Advertising Makes the World Go Round

by Adonis Hoffman

You cannot pick up a business magazine or newspaper today without reading a headline about advertising. “Google Acquires Ad-Serving Network;” “Microsoft Makes Bid for Yahoo's Advertising Network"; “AOL Abandons Pay in Favor of Ad Supported Service.” And the list goes on.

For an industry that has been overlooked, overshadowed and under-appreciated, advertising is finally getting its long overdue credit. The business world has figured out what everyone in advertising has known all along: advertising makes the world go round. In 2006, over $150 billion was spent on measured media advertising. Growth of 4 percent is projected for 2008.

Advertising, after all, is something of a shadow industry, akin to the “invisible hand” Adam Smith used to describe the force that guides free market capitalism. It undergirds the core of almost every major industry and has been the economic backbone of the media business since inception. Unfortunately few have publicly attributed such prolific economic power to the advertising industry, so the folks on Madison Avenue have had to pat themselves on the back over the years.

Until recently, the advertising industry had a latent inferiority complex that deepened whenever a new technology or “new thing” got credit for driving economic growth. Other sectors have looked down on advertising for decades, treating it as a lesser-than, but necessarily tolerable, component of whatever (bigger) business they are in. But all that is changing. With private equity confirming the multiples surrounding advertising, economic respect is on the way. There’s a palpable self-confidence permeating the advertising business today, even amidst the financial and cultural problems the industry perennially faces.

But with higher stakes come higher barriers to entry. Advertising agencies themselves can no longer afford to make horizontal acquisitions. The entrance of big money players has changed the rules of the game for the foreseeable future. The signs are clear, and in the words of Fergie and the Black-Eyed Peas: “If you ain’t got no money, take your broke a** home.”

Without doubt, advertising’s ascendance owes much to the maturation of digital, interactive and broadband technologies. The advertising models driving today’s market were heretofore impossible because the media platforms were neither reliable nor well-developed. Annual spending on online advertising recently surpassed spending on radio advertising, and it is on target to bypass newspaper, magazine and other media in the not-too-distant future.

So what does all this mean and why is it important anyway?

First, paid-for consumer content could slowly die. The proliferation of ad-supported networks provides so much choice that paid content will have to be extremely rich, highly targeted or extremely narrow to demand subscriptions. Cable television remains the glaring and profitable exception with its dual revenue streams.

Second, advertisers could slowly eclipse media as arbiters and developers of non-news programming content. In an environment where consumer choice abounds and media lack leverage, advertisers can be the kings of content if they choose to exercise their market power. As more media move toward a pure-play advertising model, the big challenge for advertising creatives will be to remain relevant and part of the mix.

And third, speaking of power, at the end of the day, it is all moving slowly but surely toward the consumer who alone determines which media platform(s) to watch, support and include in their social networks. Advertisers must find new ways to keep them engaged and interactive, while at the same time respecting their privacy, tastes and individual priorities—a daunting, but not impossible challenge for the future of advertising.

(c) 2008. All rights reserved