Ad spending has fallen off a cliff forever. Or not.

Advertising as a percentage of GDP has fallen in the US. Is that the new normal, or will it go back up one day?

The chart above fills my little data-geek heart with joy: it has 90 years of data, the data comes from literally thousands of independent sources, and it covers a large and very well-measured market. At a 99% confidence level, I am sure that the chart is showing a genuine and important trend: US advertising spending as a percentage of GDP was highly stable in a 1.1-1.5% range between 1947 and 2007 (60 years), but in the last ten years has fallen sharply to below its historical range. It has never been this low before, except during WW2.

But will this last?

Theory #1: Yes, this is the new normal, and will persist. If you have heard of “trading analog dollars for digital dimes” you will be on the right track. Digital advertising is more targeted, more effective, more measurable, and therefore more efficient. That means advertisers don’t need to spend as much to get ad effectiveness, and therefore don’t spend as much. We can expect ad spending to stay under 1% for the future, and may even drop further as more ad dollars move to efficient digital and away from inefficient traditional ads.

Theory #2: No, this will not last. Advertisers are like kids at Christmas playing with a new toy. Digital is novel, and does have some advantages, but the rates of ad fraud, bots, ad skipping and ad blockers means that advertisers are going to need to spend much more than they are today, on a mix of both digital and traditional advertising. The 1% level is not sustainable, because digital isn’t as effective as its proponents believe.

Theory #3: Digital advertisers (especially Facebook and Google, who share 55% of digital ad spend and 2/3 of the annual growth: see chart at bottom) are doing what all new entrants do: they are coming into a market, and low-balling pricing because that’s how you gain share as a new entrant. Once digital becomes 30-40% of total ad spend, and customers are entrenched in their buying habits, they will raise prices, and we will see ad spend go back into its historical range. It is clear that advertisers are more than capable of paying 1.1-1.5% of GDP for ads over the long term, so why shouldn’t digital players (once they are sufficiently established) charge all the market can bear?

I would be interested in any thoughts on the above. Theory #1 tends to be widely held by new media/digital media types, #2 is widely held by traditional media players, and (so far as I know) Theory #3 is original to me, and hasn’t been discussed elsewhere.

I kind of like #3, but everyone loves their own babies. 🙂

REDEF_Advertising_1.3F

 

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2 responses to “Ad spending has fallen off a cliff forever. Or not.”

  1. Paul Ross (@paul_s_ross) says :

    Agree. Theory 3 will be the correct answer.

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