The rise of non-conventional advertising 2 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Advertising is a cyclical industry; its fortunes varies with the ups and downs of the business cycle. It is also a significant industry; it forms ~1% of the world's GDP. The relationship between advertising and GDP is very close, such that one of the industry's key ratios is actually the advertising-to-GDP ratio (which is of course, ~1%). The industry was badly hit by the dot-com bust in 2001 but since the economic recovery in 2003 it has rebounded smartly. Worldwide ad spending has been growing at the rate of 5% for the last few years, outpacing GDP growth.

But this is not the story here. There is above-average advertising growth that is defined by two themes: the emerging markets and the rise of non-conventional advertising.

The first is relatively straightforward: given that the emerging markets experience higher growth rates, it is natural that for a fixed advertising/GDP ratio, the growth rates for advertising will be higher in these economies. It is projected that six developing economies (China, Russia, Indonesia, Brazil, Mexico and Poland) will be among the top-ten contributors of new ad dollars over the next few years ie. they will be the industry's growth drivers.

The second is a palpable momentum shift in advertising mindshare from the traditional forms of advertising media. The big two have always been print media (newspapers, magazines) and television, accounting for ~80% of total advertising spending. However, the rise of technology has given rise to increasingly popular alternative mediums, which are taking market share and forcing traditional media monopolies to re-strategise and develop new business divisions to hedge against their rise.

Internet advertising is the most obvious outperformer, and a proxy for its rise has been the ascendancy of Google, whose revenue is derived almost entirely from online advertising (of which its highly-popular contextual ads can be seen on my site). Its rise is facilitated by high Internet popularity and penetration (which explains its popularity in developed markets), its precision targeting (enabled by cookies), and increasing recognition by traditonal media that it complements, and not cannibalises. Comprising 4% of total in 2005, it is projected to grow to 6-7% in three years, overtaking outdoor advertising and eventually radio, generally seen as a declining medium.

Outdoor advertising (~5% market share) is seen to be on the rise in large developing economies, especially China. It is defined mainly by billboards, which is suitable for large expanses of empty space and roads. Other examples include street display boards (such as those seen at bus-stops), and large customisable LCD display panels mounted on the facades of shopping arcades. Outdoor display advertising is what Fung Choi has been diversifying into (which the market was enthusiastic about) and which SPH has invested in recently (through a stake in TOM Outdoor Media Group Limited, China's largest player in outdoor billboard advertising).

It is amazing what technology can do to redefine advertising. Product placements are now common in movies, and one of the most interesting mediums is computer games. There is now a market for ads and product placements inserted inside the scenes of computer games (PC or online), and one of the companies at the forefront of this niche, Massive Inc, which allows marketers to deliver fresh new ads into console and PC games via an online connection, has been acquired by Microsoft recently (presumably for integration with its X-Box).

Technology is what makes me optimistic about the rise of alternative forms of advertising media. Besides looking for companies with new promising advertising concepts to buy, one might also look to avoid the reverse: old-world media companies that fail to recognise the rise of these media and develop new strategies accordingly. SPH might have been stagnant these two years primarily for this reason, despite the economic recovery. Note the new moves it has made recently to capture this trend: through the abovementioned expansion into overseas outdoor advertising, through online classified advertising via ST701, and introduction of new free alternative-language (Chinese) print media.

A last look at the global market share of the various advertising media, courtesy of ZenithOptimedia (note that 2006 figures were projected):



References:
(1) Center for Media research Jun 2006: Internet Ad Spending Outpaces Traditional Media Worldwide
(2) Football World Cup to boost adspend growth in 2006: ZenithOptimedia
(3) AAF Survey of Industry Leaders on Advertising Trends 2004
(4) ABC News report May 2006: Microsoft Acquires Massive
(5) SPH corporate website announcements