Agency: Fallon London
campaignlive.co.uk, Friday, 30 March 2007 12:00AM
Advertising is a cyclical business, and it looks like we're in the middle of the cycle right now. Global ad expenditure is growing steadily at a nominal rate of 5 per cent to 6 per cent a year, as is the global economy. The market has fully recovered from the recession of 2001 and 2002. Ad expenditure was higher in 2006 than it was in the peak year of 2000, even after adjusting for inflation. Expenditure is not growing at the rapid pace it set in the late 90s and 2000 but, when it starts to do so, it will probably be a sign that we're heading towards the end of the cycle, and then the next downturn. At the moment, though, growth is healthy and sustainable.
Worries about structural threats to the ad market persist. So far these threats have not lived up to their early hype, and no advertising medium is in imminent danger of destruction.
Ad-avoiding technologies such as personal video recorders continue to grow in popularity, but how many ads users actually avoid is open to question. In the UK - a leading PVR market, where 7 per cent of homes have Sky+ - the number of ads viewed by young adults actually increased in 2006.
The internet is becoming ever more effective as a distribution channel for video content and a competitor to traditional broadcasters, and it is not clear how advertising will work in this environment. Online video, however, is likely to be one of the fastest-growing forms of advertising this year.
The US has nearly 14 million subscribers to satellite radio, which exposes its listeners to fewer ads than terrestrial radio and, on some stations, to no ads at all. However, subscriber growth has slowed - the biggest provider missed its growth target in 2006 - and more satellite stations are airing ads to supplement their subscription income.
The distribution of free newspapers to commuters has risen solidly, and has compensated publishers in developed markets for the long-term decline of paid-for newspapers - at the price of the lost circulation revenue.
Adspend growth by region
The ad market is currently growing slightly faster than its long-term average rate of 5 per cent a year: it grew 6.1 per cent in 2006, and we expect it to grow 5.4 per cent in 2007. This above-trend growth is being driven by the Asia-Pacific region, Central and Eastern Europe and the Middle East, particularly the last two regions.
Expenditure in Asia-Pacific is accelerating as the Beijing Olympics in 2008 approach. We expect growth to drop off slightly in the year after the games, but it should remain higher than the growth in North America, Western Europe and Latin America. China, India, Indonesia and Vietnam are all growing at double-digit rates; in all four markets GDP is growing very rapidly, and advertising is growing as a proportion of GDP as consumption plays a more important role in their economies.
China is rising quickly through the ranks of the world's largest ad markets. In 2005, the republic was the seventh largest. It was sixth in 2006,and it will take fifth place in 2008.
Japan's ad market emerged from its long depression in 2004, soon after its economy, and both are now growing again - although a lot less rapidly than most other markets in the region.
Central and Eastern Europe is the fastest-growing region, thanks principally to the astonishing rise of Russia. Russian adspend has grown at an average of 41 per cent a year since the beginning of the decade. We expect it to grow another 108 per cent over the next three years to 2009, when it will contribute 33 per cent of regional ad expenditure, up from 24 per cent in 2006. Russia was the 13th-largest ad market in the world in 2006. We predict it will be eighth in 2008, and seventh in 2009.
The spike in oil prices in 2006 caused a corresponding peak in Middle Eastern adspend, but the recent proliferation of media in the region should help sustain 11 to 12 per cent annual growth even after the recent moderation in oil prices. Egypt was the fastest-growing ad market in the world in 2006 - expanding by 47 per cent. We expect it to retain this position in 2007 and 2008.
North America, Western Europe and Latin America are lagging behind the world average. The economy in the US is expected to slow gently and we expect its ad market to do the same, after the Winter Olympics and mid-term elections boosted growth in 2006. The Eurozone economy is picking up and we expect this to stimulate ad expenditure in Western Europe, which we forecast to grow slightly faster every year for the next three years. Germany is still the laggard of Western Europe; we don't expect the German ad market to improve on the 1 to 2 per cent growth rate it has maintained since 2004 (after three years of step decline) for at least the next three years.
After very rapid growth in 2004 and 2005, Latin America is expected to settle down to more moderate adspend growth over the next three years. The expansion of Latin America's ad market has been characterised by years of wild growth punctuated by years of steep decline. We predict annual growth of 4 to 5 per cent, which looks more sustainable than the 13 to 19 per cent growth of 2004 and 2005, and is slightly higher than the 3.5 per cent average growth rate over the past ten years.
