Thursday, May 17, 2007

The UK is ahead of the US?

A version of this piece was published in Marketing in 2007

Since the earliest days of online marketing, it’s been the widely received wisdom that the US is ahead of the UK.  The gap varies – it used to be two years, and now it’s often quoted as six months.  Whatever the lead, most observers in this country agree it’s the US that has the head.

But talk to American online marketers, and they’re keen to know why the UK is ahead.

The first time I heard this, I thought I’d misheard.  But news had reached the US that the share of media budgets accounted for by online had reached 10.9% - almost double that in the US, and they wanted to know why.

The US advertising market is huge.  At £143 billion a year, it dwarfs the UK’s £18bn.  Americans spend 57% more per head of population on advertising, and seven of the top twenty advertising cities (in billings terms) in the world are in the US.

But online, the picture is reversed.  The UK spends 20% more per head of population than the US does.  And whilst in traditional media, New York is the biggest advertising market in the world (and twice the size of London), the London online advertising market is as big as New York’s.

This reversal of fortune has been caused by three key factors that have held the US back, whilst the UK benefited from local conditions that accelerated its boom.

A third of the US ad market is accounted for by local/regional advertisers, and yet only 8% of online advertising comes from this sector.  Regional advertisers’ importance to the US market is not represented online, where these businesses are failing to make an impact.

Second, the UK market’s rapid growth has been largely driven by direct response, whilst in the US, a greater share of advertising is brand-based.  Whilst 57% of UK online adspend is in search, this figure is just 44% in the US.  US advertisers are much more sophisticated in their understanding of the medium as a brand advertising environment, but the immediacy of the returns experienced by direct marketers has prompted much faster growth.

Finally, the ‘upfronts’ – the US TV networks’ practice of committing advertisers for a year in advance in order to secure the best slots – has meant the market there is considerably less flexible and iterative than in the UK, where budgets tend to have more flexibility on a quarterly level.  Advertisers here have been able to respond much more quickly to the extraordinary growth in the online market, upweighting spend whilst their American colleagues have been tied in to long-term TV deals.

The UK meanwhile, has been making hay whilst the sun shone.  TV suffered as the brand leader laboured under a CRR formula conceived in a pre-broadband era.  Radio struggled as secondary medium status was ceded to online.  As audiences fell, waning confidence amongst advertisers in these media led to revenue falling faster, with online the prime beneficiary.

But despite its success, the UK market is still smaller, less sophisticated and narrower based than the US.

The US market’s scale has given it a natural advantage in the deployment of behavioural targeting tools that let publishers segment their non-prime inventory and sell it at a premium.  These technologies track viewers, so that someone viewing say, more than three pages of sports content in a session can be shown sports-targeted advertising later when they’re looking at the news.  This creates more effective advertising, but also increases revenues as publishers can expand the supply of more highly-demanded audiences.

Video advertising, just starting in the UK, has been established for over a year now in the US.  The heavier share of brand advertisers, particularly in FMCG, has led to faster demand for these less response-focused ad formats.

So the received wisdom that the US is ahead isn’t flawed – it just isn’t that simple.  In any other market, these gaps would be seen as failures – it’s telling that the online media community universally regards them as opportunities.

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