Media economy
Scoping out the recovery in advertising
By Diego Vasquez
Oct 20, 2009 - 1:15:28 AM

The media economy still stinks, but it will stink less badly next year. That's according to an adjusted forecast released last week by Magna, a division of Interpublic's Mediabrands, which predicts that normalized advertising revenues (excluding local TV political and national TV Olympic spending) will be down 1.3 percent next year, slightly better than the 2.1 percent decline predicted over the summer, to $159 billion. That figure is derived from a formula based on industrial production (IP) and personal consumption expenditures (PCE). Still, the outlook for fourth quarter is not great. Ad revenue will be off 9 percent, a slower decline than the 13 percent estimated for third quarter and 18 percent for first half, but a sizable decline nonetheless. Brian Wieser, senior vice president and global director of forecasting at Magna, talks to Media Life about what IP and PCE signify, what media will see improvement first, and why local media have been hit so hard.


Before we get started, could you please explain two of the key terms you refer to in the updated forecast, industrial production (IP) and personal consumption expenditures (PCE)?

Those are two stats used as economic indicators. PCE would be one of the major components of GDP; in fact, it’s two thirds of GDP.

The point is that when people have looked at GDP for advertising ratios, it’s a bit too simplistic because things like wars are not typically advertisers. There’s a lot that goes into GDP that has nothing to do with advertising.

PCE has a higher statistical correlation with advertising.

IP is a statistic and data set used by the Federal Reserve. What they’re trying to do is track how much stuff we’re making in the country. It’s important to them because if manufacturers aren’t making stuff, it raises the question: Is credit too tight? And what does that say about what they need to do with their policies?

It’s a barometer for manufacturing in the country, and it’s impacted in a meaningful way by the auto sector.

Those two variables have the best relationship of any economic variables to advertising.

PCE has been collected annually since 1929 and quarterly from 1947. In no period since 1933 was there a fall in PCE until fourth quarter 2008. No quarter since 1947 saw PCE fall until fourth quarter 2008.

The bigger point is that leading up to this period, no analyst I’m aware of predicted an ad downturn in 2001. The thought was advertising doesn’t go down during a recession. And that was based on GDP, which like PCE never went down on an annual basis until the fourth quarter of last year.

This is where IP matters; it actually goes down. One of the advantages of including it is it actually captures the downturn.


Has the media economy finally bottomed out, and when did that come? Why?

It depends on your definition of bottom.

That is to say that we’re still looking at a 9 percent decline in the fourth quarter, year over year. But how we feel about it is based on whether year-over-year declines are swelling. If you were hitting your head against the wall but now you’re just tapping your head against the wall, it feels a bit better.

So down 9 percent now looks pretty good. We’re still talking about next year being down versus this year, but because the pace of decline is slower, it doesn’t feel as bad. It feels, on a relative basis, not so bad.


What prompted you to revise your 2010 forecast slightly upward?

It’s just that the expectations for production have been upgraded.

The sentiment for next year’s economy has improved in general. If PCE growth is zero, and IP growth is zero, we would expect 9 percent decline in advertising. We assume 4 percent PCE growth and 2 percent IP growth, and you then get about flat total advertising growth, based on our model.


Why did local media see such a huge hit compared to national?

There’s a few factors going on. In the broadest of strokes, it has happened as manufacturers and marketers have increasingly been able to accomplish national distribution through national retailers, so they can support their brands on a more national basis.

If you had a world where there was nothing but cottage industry companies that only operated within a 25-mile radius, there’d be no national advertising.

Likewise, if you sold everything you made in every state, there’d be almost no local advertising.

This shift to national campaigns has happened over the past 20 to 30 years as distribution through national retail channels became much more prominent.

Among the businesses that are locally oriented—think of real estate agencies that are entirely local--they’ve been particularly badly hit. And the auto sector, with its traditional emphasis on local dealers, has also been affected by the shift.

Money was being pulled back as manufacturers gained more power over their retailers. Also, advertisers like to put money at a national level because it’s just cheaper for the objectives they define.

The creation of new media expands the universe for advertisers. Imagine if cable had evolved where every city had its own version of MTV or Nickelodeon.
But cable evolved as a national medium, and that makes it a much more cost-effective way to reach people. If you’re a smaller advertiser, all of a sudden it becomes possible to advertise nationally.


Where do you see the auto category going over the next year? Do you anticipate recovery, and if so, in what areas, in terms of both advertisers (dealerships, trucks, etc.) and media?

The declines that the sector experienced will be difficult to reverse. Although it may not return to the levels it was at, next year it will be above where it is now, so there will be some rebound. Local TV was disproportionally impacted because that’s where the bulk of cuts were made.


Direct media has held up slightly better than national media and much better than local media. Why?

Direct mail in the 1980s saw some pretty rapid growth, and arguably it wasn’t taking money from traditional media but making it possible for advertisers like credit card companies to reach people in ways they couldn’t before.

Search has led to a similar expansion, so a lot of the growth that’s reflected in this area is coming from search.


What media categories (i.e. radio, newspapers, etc.) will be the first to start seeing improvement?

Well, national will be first; it’s just healthier. Everything is improving, just to slightly different degrees. The better question may be, when will recovery happen for each media?

They’re all recovering; it’s just at different pace. But it’s all relative. Look at newspapers. They’re still down but not as much as before, so is that recovery?


Are there some media types that may never reach their previous levels?

The newspaper sector will probably be half of its size over a seven-year period. And that will be true for directories as well.


What advertising categories will see the fastest recovery (i.e., pharmaceuticals, food/food products, real estate, etc.)?

I really don’t look at that because there is no good data on individual categories. It’s really difficult to make more than a qualitative observation, as I have on autos and retailers.



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