The Year Ahead For ... The City

Marcus Anselm says that although economic recovery is likely to be modest during 2010, the digital sector can again buck the trend.

Chief executives of marketing services businesses tend to be concise when expressing their views on the future. "Full of hope and full of micro-payments for content online" was just one of the responses we heard when speaking to industry leaders about their sentiments regarding 2010.

Succinct as it is, this double statement touches on two themes that will continue to shape the fortunes of the media and advertising industries this year. Given that only a few months ago financial publications were debating the very future of capitalism, following the near-collapse of the global financial system, it is unsurprising that cyclical concerns are front of mind for most.

What is perhaps more surprising is that with the UK still mired in the longest and deepest recession since World War II, the sentiment of "hope", or at least a defiant version of it, for 2010 is not uncommon among the industry people we work with. While there are some good reasons for that, we should not allow the temporary cyclical turmoil to obscure permanent structural trends that have been transforming the media and advertising industries during the recent years.

"Cautiously optimistic", "keep calm and carry on", "whatever you do, be cautious", "moving into rehabilitation", "flat and bumpy" - some of the other perspectives on 2010 we have heard. While the mood is far from exuberance or even relief, it conveys a sense of understanding of the challenges that lie ahead, and readiness for them. This in itself is a cause for optimism, especially given the stark contrast to the global economy-wide uncertainty, panic and fear that froze the hearts and markets in 2008.

There are some good reasons for the thaw in sentiment. Recently, institutions such as the International Monetary Fund and the Bank of England got busy revising their 2010 GDP forecasts upwards, to 3.1 per cent globally and 2.1 per cent in the UK.

The state of the economy matters to the media and advertising industries more than most - advertising expenditure moves elastically with GDP. Global stock markets have not only broken the fall but staged a remarkable rally: the MSCI World Index has climbed by 64 per cent since March; our indices of large-cap and mid-cap advertising and marketing services companies have risen by 57 per cent and 70 per cent respectively during the same period.

Bank lending and capital markets activity may, for good reasons, never be the same again, but, the latter at least, once paralysed, are beginning to function. Recently, Havas issued EUR350 million worth of corporate bonds, with its order book rumoured to have reached EUR1 billion within 30 minutes.

In the UK alone, more than $75 billion has been raised through equity-related issuances in the first three quarters of 2009. Companies' ability to once again issue bonds, commercial paper and equity not only allows them to finance operations and restructure debt, something we will see more of in 2010, but also to pay for mergers and acquisitions.

Recent M&A surveys show that two-thirds of respondents expect M&A to increase in their region during 2010. One only needs to look at the past few months to see that the M&A market, having fallen globally in value terms by around 33 per cent between 2007 and 2008, and then again by around 57 per cent between 2008 and the first three quarters of 2009, is once again showing signs of life.

In the marketing services arena and, more particularly, digital, transactions such as the $530 million acquisition of Razorfish by Publicis, Google's acquisition of AdMob for $750 million and Cheil's purchase of The Barbarian Group reflect ongoing structural trends within the industry that will continue to provide strategic rationale for consolidation in 2010. Further, the auction process being run at the time of writing for the disposal of Cossette demonstrates that it is not just pure digital assets attracting the attention of institutional and strategic players.

Yet, it's a long wait from the first thaw to the height of the summer. The leveraging binge of the pre-crisis years and the subsequent collapse in asset prices has left disturbing holes in American and European financial institutions' and consumers' balance sheets. These gaps will be filled by saving, not expanding loan books or spending, something the convalescent economy desperately needs.

Combine this with rising unemployment, albeit at a reducing rate, global dependence on the US consumer, surplus economies', such as China's, inability to plug the spending gap and any talk of a "V-shaped" rebound in any Western region seems extravagant.

What this all might mean for 2010 is continuing challenges, sluggish growth and slow recovery of corporate profits. The latter might make the recent stock market rallies seem excessively enthusiastic and also do little to encourage marketing departments to lavish advertising dollars upon the sector. Procurement departments will not become any easier to deal with and margins will remain under constant pressure. Flat is likely for most to become the new growth in 2010.

The demand for efficiency and effectiveness, galvanised by the downturn, is likely to accelerate the profound structural trends that continue to transform the media and advertising industries.

Accountability and transparency of metrics make online advertising particularly attractive in a downturn, especially when it is performance-based. Advertising spend forecasts vary by source but most agree that digital will be the only major medium to have grown in 2009 and will continue to increase its share in subsequent years.

One specific report suggests that the growing prominence of digital advertising and the efficiencies of its new models will facilitate a structural reduction in the overall level of advertising expenditure, forecasting that global adspend across all media will still be below its 2008 levels in 2013.

This trend will continue to inform corporate strategy within the sector. While multiples for businesses that use the word "digital" or "data analytics" to describe themselves are way off the levels seen in 2006 and 2007, such businesses are still very much top of the "wish list" of acquisition targets.

New online advertising and content revenue models, including ones involving micro-payments for content online, will continue to emerge and capture headlines in 2010 - News Corporation's move to charge users for its online content combined with rumours of it entering into an agreement with Bing for exclusive search being a good example of this. The winners will be those who continue to innovate and challenge the norm. Consumers no longer simply expect content for free, they require it to be delivered real-time to increasingly shrinking hand-held mobile devices. Tweaking existing revenue models and hoping for the best is not good enough. If the shake-up caused by the downturn is used as a catalyst to address latent structural issues, the eventual outcome of the recession may turn out to be bright.

- Marcus Anselm is a partner at Clarity.