Thursday, April 12, 2007

Online ad spend surges, and will keep going

A version of this piece was published in Marketing in 2007

The IPA’s authoritative Bellwether report was published this week, and it’s provided some much-needed good news for the advertising business.  Whilst there’s an understandable reluctance to indulge in an orgy of chicken-counting, the first upward revision of main media ad budgets in 2½ years has been greeted with enthusiasm.

It’ll come as no surprise to regular readers of this column that this is a consequence of online media’s extraordinary and continuing growth, with the recent IAB/PwC survey showing 41% in 2006.

Last week I looked at how rates of growth are declining in online as the medium matures, and there’s no doubt that this trend will continue as a natural consequence of scale. 

But given this trend, how sustainable is this sort of growth? 

The answer is pretty simple.  Very.  And for two good reasons.

First, the supply of commercial audience is continuing to grow rapidly.  Internet penetration grew around 5% in 2006, but more significantly, broadband continued to surge forward.  Ofcom’s April ‘Digital Progress Report’ reveals that 80% of internet homes are now on broadband – that’s over half of all homes in the UK, and it’s 30% more than in 2005.  Unsurprisingly, people spend a lot more (almost double) time online when they’ve got broadband compared to dial-up, and the impact on audience has been significant.

Comscore reports 15% more time online per user in 2006 than in 2005, and that’s fed through to a 20% increase in audiences.

This is important, firstly because it’s an anti-inflationary pressure in the media market, meaning that dizzying levels of growth are still not feeding through to general inflation online.  But its real significance comes at a business level for mass marketers whose businesses rely on the ability to communicate daily with mass audiences.  More and more of people’s time is spent online, and that continues to exert pressure to divert budget that way.

Second, and more importantly, the internet isn’t just a marketing channel.  It’s a channel to market.  Investment in online advertising follows trends in consumer consumption patterns not just in media, but in purchasing too.  In 2006, Enders Analysis estimates online commerce at £30bn, up 43% on the previous year, and accounting for just under 12% of UK retail sales.

And it’s this that’s driving the real growth online. 

In the US, where brand advertising is a bigger part of the online media mix, search takes a smaller share, and online is just 5.8% of total adspend.  Here in the UK, the focus of development in online advertising has been direct response, and this has helped to drive online’s share to 11.4% - double that in the US.

This fundamentally changes the media game.  I spent several years as a TV buyer in the early ‘90s, and my focus was on acquiring media cheaply, and controlling its delivery.  Reach, frequency, ratings, dayparts, discounts against station price.  Nobody ever told me how sales were going, and even when I showed an interest, there seemed to be little connection made between what I did and its impact on sales, except at a rudimentary level if a sales week had gone badly and a scapegoat was needed.

But online, data is king.  We track everything, and we analyse the pips out of it, feeding this back into media deployment, keyword bidding and affiliate management.  And as consumers shift more and more of their expenditure online, it becomes easier to track the impact of what we do – more of it can be measured directly, and more of it is rolled into the modelling we run.

So online budgets are set to continue to grow, because that growth is based on predictive investment models derived from real consumers’ behaviour, and at the less sophisticated end, because that’s what everyone else is doing.

Forecasting buoyant GDP growth, improved corporate profits (a strong indicator of future adspend growth) the Bellwether survey makes good reading for marketers, and even better for digital marketers. 

If digital could boom whilst other media crawled along the bottom of Sir Martin’s bath, they reason, what can it do in an upturn?

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