Brian Wieser: Updating 2017 Forecast To +4.4% Underlying Growth -- Pivotal Research

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We are refining our expectations for total U.S. advertising growth for 2017 and beyond.  We call for +4.4% underlying expansion this year, which is similar to the +4-5% range we published in August.  In this note we review some of the key challenges ahead, especially for TV and digital advertising, which account for the bulk of the industry's activity.  Our forecast model is included in the appendix to this report.

Advertising is facing challenges on many fronts, especially within the two largest media, digital and television.  Among the large packaged goods marketers and big brands who dominate television, we have market-share losses to smaller brands driving reduced spending for many who budget for advertising as a percentage of revenue and zero-based budgeting tactics for others.  Further, there do not seem to be many significant new categories of marketers whose constituents are large, consumer focused, differentiated themselves on the basis of awareness of attributes, budget on a share-of-voice basis and operate in nationally oriented and oligopolistic sectors.  As those categories emerged in the past, they drove up pricing for all and revenues for owners of national television properties in particular.  Increasingly fragmented and often unmeasured viewing makes it harder, if not more expensive to use television efficiently.  So, while it remains the "least inefficient" medium for many, it's difficult to see a path to growth.  We generally see ad revenue growth at national TV media outlets declining by around -2% each year going forward, excluding incremental spending associated with the Olympics, similar to our expectation for this year.

Meanwhile, digital advertising is having a moment, and not a good one.  Beyond ad quality issues, we have concerns that marketers will concern themselves more with basic trustworthiness of media owners, the capacity to use personal data going forward as well as the underlying effectiveness of digital media more generally.  Ad quality issues of viewability, brand safety, fraud and bots are problematic of course, but ultimately seem relatively manageable for marketers vs. the latter group of problems.  Facebook's recently publicized issues around mis-matches between audience data provided for planning purposes vs. data from global census bureaus and its initial inability to find ads from Russian propogandists follow on several other incidents over the past year, all of which compromise claims Facebook makes to marketers.  This has tangible implications.  A significant share of spending on advertising occurs simply because it is perceived to be effective, or because tools used to assess spending effectiveness are really used to justify a choice or refine pre-existing budgets.  Whether a collection of media and creative choices are actually the most effective is a subjective question, even in a world awash with data, which is why marketer trust matters

This has been laid bare in recent comments and actions from executives at companies as diverse as Procter & Gamble, Uber and Restoration Hardware.  P&G eliminated $140mm in digital advertising in the second quarter.  As conveyed in a lawsuit with one of its advertising agencies, Uber eliminated spending on app installs earlier this year.  Restoration Hardware eliminated most of the keywords it was buying from search engines.  In each instance, each company indicated there was no negative business impact.  While digital advertising can be incredibly effective, these three cases are very public examples of the heightened scrutiny that is being applied to digital advertising from the highest levels of marketers' organizations, whereas relatively little rigor was applied before.  On top of this, with looming regulations in Europe around the use of personal data – with few marketers fully aware of related implications, including the global fines associated with violations – and Apple's new restrictions on cookies within its Safari browsers, marketers must begin looking at new approaches to use digital media more generally.

Still, for all the risks that follow from these issues, we don't think they will observably impact digital ad growth at this time.  This is largely because performance-based marketing is increasingly common, as businesses with digital-centric business models take share (as with Dollar Shave Club vs. Gillette) and concentrate spending on digital media.  In total, we forecast +21% growth for the medium in 2017.

Additional data associated with the growth of different types of advertising including local TV, radio, outdoor, magazines, newspapers, directories and direct mail follows in our model, which accounts for the remainder of this note.  We highlight a methodological modification which we expect to refine over time: we have derived a crude estimate for app install ad spending, backing that figure out of national mass media advertising and placing it within our Direct and SMB category.  We think this revised baseline provides a better estimate of historical growth and absolute size of brand-oriented advertising vs. purer performance-based advertising budgets, although we recognize that there are still performance-based elements in our national and local groupings of spending much as there are branding elements in our direct total.

The full report including risks and disclosures can be found here:  Ad Forecast 9-25-17.pdf

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