Media Buyers Revise Global Advertising Forecasts Upwards for 2005, But Traditional Media Fears Record Internet Ad Spending Will Come at Their Expense

Philip Stone December 13, 2004

At the end of each year global traditional media powerbrokers meet in New York for two media conferences where they prognosticate about the year ahead. This year it was a mixed bag – the media buyers said 2005 would be a great year; the US media, however, predicted a tough year ahead. And there was general sentiment that as traditional media audiences continued to decrease and Internet audiences continued to increase, that the ever-increasing flow of advertising money to the Internet might drip from funds previously allocated to traditional media

Zenith Optimedia, division of French-based Publicis, set the most positive tone. It raised its 2005 global ad spend forecast to 5% from the 4.8% forecast in October, saying the 2005 spend would be the best in five years. It expects a 2005 global ad spend of $388.3 billion, rising by 5.8% in 2006 to $434.6 billion. Meanwhile, Universal McCann, which includes direct marketing expenditures within its numbers, painted an even rosier picture, forecasting a global 2005 ad spend of $553.4 billion, a 6.1 % increase over 2004.

Nice to hear, but there was a lot skepticism with the numbers. US advertising, which is about 45% of the global ad spend market, was particularly robust in 2004 because of the Olympic Games and the US elections, and the Olympics were also a factor globally. There are no similar events in 2005.  Even before the conference began Merrill Lynch forecast “traditional media investors are going to be hard pressed to get excited about revenue momentum in the various mediums in 2005.”

Presentations by major US media groups afterwards set an even more sober tone. USA Today, the US circulation leader, plans an 8% increase in advertising rates in January. The newspaper is going through a rough patch, however, since September when it increased its single copy price from 50 cents to 75 cents. Single-copy sales tumbled 12.7% in October and 13% in November. The newspaper claims to have made up those circulation losses by increasing subscription sales (its current special is now equivalent to 47 cents a copy instead of the newsstand 75 cents) and by new bulk sales to hotels. Since that means the overall circulation is now slightly higher than before – the paper feels justified in going ahead with its 8% advertising increase, but the newspaper has not said how the single-copy circulation drop has affected actual revenue.

Several other US newspapers have announced advertising increases for 2005 at a time when the US newspaper industry is still recovering from circulation-inflated scandals at several leading newspaper chains. The advertising community is not convinced of the accuracy of audited circulation figures which in turn are used to set rates and bulk sales are particularly questioned.

The Washington Post highlighted another problem facing a lot of newspapers – lower newspaper circulation perhaps because readers are going to the newspaper’s web site and reading the copy for free. The Post’s circulation is down 3.2% during the week and 2.2 % on weekends, yet advertising revenues at the newspaper’s web site grew so much in 2004 that it posted a profit for the first time.

Other newspapers had similar forecasts for their traditional media product. . The New York Times said it expected 2005 to be “challenging”, with slight increases in advertising revenues and circulation remaining stable. Dow Jones, publisher of the Wall Street Journal, said business-to-business advertising remains volatile, and technology advertising is depressed. And Gannett said it expected 2005 circulation to possibly dip although there might be slight increases in advertising.

But perhaps the most worrying forecast came from Fitch Ratings, a leading global rating agency, in its outlook released during the week. It explained that the entire range of traditional media services – newspapers, television, radio, and magazines -- have suffered  audience loss for some time. Less audience is building a long-term trend for traditional media advertising pricing pressures, limited revenue growth, and increasingly tight margins

And where is that audience going? The Internet, which on a percentage basis is by far the largest recipient of increased annual advertising. 

The Fitch warning was clear. “Advertising on the Internet, which presently only represents about 4-5% of  (US) national advertising, continues to grow at double digit rates gradually appropriating advertising dollars normally spent on traditional media.”

The US advertising market is a mirror of what can be expected elsewhere. In the US Internet advertising is already 16% above when the bubble broke in 2000, and according to TNS Media Intelligence/CMR the ad spend in 2004 is already more than 25% ahead of 2003.

And unless there is another unforeseen bubble on the horizon, all the forecasters are saying these types of increases are going to continue for the foreseeable future.

But since the Internet bubble burst in 2000, the cost of advertising in a newspaper has increased on average by 41% globally, according to Initiative Futures Worldwide. A further increase of 9.2% is forecast for 2005. Can those increases be sustained?

With Internet advertising costs actually forecast to drop slightly in 2005 because of supply and demand, the question becomes when will newspapers experience their “bubble?” The ingredients  are there – circulation dropping, advertising costs increasing.

Business experience has proven an entity cannot continue going back to the same customer and asking for rate increases.  The business needs more customers (not less as newspapers now experience) and new and better products.  Some newspapers, especially in Germany, are taking steps to increase total readership by going after readers who have previously stayed away.

The big question is whether the rest are leaving it too late?