Ad expenditure by medium
Ad expenditure is growing in all media. No medium has lost money since 2002, when expenditure on newspapers and magazines shrank by 3 per cent and 4 per cent respectively. Most of the traditional media are losing market share to the internet, however.
We currently expect internet advertising to grow seven times faster than advertising in traditional media in 2007 - by 28.2 per cent compared with 3 per cent. Given the internet's capacity for exceeding even the most generous expectations, we won't be too surprised if we revise this growth rate upwards during the year.
The internet has, of course, being growing much faster than the traditional media for years. Penetration is peaking at about 70 per cent in developed markets, but is still only 17 per cent worldwide, suggesting that global penetration may eventually reach four times its current level. Faster connection encourages users to treat the internet as a source of entertainment as much as information, and to devote more time to it; it also allows adver- tisers to develop more creative and interactive - and therefore more effective - internet ads.
The internet attracted 5.8 per cent of all ad expenditure in 2006. We expect it to attract 8.6 per cent in 2009. Its share is clearly heading well into double figures, and is already 11 per cent in Norway, 11.4 per cent in Sweden and 13.5 per cent in the UK.
Television's share of adspend has faltered before in some markets, but we now forecast its first ever sustained loss of share at a global level, from 37.8 per cent in 2006 to 37.2 per cent in 2009. This is partly because the internet is growing so much faster. But the spread of digital TV has also encouraged viewers to migrate from expensive mass-audience channels to cheap specialist channels, which has held down both prices and growth rate. TV adspend is growing at 5.1 per cent a year, compared with its average 5.5 per cent growth rate over the past ten years.
Radio is losing share in developed markets, where it is losing audience to paid services (such as satellite radio in the US) and audio over the internet. We expect its market share to fall from 8.4 per cent in 2006 to 8 per cent in 2009, although radio adspend should still grow by 3.7 per cent a year on average.
Newspapers and magazines
Newspapers and magazines are the slowest growing of the traditional media, but they are still growing at 3 per cent and 4 per cent a year respectively. We expect newspapers' share of ad expenditure to fall from 29.1 per cent in 2006 to 27.3 per cent in 2009, while magazines' share will fall from 12.9 per cent to 12.5 per cent over the same period. Magazines are holding on to more of their share because readers are less willing to substitute them with the internet: the leisurely experience of reading a magazine is very different from reading a website. Newspapers are also suffering more from the loss of classified advertising to the internet.
Cinema and outdoor
We think cinema and outdoor will be the only media apart from the internet to gain market share over the next three years. Cinema advertising continues to grow rapidly in the US, where it is still quite new. In most developed markets, cinema chains continue to construct new multiplexes and improve the cinema-going experience. We forecast cinema ad expenditure to grow by 7.8 per cent a year on average between 2006 and 2009.
Outdoor continues to gain share as contractors invest in better displays and better research. Outdoor is reaching further into the places where people consume, such as shops and bars. Its high reach means it's a good substitute for television. Outdoor is hard to avoid, yet not intrusive, and is good for simple brand communication. We expect it to grow at an average rate of 7.5 per cent a year and increase its share of the ad market from 5.5 per cent in 2006 to 5.9 per cent in 2009.
- Jonathan Barnard is the head of publications at ZenithOptimedia.
Russian adspend has grown at an average of 41 per cent a year since the beginning of the decade. It is expected to grow another 108 per cent over the next three years to 2009. Russia was the 13th-largest ad market in the world in 2006. ZenithOptimedia predicts it will be eighth in 2008, and seventh in 2009.
The 2006 spike in oil prices helped boost ad expenditure in the Middle East. This is beginning to level out but the recent proliferation of media in the region will help sustain growth. Egypt was the fastest-growing ad market in the world in 2006 - expanding by 47 per cent.
Ad expenditure in Asia-Pacific is accelerating in the run-up to the Beijing Olympics in 2008. The economies of China, India, Indonesia and Vietnam are all growing at double-digit rates; in all four markets GDP is growing very rapidly, and advertising is growing proportionally. Even Japan is emerging from the doldrums.
This article was first published on campaignlive.co.uk