Ther battle for advertising dollars is more intense than ever, as an expanding menu of media forms and players vie for what is essentially a fixed pool of advertiser expenditures. Lots of folks are counting on advertising for survival, if not generous profits. Broadcasters have always had this single revenue stream. Daily newspapers get about 80% of revenue from advertising and the hot print properties, such as the give-away Metro dailies, depend about 100% on advertising. Now much of the Web is counting on advertising: Google, Yahoo! and increasingly AOL to name just a few of the biggies. News Corp. just shelled out $600 million for MySpace.com, which has no real revenue except advertising.
Diane Mermigas at the Hollywood Reporter.com trumpets “Convergence fulfilled: A fleet new class of corporate entrepreneurs invents the future.” The article covers a broad territory but essentially paints a positive future for the established media players, with this caveat: their “ business models, revenue streams, creative dynamics and key relations with global advertisers, consumers and competitors will be dramatically different…” That’s for sure, and here’s why.
Mermigas quotes many of the usual suspects: Forrester Research, the investment banking analysts (who were so wise in their analysis in the late nineties—not), and consultant prognosticators. For years I’ve been threatening to do a study of the old “predictions” made by all these folks and match them up with actual results. My hypothesis is that the rate of accuracy will be no better than a coin toss.
But one thing jumped out at me in this piece—and others I have seen. Mermigas cites these sources for her contention that “Ad revenue will grow impressively as advertising takes on new forms.” She says that Internet-based advertising will grow most dramatically, but even traditional media will see growth of 4.3% annually.
Can’t happen. The reality is that over time advertising cannot grow—or at least has not grown—faster than the economy. Over the past 70 years—-that’s a long trend -- advertising expenditures has varied within a rather narrow range of 2.00% to 2.50% of GDP. And for most of that time it has been closer to 2.20%-2.30%. This has held true through recession and boom times. It had held true even as new media forms joined the fray—television, cable, now the Internet. In 1990, advertising expenditures were 2.28% of GDP. In 2003 it was 2.27%.
Of course, there have been winners and losers. Newspaper publishers had 45% of the pie until radio came along, which quickly stole share as newspapers fell into the 30% range. In the 1950s and 1960s television’s impact on newspapers was far less than it was on radio. One of the most robust segments of advertising has been direct mail, which has actually increased slightly in recent years and never really dipped as did newspapers, radio and magazines. It now accounts for about 20% of advertising, considerably more than do newspapers.
In good times the U.S. economy can grow about 4% annually. This constancy in advertising as a proportion of the economy means that if any media segment grows faster than 4%-- such as Internet advertising has been—then other sectors must grow slower—like newspapers. So when Forrester Research predicts that Internet advertising will be 8% of the total by 2010,-- an average of almost 50% annually, then it is hard to buy in to Morgan Stanley’s prediction that traditional media will still grow an average of 4.3% unless the economy is on a real rip.
Although I’m generally not a betting man, my money says that Forrester’s guess aout the Internet will be more accurate than Morgan Stanley’s about traditional media. If that’s the case, the outlook for traditional media players is at best one of treading water. That’s why companies like News Corp. need MySpace.com-like investments.
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