Global Marketing Monitor: Weekly Market Trends (May 01, 2021)

In this note we explain how a range of factors including the notion of creative destruction is arguably more important drivers of growth in advertising than economic activity alone Those same factors help explain why we think changes to mobile device operating systems such as the changes Apple began implementing this week won39t have a noticeable impact on advertisingNew US and European economic data show diverging trends New economic data for the first quarter of 2021 came out this week In the US we saw yearoveryear nominal GDP growth of approximate 04 in real inflationadjusted terms and 23 in nominal terms Meanwhile in Europe first quarter GDP declined in real terms by around 06 although it would have slightly in nominal terms Despite these mixed amp8211 and arguably still relatively soft if improving in context of the pandemic amp8211 trends during the past week we also saw unequivocally strong growth in advertising in quarterly earnings results specifically with the digital media platforms which will lead the entire industry higher in 2021 in most markets around the worldThe world39s largest digital media owners grew by around 40 globally and by more than 30 in each of the US and Europe during the first quarter of 2021 At a global level if we add up our estimates or actual advertising outcomes for the first quarter for Google Facebook Amazon Twitter Snap and Pinterest we can see approximately 40 growth in constant currency terms Importantly this growth was not only because of an quoteasyquot comparable of 1Q20 during that period growth did slow because of early pandemicrelated effects especially in Europe but not by much collectively at a global level that group of companies39 advertising revenues rose on an annual basis by 16 in 1Q20 not far from the 22 growth rate observed in 4Q20 To illustrate further if we look at the twoyear compounded annual growth rate as an illustration of quotaveragequot growth we can still see nearly 30 annualized growth size during the first quarter of 2019Interestingly advertising trends are not that different at a regional level based on data we can see from Google and Facebook whose trends lead the broader industry given their scale Combined they posted around 38 yearoveryear growth in ad revenues globally In the US the two companies39 advertising revenues probably grew around 34 over the yearago quarter and posted a 23 CAGR over the past two years This is slightly higher than the twoyear growth rate we saw in 2019 over 2017 despite the companies39 much larger size at present Meanwhile in Europe including the Middle East and Africa for Google we can see approximately 37 growth for the two companies during the first quarter of 2021 over 1Q20 and a roughly 24 twoyear CAGR The yearago comparable was only slightly easier for Europe than the US but Europe still saw slightly faster twoyear growth in the first quarter than in 2019 relative to 2017The data illustrates that economic activity may correlate with advertising but is not necessarily causal Overall we can say that within the two regions digital advertising a grew rapidly despite tepid underlying economic conditions b grew faster in Europe than in the US on a one year or twoyear basis despite stronger economic conditions in the US c likely experienced slightly faster underlying growth in both regions than we saw before the pandemic While the data isn39t perfectly comparable amp8211 the European economic data does not include the UK whereas the advertising revenue trends do and the definitions of the region vary between companies amp8211 and share changes among media owners not captured here may explain some of what we are observing these trends may still surprise some observers without further explanation This will be especially true for those who have been taught that advertising and economic measures such as GDP are directly related While the relationship does broadly hold in many countries around the world it can be more coincidental than causal for reasons we explain hereWhat determines advertising budgets for individual marketers Let39s start by making a general observation about what drives total advertising budgets at the level of the individual marketer Over many years of looking at this topic we have observed several general ways that total advertising budgets get setRulesofthumb Some businesses amp8211 often but not only smaller ones amp8211 have a fixed budget in mind for spending on advertising A typical small business with 1 million in annual revenue plus or minus some number in any given year might allocate 10000 to advertising There are only limited efforts to correlate spending to sales because of a lack of resources to do so or because there are so many intangible variables connecting advertising with sales that can39t be quantifiedShareofrevenue Many businesses more typically large ones in stable categories with competitors who publicly report their advertising spending choices allocate companywide budgets to advertising with references to peer averagesOther businesses39 budgets for advertising are primarily set in connection with a tangible nearterm sales goal and spending on advertising will rise so long as that spending is perceived to be the driver of sales and so long as it does not exceed the incremental operating income or cash flow associated with sales growth Budgeting set solely based on quotperformancequot is likely only a small share of overall advertising activity as the larger a marketer becomes the more the strength of their brand product distribution choices competitive activity and other factors may drive business outcomes relative to advertisingMarketers may then be predisposed towards using or increasing the use of digital advertising because their business is organized around digital activities or because they perceive andor have quantified digital advertising to support business marketing or media goals better than alternatives Optimization will more generally happen within media than across it because there are massive practical challenges including workflow management and measurement issues with the latter approach relative to the formerNew competitors can be a catalyst for growth Overlapping the aforementioned drivers actions such as the introduction of new competitors to an existing category which can occur unpredictably may cause significant changes to advertising budgets over time To the extent that new competitors increase spending and threaten to take a company39s market share and to the extent that advertising is perceived as key to sustaining market share the concept of quotavoidance of lossquot can be a powerful motivator causing budgets to increase companies This will be especially relevant to marketers who budget on the quotshareofrevenuequot and in brandfocused categories more generallyEconomic change in the form of broader forms of creative destruction may be a bigger catalyst for growth With all of this backdrop arguably the most important driver of advertising to an economy relates to the concept of creative destruction Coined by economist Joseph Schumpeter it is the quotprocess of industrial mutation that continuously revolutionizes the economic structure from within