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Recession: To spend or not to spend

by Vincent Letang

For several weeks now one of the local cafés in Camden Town [a district of London that surrounds the Screen Digest offices] where I buy my sandwiches at lunchtime has had a ‘recession special’ offer of the day (hot drink and pain au chocolat for £2!). So I guess we are in the thick of it. As for the consequences on advertising spending—and on advertising revenues for media owners—they will be disastrous in 2009.

We currently believe that in the UK and the US total ad spending will shrink between five and six per cent in 2009 compared to 2008 which was already down and it could be worse if - as seems likely - major consumer brands go bankrupt in the UK (retail) and the US (automotive). Advertising markets are more volatile and more reactive than most and they always amplify economic recessions for fundamental factors.

First, marketing spending is the easiest cost to cut in the short term when managers are anxious to limit operational losses. This is especially true for brand advertising; direct marketing on the other hand may be maintained or even increased as a way to support sales in tough times. Mediabuying agencies beg their clients to hold their nerves in adversity, warning that dropping brand advertising could jeopardise years of brand-building investments and leave the way open to competitors, quoting virtuous stories of marketers who kept investing during crises and came out stronger.

But the maths are obvious: if your revenues fall by 10 per cent and all other costs (rentals, payroll, etc) are fixed in the short term, one of the few disposable expenditures is advertising, and, since it is relatively small at the scale of the company, the cut has to be much higher than 10 per cent to make any significant impact on the bottom line.

It is easy to be cynical and say that if marketers did really believe in the power of advertising they would actually increase spending in tough times. However, big brands actually fight for market shares and marketing managers are being rational in cutting adspend when they anticipate that their competitors will also cut their marketing spending.

The second reason is that advertising spending is concentrated around a limited number of big consumer brands in a handful of B-to-C sectors, and these are disproportionately affected by the recession. Anxious consumers cancel new cars and new TVs, and go for no-brand products and hard discount.

In the UK, the retail sector maintained adspend in the first half of 2008 but then they have started to give in. Now if it turns out that some retailers simply disappear (like Woolworths and Zavvi), we are likely to reach deeper water in terms of ad recession. Surviving brand will certainly not increase their own spending to compensate for the dead—quite the opposite if the level of competition is reduced.

A third reason is that media is essentially a fixed-capacity, fixed-costs activity like air transport. Whether they carry ads or not, TV channels and outdoor billboards cost about the same to produce and maintain. Therefore the volume and price of bookings is subject to yield management and volatile prices, despite rate cards. In periods of weak demand many media owners are tempted to drop prices; advertisers and their agencies are good at negotiating bargains.

In this context, how are ad-funded businesses likely to fare the storm, compared with other media/entertainment sectors? There are three fundamental business models in the media ecosystem: companies living on subscription-based services, like pay TV or broadband ; those living on discrete consumer sales, like theatrical exhibitors and DVD publishers/retailers ; and those living on advertising sales.

The first, although not immune from recession, is likely to be relatively better off because subscribers face exit barriers and cannot leave overnight. And staying at home and watching football or movies on Sky—for which you are already paying every month anyway—is after all the cheapest way to spend a family evening. Those living on discrete consumer sales have more to worry about: going out or buying yet another DVD are the kind of small luxuries that are easy to cut.

But we would argue that the worst of all categories to be in these days is the third: being a media owner exclusively or predominantly advertising-funded. And the best place? Perhaps a cheap café in Camden Town.


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