Five worst industries for 2009 (4)

Check out, too, the first three installments of this post – on retailing, private equity, and newspaper publishing.


4. Advertising

Last year should have represented the leading edge of a terrible stretch for the advertising industry, but several firms benefited from one-off events like the Beijing Olympics and the November elections in the US. Few big-ticket events present themselves this year, and you should expect the advertising industry to experience its typical swoon amid a recessionary economy.

Analyzing the advertising industry is complicated these days by the rise of Google (NASDAQ:GOOG), which is an advertising firm posing as a computer services company. Google is a classic disruptive presence in the economy, destroying old business models even as it creates new ones, and its innovative approach to advertising will continue to apply pressure to traditional advertising. But Google’s presence puts greater pressure on the distribution of ad content; its challenge is felt more by newspapers, magazines, telephone directories, and the like, and is part of a fundamental, generational shift taking place in advertising that is reorienting the way companies think about how to reach an audience.

Just as one example among many, consider the role afternoon soap operas have played over several generations. As noted by Frank Lidz over at Portfolio.com, soaps are TV’s “quintessential advertising vehicle, and the birthplace of product placement,” but they are also rapidly declining in viewership and simply don’t generate the ad revenue they used to. Viewers are leaving the soaps, and ads follow the viewers. When we speak of broad generational changes in media, this is a classic case. Soap operas inhabit a world filled with Reader’s Digests and telephone directories…none of this stuff seems very relevant in a landscape shaped by the iPhone, You Tube, and Facebook.

But one component of this shift does impact the long-term health of the advertising industry. As advertising dollars transition into new media, the content of ads is changing. Today, there is less demand for the creatively intense ad campaign. Placement trumps creativity. For many buyers of advertising, a well-placed ad is worth much more than a catchy ad. The focus going forward is not just on “eyeballs,” but the right sets of eyeballs. Website analytics provide advertisers a kind of return on investment only dreamed of under the old Nielsen regime of television ratings, which were, at best, speculative. For the firm with a handle on analytics, this new era can drive even greater profits, but these profits will have little to do with the ad campaign as traditionally conceived.


The Survivors

This leads me to think that the survivors in the ad industry are companies that are large and diversified enough to have in-house analytical skill – firms that not only develop and design ads, but can also can advise as to placement and strategy, i.e., the comprehensive marketing company. Because of prior shake-outs in the industry, most of today’s top ad firms are modeled – at least, ideally – on this comprehensive point of service. Companies like Omnicom (NYSE:OMC) and WPP Group (WPP.LSE) provide traditional ad services, but can also address branding, public relations, direct marketing, field marketing, in-store design, media planning and buying, product placement, etc. Google might control the new distribution channels for advertising, but the giants of the advertising space have successfully established themselves as the consultants who develop the goods. These skills are going to become more important, not less, over time, particularly when companies operate outside their home markets or need a comprehensive approach to multiple media outlets.

Still, 2009 will not be a good year in the advertising industry. The survivors, however, should be attractively priced when the economy rebounds in a year or so. It’s too early, even with the sharp decline in the shares of several ad firms, to be bullish. Watch and wait.