Advertising in the digital age

The advertising services industry is sensitive to changes in economic conditions, which affect the overall level of advertising and promotional spending by clients.

Recently, the relatively high cost of main media advertising and fragmentation of consumers’ media viewing habits has prompted clients to include a greater proportion of below-the-line communication in marketing campaigns. Fragmentation of media has been driven by the emergence of digital and new media, including web-enabled mobile phones, faster and cheaper internet, iPods and podcasts, pay TV, new free-to-air channels and social networking websites like Twitter, YouTube and Facebook.

This is providing a very challenging and fragmented media environment for advertising agencies to operate in, and is leading many to reinvent themselves, moving away from their traditional roles. For example, all of the major industry players are now diversified marketing communications holding companies after acquiring complementary businesses like public relations agencies, market research firms, digital advertising agencies and web developers.

IBISWorld forecasts that the industry will generate revenue of $2.1 billion in 2011-12, representing an increase of 1.8% on the previous year. This modest recovery comes on the back of two years of revenue decline that coincided with a cyclical economic downturn and a modest recovery in the third year. During this time, clients cut advertising budgets amid weaker consumer spending, particularly on highly discretionary and big-ticket items. Over the five years through 2011-12, industry revenue is expected to grow at an average annual rate of 0.7%.

Industry outlook

Over the next five years, the industry will have to further reinvent its services to be more in line with increasing media fragmentation. This fragmentation is attributed to the declining main media usage by younger people in favour of new digital media. Clients will also increasingly use direct promotions and demand that payments for advertising services be based on a fee-for-service model rather than commissions.

IBISWorld forecasts that industry revenue will increase at an average annual rate of 2.8% over the five years through 2016-17 to reach $2.41 billion. Growth in household disposable income and expenditure will encourage greater spending on advertising by industry clients. The redirection of marketing budgets away from main media advertising to more direct forms will continue, with more advertising firms following the lead of major players by combining with public relations agencies, market research firms and other complementary advertising agencies to become one-stop shops for clients’ marketing and communications needs.

Associated with the unbundling of services by clients has been the search for specialists in each area of service, which has provided some growth for the small and newer niche or specialist agencies against the high-overhead, long-established agencies. Many small and newly established creative agencies, formed with people formerly from the larger agencies, are actively competing (and winning some accounts) against the larger and more established firms. Some of these smaller agencies can now guarantee that senior staff will be assigned to, and actually work on, clients’ accounts and are thus more responsive to clients’ needs.

Reflecting this consolidation, the number of establishments in the industry is expected to grow at an average of only 0.5% per annum over the five years through 2016-17. The return of stronger economic growth from 2010-11 is expected to lead to stronger industry revenue and employment growth. However, the industry will still have to cope with the increasing transfer of marketing expenditure to direct promotional activities. Further strong increases in pay-TV and internet advertising are also anticipated. Industry competition will remain strong and consolidation of some medium-size players is expected in order to compete with the major global players.

Digital diversity

The proliferation of digital TV channels has increased the quantity of TV advertising slots available, with the new channels generally offering more affordable rates due to smaller audiences. While this is expected to result in an increase to the total amount of advertising spending on free-to-air TV, the effect will not be dramatic due to a dilution of existing spending across a larger volume of advertising, rather than the new space being taken up entirely by fresh money.

There is a growing view among many clients that mass media advertising is a high-cost method of communicating with their customers and that the message may be diluted or lost among the myriad of other advertisements. Consumers are increasingly able to filter out advertisements, particularly by opting to access media entertainment and news online. As a result, clients are demanding that new methods and media be adopted to communicate with customers. Advertising dollars are chasing online consumers and IBISWorld estimates that spending on online advertising will rise to account for about 30% of total media advertising spending by 2015-16, up from 14% in 2008-09. However, marketing dollars will simultaneously be shifted away from traditional paid media advertising towards incorporating more direct, below-the-line methods to better reach customers.

This trend will be emphasised by the move online, with websites following the lead of Facebook and YouTube in avoiding gratuitous display advertising to keep site users happy. Advertisers will be forced to find less intrusive ways to communicate with their target market and consumers will increasingly decide what advertising they view and when. The challenge for advertisers will be to create content that their target audience will choose to view and interact with, such as viral campaigns and Facebook and smartphone applications.

In response, the major players have linked onto global advertising companies and similarly have acquired companies in the public relations, direct marketing, website development, market research, database management and related areas. This is designed to achieve the better results demanded by clients and capitalise on changes in technology to present a one-stop solutions shop to clients, especially global ones.

Consumer sentiment to consumer consumption

While consumer sentiment has recovered, this has failed to translate into household consumption, discouraging investment in the industry. Rather, consumers are choosing to either pay off debt or save their money due to rising interest rates and rising difficulty in utilising property as an investment tool. This hesitancy to consume currently appears to be slowly dissipating, but if the property market continues to falter this slow recovery in consumer expenditure will be expected to be prolonged until at least mid-2012. This more frugal environment will likely slow overall advertising expenditure in the next five years and push marketing initiatives towards discount-oriented portals, such as group buying and last-minute deal websites.

Key success factors

• Close monitoring of competition: Agencies need to be entrepreneurial and aware of what is happening in the industry, with consumers, with client’s products and with their competition. Agencies also need to be aware of which accounts are or may come under review.
• Access to niche markets: It is beneficial for the smaller operator to develop specialist skills or specialise in certain key areas. Many larger agencies now have links with companies to provide a one-stop-shop service.
• Having a loyal customer base: The development of a base of loyal clients (based on satisfaction with campaigns and the results achieved) is important so as to have a significant component of fee income from repeat work.
• Ability to effectively communicate and negotiate: The quality of strategic thinking and the strength and quality of creative ideas is vital in winning and holding accounts.
• Effective cost controls: Firms need to always provide quality service to clients (through continually delivering quality products to clients both within time and budget) and to tailor service fees to meet clients’ budget and needs.
• Marketing of differentiated products: Firms need to be able to develop differentiated campaigns for clients based on quality market research and strategic thinking.
• Use of production techniques that add value to base product(s): It is important to have a close association with all media and to have some media clout to obtain the best results for the client in its overall media spend.
• Access to highly skilled workforce: Firms need to have access to consultants with specialist strategic thinking and creative skills.