incessantly destroying the old one incessantly creating a new onequot While the pandemic certainly destroyed many businesses especially in the restaurant retail and travel sectors it has concurrently led to the creation of many more especially related to ecommerce or otherwise related to decentralized business models The scale of change may have been so significant that years from now we might look back on this era as a mass genesis event of new business creation Of course we can39t forget that creative destruction will generally relate to economic growth as the innovation which leads to creative destruction should generally lead to economic growthCreative destruction may be the most important source driving advertising growth at present As new businesses are formed with different conventions related to advertising amp8211 let39s say more focused on using ecommerce or digital media than the businesses they effectively replace amp8211 and as those new businesses account for a greater share of the overall economy advertising growth rates can change dramatically Mathematically this would be true even if the typical likeforlike advertiser does not change the percentage of revenue they allocate to revenue As we have written previously focusing on data related to high levels of new business formation since the start of the pandemic to the extent these trends are global our best guess is that this is the primary factor describing driving the advertising markets in both regions at presentOther factors beyond business growth or decline may cause advertising growth to speed up or slow down Under more stable circumstances and over longer periods of time other factors should be at play in impacting growth rates for advertising for companies within individual sectors Consider whether or not an economy supports or favors monopolies oligopolies or perfect competition An economy dominated by monopolies could grow rapidly but would probably see limited advertising activities as the perceived benefits from advertising in the eyes of budget holders would probably be similarly limited An economy with oligopolies could see significant advertising if each participant in a sector has the scale to spend meaningful sums on advertising but was unable to anticipate what its competitor was doing On the other hand an economy with stable oligopolies might see less advertising if tacit collusion plays a role in budget setting And then an economy full of fragmented smaller businesses in a category operating under conditions of perfect competition will probably see some advertising but spending will likely be relatively stable and lower as a percentage of revenuesChanges in advertising growth rates may occur as an economy favors one type of organization over another To the extent that oligopolies are generally more common in mature societies amp8211 taking a share of economic activity from smaller businesses but always concerned about antitrust related actions by governments and increasingly competitive with a small group of large peers across converging industries amp8211 we could see this sort of structural trend favoring advertising as wellAll of these issues help explain why Apple39s changes to iOS and the deprecation of thirdparty cookies won39t likely impact media owner ad revenue growth rates Incidentally and tying all of the above to one of the week39s other most important issues these elements play into our thinking of the impact of Apple39s changes to iOS and more generally the deprecation of thirdparty cookies While the changes are meaningful in operational terms and similarly meaningful strategically for marketers who should use the opportunity to reassess how they connect brandbuilding creativity media and identity together we do not expect growth rates for the largest digital media owners to be observably different as a resultTo illustrate why let39s look at the different types of budgetsetting processes we have identified rulesofthumb shareofrevenue and performance and the nature of media budget allocations with optimization usually occurring within media rather than across it the role of creative destruction and the type of competition government policies favor within a given country39s economyMarketers who fit into the rulesofthumb and shareof revenue camps won39t likely alter their total advertising spending because of a change in how data gets managed Performance marketers may incrementally change spending if opportunities to drive performance diminish although it39s inaccurate to say that performance won39t be achievable in a more privacycentric world for digital advertising It may be harder to achieve but performance marketers will look for new and different signals to drive their business goals and then invest against those signals amp8211 most of which are likely to live with digital media owners On a relative basis the best signals will continue to live with the largest digital media owners just as they do today For all of those advertisers the drivers of allocations to digital media likely continues but optimization against any given goal may alter which specific media owners benefit or lose outLooking at the creative destruction dimension unless changes in digital advertising data were enough to cause the aforementioned newlyformed businesses to decline as a share of the advertising economy those marketers will similarly look to make the most of whatever data they have access to If they are performanceoriented they will find ways to optimize their budgets If they are ruleofthumb oriented they will continue to spend similarly in absolute terms going forward as wellThe natureofcompetition considerations should also continue to be favorable to digital advertising as governments around the world continue to amp8211 mostly successfully amp8211 prevent pure monopolies from forming Arguably government policies tend to have the effect of favoring the creation of oligopolies and also have the effect of causing smaller businesses to lose their share of economic activity over extended periodsOverall those outcomes probably won39t impact the underlying rapid growth in advertising spending we have been observing in the near term At a practical level comparisons between the second quarter of 2021 and the second quarter of 2020 amp8211 where Apple39s changes will primarily be made amp8211 will make interpretations of trends particularly challengingNone of this is to suggest that studying economic activity is unimportant and as we can see with the incremental sequential improvements in economic output over the course of the pandemic there has been a quotdirectionalquot relationship with advertising Moreover it is still critical to see at least a partial picture of the environment in which business operates However we need to be mindful that changes in advertising growth rates let alone allocations to individual media platforms will always depend on a much broader palette of business driversCopyright and Republished with permissionPhoto courtesy of GroupMClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillagecomMyersBizNetamp160

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Global Marketing Monitor: Weekly Market Trends (May 01, 2021)

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