Technology

Why Online Ads Are Weathering the Recession


In most media, 2009 will bring unkind cuts, and Madison Avenue will never be the same. But Internet advertising seems to be holding up

It hardly matters what sector of the economy you're in—it's none too soon for 2008 to be over. In the advertising business, the pain has proved especially acute, compounded by the latest estimates of where ad budgets are heading in 2009.

Just last week, Barclays Capital (BCS) lowered its projections for U.S. ad spending to a negative 10% next year and a positive 1% in 2010. Every one of the traditional media platforms is getting hit, with newspapers (no surprise) taking the brunt of the pressure, with a drop of 17%, followed by TV (minus 15.5%), magazines (minus 15%), and radio (minus 13%). While other researchers aren't offering prophesies quite so dire, one thing is clear: This is already no typical ad recession. In 1991, ad spending dropped a mere 1.9% from the prior year, while in 2001 it fell only 6.2%.

The only bright spot this time is online advertising, which, despite a series of downward revisions, is still expected to grow between 6% and 10% next year over 2008 levels.

Radical Restructuring

We already know that Wall Street and Detroit will never be the same. Radical structural changes in financial services this year have unfolded at a breathtaking pace. Now, it looks as if we may add advertising to the short list of industries that will emerge from this recession altered in dramatic ways, and for good. The harbinger of advertising's radical transformation is the sustained growth of online.

Remember that the last recession knocked online advertising for a loop. The Interactive Advertising Bureau (IAB) reports that Internet advertising was down 12% in 2001 and 16% in 2002. It wasn't until 2004 that online surpassed spending levels reached in the medium's peak year of 2000. But during the current recession, online is holding its own, and traditional media are taking the hit. Indeed, a survey of 400 senior-level marketing decision-makers, released last week by PermissionTV, confirmed the view that digital marketing would be the least affected by budget cuts among all major commercial media.

So why is this time around for online advertising different?

For starters, online has come of age as a medium since the early 2000s. IAB President Randall Rothenberg observed recently that in a typical recession, "above-the-line dollars [move] below the line." When budgets are tight, pay-as-you-go approaches (say, point-of-sale promotion) are more appealing than betting on what may come (mass-market TV spots). In the last recession, online advertising had yet to prove itself as a bona fide option, above or below the line. Now, it's credibly done both.

Second, the brightest aspects of online advertising's appeal are the special strengths of digital as an ad medium. One is accountability. That's what continues to give search advertising its momentum, fueling the growth (albeit slowing) of market leader Google (GOOG). Every marketer can determine what a search-based "click-through" is worth by calculating the impact on sales. It helps, too, that marketers pay only for search ads that result in a click-through. No surprise, search will expand by a healthy 15% in 2009. Another attribute of digital is the compelling user experiences based on rich integrated media formats and built-in interactivity. That's why industry analysts expect spending on online video ads to grow by a robust 45% next year, revised down only slightly from earlier estimates.

Third, it's an iron law of marketing that word of mouth is the most powerful medium that money can't buy. Online environments are, of course, rapidly becoming social media, where word-of-mouth communications travel at lightning speed and exert ever more influence on consumer behavior. No one, including social networking giants Facebook and MySpace (NWS), has cracked the code on word of mouth—or its monetization. But that doesn't mean they're not trying. Thanks to the huge numbers of business people who use it, Facebook has overtaken LinkedIn as a top business networking site. It's testing B2B marketing concepts like the recently introduced "VISA Business Network," which enables small business owners to interact with one another and advertise efficiently on the site. Last summer, MySpace also began targeting small businesses with a self-service model for advertising placement. (Only 1 million of 23 million small businesses in the U.S. advertise in any way online.)

Fourth, marketers are spending digital dollars to create "earned" rather than "paid" ad placements. Paid placements occur when brands buy ad space from existing online publishers. Earned placements often require that brand marketers create media vehicles of their own. Sometimes, earned media can take shape as the online equivalent of guerrilla marketing, in which brands create engaging online experiences—such as Pedigree's Dogs Rule Web site, which, with its agency TBWA\Chiat\Day, created a multifaceted online hub of services, community, and videos for owners and lovers of dogs. Others are less playful and more sobering, like Chevron's (CVX) partnership with the Economist Group to create Energyville, an online game designed to educate consumers about trade-offs between global energy resources and demands and their environmental implications.

Pinpoint Accuracy

Finally, there's the capacity of online to reach consumers with precision at specific points in the buying process (from awareness to interest to purchase) through theme-based or algorithm-driven targeting. Whether it's "vertical" ad networks (such as the CBS College Sports Network (CBS) of sites and blogs for online users obsessed with collegiate competition, including March Madness) or behavioral targeting (such as Tacoda and Specific Media, which analyze users' click streams to predict what they're likely to want or to buy), the results are similar: The online medium can provide marketers with unprecedented capacities to target specific users and usage occasions. Mobile advertising, which pinpoints a consumer's physical location, only adds to the expanding possibilities.

In short, Madison Avenue won't come out of this ad recession the way it came in.

Why would advertisers budget on faith when they could invest in measurable returns? Why would brands lavish dollars on mass media when they could target only those consumers who matter most? Why would marketers continue to allocate less than 10% of their budgets to interactive (in measured media), when consumers are spending more than 35% of their time with interactive platforms even today?

It's not that online advertising will supplant traditional media. It won't. But a new and different ad equilibrium will emerge from the coming economic recovery—and it will represent a radical shift from anything we've known before.


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