Advertising puts and takes in economic uncertainty

The top story in advertising is the top story everywhere; the economic debacle that is happening in the U.S.

Advertising puts and takes in economic uncertainty

There’s no bigger story in the world right now that the erratic economic policy coming from DC and the impact it is having on the world. I’ll make the disclaimer at the top of this post, that this isn’t a political thing, though you have to be kind of an idiot, or a lying grifter, to not be clear on what’s happening. OK, got that out of my system.

Recessions are bad for advertising

This should be obvious, but it is worth re-iterating. Advertising is correlated with GDP, and if the latter goes down, so will the former. We talked on the pod with Brian Wieser, who is an expert in these issues. He told us that whereas in the past there was an idea that advertising was a leading indicator of a recession, he thinks that correlation has been broken and that it acts more in sync with the macro economy. In either case, it is still highly correlated.

Advertising usually takes more of a hit from economic uncertainty that other corporate budget items for two reasons:

1. Advertising is usually budgeted and committed on a short time frame. Even the TV “up fronts” generally only cover one season, while a lot of digital spend is “spot” or guaranteed only for short time periods. Compared to employees, plants, debt, and other commitments, advertising is the easiest to cut.

2. It is harder to see the downside of cutting ad budgets. Will revenue really decline if you skip sponsoring one season of The Voice? Rack that up with the 50% of advertising that doesn’t work, and hit the CFO’s budget.

The Covid economic blip was weird, since there was so much stimulus and the economy never really went into recession. If we go back to the last major recession in 2008, we see that the ad market took a pretty big hit. According to eMarketer, ad spend declined almost 6% in 2008 and more than 17% in 2009 (the housing crisis hit late in 2008). This compares to US GDP which only declined 2.6% that year.

And it seems pretty clear we are either already in a recession or headed that way. Here’s a tweet:

Performance advertising performs

The natural expectation in difficult economic times is for spend to shift from less performant and measurable channels to more direct channels. Or at the very least the expectation is that more measurable channels will decline less, since their ROAS can be justified.

Performance channels like Google, Meta, and the like are highly optimized marketplaces, so what should we expect to happen when the economy goes kablooey?

A demand shock is already taking place, with large Chinese firms pulling their spending. Temu and Shein are two of the largest advertisers on social, and their presence has variously been blamed on “crowding out” other advertisers. That effect is already underway:

When competitive demand goes down, prices go down, which means ROAS goes up. Right? Well the “R” in “ROAS” comes from consumers, and if they aren’t buying as much stuff then either the return on ad spend declines, or the amount you can spend profitably declines.

This leaves marketers with choices about whether to reduce their ROAS expectations in order to increase gross customer acquisition, or whether to retain a high bar. In past recessions, anecdotally it has been a great time to start new brands and gain share. Of course, this requires enough capital to survive.

While “open web” display ads have a more loosely-coupled marketplace effect (and much less China-based spending), we should expect a similar dynamic of reduced ad demand causing lower prices, while reduced consumer demand causing lower ROAS even at the higher prices. Remember, while we in the ad industry may think open web ads are “cheap” relative to TV and other channels, marketers perceive them as “expensive” relative to social.

Consumer shifts

The Covid era saw a huge boom in CTV as people were stuck in their homes. We don’t know exactly what the next year or two will do to consumer behaviors but here’s a list of possibilities off the top of my head:

• Growth in ad-supported CTV

• “Cord cutting” of paid CTV channels

• Continued growth of creator economy (no tariffs on OF!)

• Decline of “shoppable ads” given how many were affiliate/Chinese

• Decline in movie going

• Growth in podcasts as news source

• Cannibalism and roving gangs of warlords

Jobs that won’t come back

Corporate America usually takes the opportunity of a recession to trim payrolls. This time, though, we have AI waiting in the wings to replace headcount, never to return. The big tech companies have been growing without headcount increases for the past couple of years. Is that because they were bloated previously, or because they are living in a future the rest of us are about to experience?

We should expect the diffusion of AI into the enterprise to make significant headcount reductions permanent, especially in knowledge work like agencies and finance. The bad news here is that unemployment could deepen the recession as it will also dry up consumer demand. And with higher prices due to tariffs, that will put the squeeze on the consumer for the forseeable future.

Reading list

• Eric Seufert’s Mobile Dev Memo takes a look with a focus on how much of Meta’s revenue comes from APAC vs how much usage there is in APAC and finds there’s a $12.2 billion “trade deficit” at Meta among APAC advertisers (link $$)

• De minimis tariff exception also going away, targeting Temu and Shein (link)

• WPP acquires Infosum (link)

• Spotify’s new ad exchange, AI stuff, etc  ((Ari’s write-up (link))

• TTD paying for distribution of its TVOS through generous rev shares on ads (AdWeek) (link) 

• Disney making live sports and entertainment biddable, and enabling dynamic ad insertion for live events on Disney+ (link)

• Transmit to deliver ad tech for FIFA+ service (link)

• Walmart asking for 25-50% increases in retail media spend (AdWeek scoop) 

• Uber Ads partnering with…Instacart? (link) 

• TikTok deadline extended (link)