The advertising industry has always held a special fascination because of its impact on our culture and our desires, a reality dramatized to great effect by such television series as thirtysomething and Mad Men. In the business world, the future of ad spending is an endlessly debated topic. Will new digital media kill old media, and if so, where will the ad dollars flow? What does megaconsolidation in the cable industry, powered by the merger of Comcast (CMCSA) and Time Warner (TWX), mean for ad rates?
But in one sense, the advertising business is about as static and boring as they come. The industry has never grown in scale. Looking at data since the 1920s, the U.S. advertising industry has always been about 1 percent of U.S. GDP. It’s surprisingly consistent, mostly tracking between 1 percent and 1.4 percent—and averaging 1.29 percent. This is according to DB5, a media and marketing research firm that specializes in bridging traditional and new media.
This 1.29-percent number combines advertising spending on television, radio, billboard, newspaper, magazine, trade journals, and the Internet. Total ad spending has never really outgrown the overall economy—doing nothing more than keep pace.
The only dip below 1 percent was during World War II, a time of different national priorities. Beyond that, advertising spending is a straight line. Contrast that with two American industries famously moving in opposite directions: manufacturing and finance. Both have shown shown real change over the past decades. But advertising is peculiarly flat, barely moving.
Daniel Goldstein, db5′s chief strategy officer, suggests two possible reasons for the flat line: Unlike manufacturing or financial services, companies cannot export or import advertising expenditures—by definition, it’s all domestic spending. Another reason: “Advertisers have failed to convince the client community of the value of advertising as an investment.” The ratio of sales to ad spending has remained stubbornly flat at 3.5 percent for a century. While other components of company spending—such as human resources, working capital, information technology—have fluctuated, ad spending has not.
That means the only way to expand in this business is to steal share. “Everything is a share game,” says Goldstein, as declines in older media give way to growth in newer media. It has been a continuous trend from the beginning.
New media do not increase ad spending–introduction of radio, TV, and the Internet has never, in each case, caused the ad industry to grow faster than the economy; they just shifted how the existing dollars were split. More specifically, you can see Internet spending—the latest “new medium”—is now at a 20 percent share. That’s about the same as where radio spending was prior to the TV years.
There appears to be a predictable growth rate for new media. For each “new” medium at the time—radio, television, and Internet—the growth pattern has seen similar curves. The first five years saw rapid (but declining) growth rates, and after the fifth year, growth rates steadied. The Internet is certainly disruptive, but no more disruptive than TV and radio in the past.
The next time you see a story discussing the future of ad spending, remember that its growth will just match the growth of the U.S. economy growth. The pie is not growing, as in the financial industry. The easiest way to make more money is to steal larger slices of the pie. Hence it’s no surprise to see mergers such as the recent Publicis/Omnicom deal.