Most major Wall Street firms are now predicting a recession (or saying we’re in one). Financial services firms, retailers, cable companies, and phone companies are hurting. Credit card companies are suddenly seeing a slowdown in consumer spending and an increase in delinquencies. Etc.
The dominoes are falling, but at many big media companies the current refrain is still a cheery “No recession here!” (For example, see News Corp’s (NWS) Peter Chernin’s categorical denial of weakness on Wednesday, and CBS’s Les Moonves’s similar denial yesterday.)
So, are Viacom (VIAB), Yahoo (YHOO), and Google (GOOG), et al, a safe haven? Will TV, magazine, and online advertising be immune from economic weakness?
When companies see revenue weakness, they eventually cut back on ad spending (how else to save the bottom line?) The revenue weakness comes first; the spending cuts usually lag. In the case of advertising, this is in part because companies wait to cut until they are sure the weakness isn’t a temporary blip, and in part because advertising budgets are often committed in advance.
As the CEO of NielsenConnect, Jon Mandel, said at a conference in November:
Ad spend always trails the rest of the economy, so you only see ads dropping after it’s already in the tank. The day somebody says it’s a recession, 6 months later spend goes down. Just like the sun comes up every morning.
This is certainly what happened in the last recession (although for some sectors, the falloff happened even faster).
The first signs of a slowdown appeared during the summer of 2000–similar to the current situation. Newspaper advertising–to pick a then-healthy media business–was coming off strong year and a solid Q4, but in Q1 of 2001, when the contraction officially started, it promptly plummeted 4%. Even though the contraction officially ended after 8 months, moreover, (per NBER) newspaper advertising continued to decline until nearly a year later, in Q2 2002. This will be important to remember as we go through the period where everyone starts trying to call the bottom:
Newspaper Advertising, Y/Y Change (Red = US Recession)
2000 Q1: +5.7%
2000 Q2: +6.8%
2000 Q3: +4.3%
2000 Q4: +4.1%
2001 Q1: -4.3%
2001 Q2: -8.4%
2001 Q3: -10.3%
2001 Q4: -11.9%
2002 Q1: -6.2%
2002 Q2: -1.8%
2002 Q3: +1.0%
2002 Q4: +4.1%
Source: Newspaper Association of America
The fall-off in Internet advertising in 2001 was even more severe, and the trouble there started even earlier: mid-summer for the second-tier companies, fall for the top-tier companies, and late-2000 for then-leader AOL, which had the benefit (and, later, disadvantage) of having most of its revenue in the form of long-term guaranteed deals.
Will Search Be Immune?
Google fans want to believe that search advertising will be immune from a general ad slowdown, because it’s barely advertising–it’s almost a cost of sales. We heard this argument the last time around, too, right before Yahoo blew up. Search will likely be the last form of advertising to get cut, because advertisers have direct control over their ROIs, but with less revenue there will be fewer dollars available to spend on advertising. Period.
Will Google Be Safe Because of International?
Google fans also want to believe that Google will be immune because its business is half international. Provided the rest of the world doesn’t follow the US into the tank, this will certainly help, but Google will still feel the pain (perhaps only as a slowdown in revenue growth). It also seems plausible to us that the US contagion will spread.
The Bottom Line
There’s always a chance that it will be different this time: As the judge in the Martha Stewart trial put it repeatedly, “Anything’s possible.” If history is any guide, however, we’re about to see a big slowdown in advertising spending. The only real question is “How bad is it going to get?”
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