Tech

Why did advertising sales fall before the economic downturn?

Not every truism is true, but for the advertising industry, there is one that is quite true: when the economy goes down, the advertising market goes first.

The idea behind this is pretty simple. If a company needs to cut costs, it’s much easier to get rid of advertising budgets than anything else, like workers. So people in the media have been trained to expect advertising dollars to disappear after the economic turmoil. See, for example, Great Recession of 2008when advertising spending fell by double digits next year. Or in the spring of 2020, when advertising dollars completely stopped for a few weeks while the world struggled to deal with the pandemic.

But now we are seeing something different: for most of this year, growth in advertising spending has slowed or stalled in various industries and media. You can see very obvious examples of this in public companies such as Snap, which recently laid off 20 percent of its staff. and blamed the advertising market, which “slowed down significantly“. Or you can ask someone who runs a private media company informally how they are doing. “I’m glad I’m running a private company” that doesn’t have to publish its results, one of them told me this week.

But as long as the advertising market is faltering, the economy as a whole is doing just fine. Or at least mixed.

Yes, inflation is rising, the stock market is falling, and dire warnings about the future. On the other hand, the unemployment rate is quite normal, and even if consumers spend less than at the height of the pandemic, they are still spending.

What is the reason for the shutdown and what will happen next? I asked people in the media and advertising companies. They all agree that something unusual has happened. None of them agree with the cause.

So let’s look at some of the arguments:

Things are really bad, even if others do not see it. And they will get worse. So it’s better to stop wasting now.

This theory makes sense and is a bit counter-intuitive because it requires you to believe that the people in charge of buying ads are taking the initiative, not reacting.

But if you’re up for it: If your business is selling expensive items that have become much more expensive due to inflation, such as cars, or items that are much harder to make or obtain due to supply chain issues, such as phones and other consumer goods. electronics – your business is already under pressure. Either you find it hard to sell what you have, or you still can’t get it in stock. So why spend money advertising all this now?

“They say, ‘We can’t get enough product on the shelf, so why spend money now to increase demand if we don’t have supply?’ one publisher told me this week before adding hopefully, “Maybe they’ll spend more in the fourth quarter.”

Blame Apple. Or TikTok. Or crypto. Or VK.

This suits many people in the media, in part because they can blame big tech companies or Tech-Funded Exuberance or both. But the point is, someone else is to blame.

If you want, you can accuse Apple of rewriting the digital ad tracking rules that have made traditional digital advertising a lot more difficult and expensive, and really hurt Facebook and Snap’s ad business in particular. Another culprit could be TikTok, which is guilty of two different sins: on the one hand, it takes advertising money from other digital outlets – in April, the company should have seen jump in ad revenue to $12 billion in 2022, up from $4 billion last year. And it’s also depressing the overall ad market because it inspired two of its main competitors, Facebook and YouTube, to create TikTok clones that currently have high engagement but minimal ads.

You can also just point out that the most recent tech bubble has burst: the moment of cryptocurrencies is over for now, so the flood of advertising from companies like OpenSea and Crypto.com has slowed down to a bare minimum. The same goes for the many venture capital-backed startups that have been told to grow as fast as possible and not worry about the runway—the money to run their companies—because they could always raise more when they needed to. . Now the venture capital market has stalled, cash is king, and companies that have decided they can sell their way to success are looking for other ways to survive.

This is a structural problem.

This one involves blaming the media business, at least in part, which is why it’s much less popular with the people I spoke to. But it’s definitely something to think about: the way people buy ads, and the kind of ads they buy, has changed over the last decade-plus. And that makes the advertising business much more susceptible to fast reversals.

In the old days, ads were often bought long before they were launched. The TV industry, for example, has built a whole calendar around pre-sales ads: spring “advancements” when TV networks showcase programs they planned to air next year and try to convince media buyers to lock in the annual cost. promotional purchases.

But now much of the advertising spend has moved to the digital environment, where the big platforms and small players emphasize the ease of buying inventory when the buyer wants it, which also gives buyers plenty of options. No buy advertising.

Publishers used to expect at least half of their revenue to come from annual media purchases, but that figure has been steadily declining for years, former Complex Networks CEO Rich Antoniello told me. “Now you buy it quarterly or monthly. And you buy Facebook and Google campaign after campaign, which can last for even shorter periods.

This flexibility has worked great for publishers when things have been going well—for example, in the last couple of years, when everyone was buying everything online and had extra money to fund those purchases. Now we see the other side.

Relax. It’s just a hangover.

This is by far the most optimistic argument, and I hear it almost as often as a vague opinion: yes, things are slower now than they have been in the last two years. But for the past two years, they have been insanely erratic.

“I’m talking about it more like normalization,” says Keith Scott-Dawkins, global director of business intelligence at GroupM, the ad giant. She provided a helpful chart that tracks digital companies’ advertising revenue and spending to explain her argument: it looks like a recession because it’s following a wild boom:

So yes, the chart pointing down and to the right expresses optimism in today’s media business. But it also speaks to how historically strange the past two years have been.

Again, I don’t know which of these arguments is correct, although I expect a possible and unsatisfactory answer to be “all of the above”, at least a little.

Either way, it will have the same effect: Fewer ad dollars for the media means less revenue, which means they’ll either have to cut back on people and products—what you watch, listen to, and read every day—or ask users to make up for the slack by paying for it out of your own pocket.


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