adrevenue has been generated from a direct response model; PPC effectively took us back to the old results-based payment per inquiry (PI) deals. Direct response advertisers like paying for sales results and not for simply being seen. These direct response advertisers like the way Google’s performance based model works for them so the money flows straight in. For Facebook to take a share of this direct response revenue, it must deliver results that are at least as good as those generated by Google.

But Facebook has an ace and this could be where the $15bn comes in. Because of the way it is used, and because of the type of people who use it, advertisers may see it as more than a purveyor of direct response sales performance. They may come to view it as a place to talk about brands in targeted ways to highly targeted groups of consumers. This means that it could be liberated from the rigid ROI metrics that rule direct response. And that in turn means that advertisers may be prepared to pay more per person reached on Facebook and and be more relaxed about how it delivers ROI. From a media owner perspective, that’s a good place to be when it comes to counting the ad revenue dollars. In other words, the next 100 years did begin in 1997 for direct response advertisers, but they may just be about to begin again for brand advertisers.

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August 24th, 2007

How would online advertising fare in a recession?

Recent uncertainties about US credit and its distribution throughout the world economy have meant that we’ve been seeing and hearing a lot more of the word “recession”. Naturally, this has prompted occupants of the online world to ask how another recession might affect them now the Internet is a far more established part of marketing. This might seem like a very daunting question, answerable only by those in possession of a crystal ball, but in fact, advertiser behaviour in a recession follows a reasonably predictable pattern. Here’s a brief summary of what is likely to happen:

1) Advertisers spend less: For many companies, a line of red ink through the ad budget is a quick and easy way to put some more money on the bottom line. If there’s no immediate and significant downward effect on sales, then many senior managers will see it as a painless way to maintain profits.

2) Advertising gets cheaper: As there’s still roughly the same number of advertising opportunities, but lower market demand, the cost of advertising falls.

3) It’s easier to cut through: With many advertisers spending less and the price of advertising falling, advertisers who maintain budgets get more cut through for the same money. Old hands at advertising like P&G and Unilever know this, and almost always maintain spend in a recession. For them, it’s a good time to invest in their brands.

4) There’s a focus on measurable sales results: In a recession companies want to maintain sales. As a result, tactical direct marketing often fares much better in a recession than brand advertising. If an ad budget can be shown to be make a direct contribution to sales, it is more defendable. The marketing manager who can say, “If you cut my budget by 50%, my sales will fall by 50% and here’s the proof” is far more likely to retain budget than the marketing manager who cannot.

So, where does this leave online?

Because the lion’s share of online advertising is evaluated by its ability to deliver clicks, leads and sales I believe online media would be in a relatively strong position if we were to enter a recession. There would be increased investment in online as more companies sought to invest in channels that are seen to deliver sales.

Superficially, this might look good. But ironically, it’s likely to be bad news for existing online advertisers. This is for two reasons. Firstly, increased demand for online could have an inflationary effect on costs, particularly in highly accountable areas of online marketing like paid search - where increased demand would manifest itself in higher bid prices. Secondly, as well as experiencing higher bid or CPM prices, advertisers would experience more message competition as more companies switched their budgets into online.

So the ‘net’ effect of a recession would be superficially good (higher online spends) but fundamentally bad (higher online prices and a more crowded marketplace). I think this would affect different areas of the online marketing community in different ways. For online media owners, it’s good news - they’d experience increased demand and higher prices. For digital agencies it’s both good and bad; more advertisers spending online, but it becomes harder to get cheap deals. And for advertisers, it becomes more difficult to maintain a low cost of sales.

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