The great divergence: Why is the ad market sending out such mixed signals?

One of the greatest debates at the moment is the divergence in messaging and performance coming from the different advertising platforms and groups from the first-half results season.

On the one hand, groups such as Meta, Snap and YouTube painted a picture of a slowing macroeconomic environment that is affecting their advertising business.

While other factors, especially the impact of Apple’s privacy changes, have also been mentioned, the macro factor has been cited as the key cause of the problems. Given the UK market is about 70% digital, one of the world’s most advanced, that messaging has particular relevance here.

On the other hand, all the major agency groups have raised their full-year top-line guidance, barring Dentsu (which guided to the upper end of its range).

Out of home is doing spectacularly well. The US broadcasters have reported that demand generally remains strong, as did pricing in the Upfronts season. The European broadcasters’ Q2 ad performance was not great but it wasn’t bad either, and it was in the light of tough comps, Meanwhile, the likes of ITV are well above 2019 levels. Even The New York Times reported that, while its digital ad revenues had fallen 2% in Q2, its print revenue were up 15%.

So what is happening?

One reason cited recently is advertisers are taking money out of activities such as direct response in response to macro pressures because it is the spending that drives an immediate response.

In this argument, the cuts will come to brand activity eventually, it is only a matter of time. It is also an outlook that, for the online platforms, is optimistic as it suggests the issues are temporary.

I am not convinced by this. Consumers are still spending so it would seem unusual for firms to cut now for the fear of what may happen to the consumer in a few months.

Looking at the results from major advertisers, it is clear that most are still prepared to spend. Nearly all the major FMCG groups raised top-line off the back of being able to push through better than expected price increases. Sectors such as airlines and entertainment are coming back.

That is not to say there is not weakness. Direct-to-consumer firms, and particularly those businesses that received massive funding – and increases in valuation – in the pandemic days are pulling back.

However, corporate results generally are holding up much better than expected. It is also worth mentioning that macroeconomic weakness was cited as a factor by several of the companies back at their Q3 2021 results when we didn’t have the issues we do now.

Instead, I suspect a few things may be happening. At the margins, there is probably an impact from what is happening in the Ukraine, with some advertisers reluctant to spend, particularly on social media sites. The main issues lie elsewhere.

One possible factor is small and medium businesses (SMBs) pulling back on advertising spending. The Financial Times reported recently that, for many SMBs, there is greater uncertainty over how effective their advertising is, due to the Apple iOS privacy changes, and that, while SMBs were willing to allow some grace to see how much falling sales were due to the macro side of things, that has now changed as they realise the pullback spending from some of their customers.

That would go some way to explaining the situation. Google and Meta have emphasised many times in the past that their main revenue base is SMBs (the figure generally stated is that 85% of ad spending on the platforms come from non-traditional advertisers) who tend not to be customers of the agencies or, in many cases, sectors such as broadcasters and, to some degree, out of home. SMBs also probably do not have the depth nor pricing power of major advertisers.

However, there is probably a more structurally negative message that lies in here, around growing doubts over the effectiveness of a number of the online platforms. The likes of Meta and Snap, as well as YouTube, are having difficulties adapting to the new situation and providing accurate measurement and targeting metrics and this has been noticed by advertisers. The fact they have been so vocal about this may have paradoxically raised questions in advertisers’ minds about the platforms’ effectiveness.

If that is the case, then we are not just in store for a “cyclical” suppression of revenue growth but, potentially, a period of longer subdued growth for these names. If that is true, it not only raises questions about future revenue growth but also the vulnerability of some of the platforms’ advertising revenues to capture from other players. The advertising space might be about to get very interesting indeed. 

Ian Whittaker is founder and managing director of Liberty Sky Advisors

He writes a regular column for Campaign about the advertising landscape from a financial standpoint. For further insights and articles, subscribe at: https://ianwhittakermedia.com/