The State of Advertising

Based on information sessions presented by Grey Global during the AEF Visiting Professor Program Summer 2004

The Advertising Agency Business

In the past fifteen years, changes in the overall business environment have drastically impacted the agency business.

1. Wall Street pressure for quarterly earnings.

2. Decline of marketers and emergence of CFO’s and lawyers as CEO’s.

3. Globalization of business.

4. Consolidation of businesses through mergers and acquisitions.

5. Decline in large new advertised categories entering the market.

Against this background, the last five years have seen an extraordinary upheaval.

The Evolution of Advertising

Fragmentation

•Average HH has 150+ channels; 17,000 magazines (5,000 consumer); 400,000 highway billboards; 30,000 plastered buses

Clutter

•330 ads per day (21 per hour)

Alienation

•65% believe they are constantly bombarded with too much advertising

•69% are interested in products that would help them skip or block marketing

The Evolution of Advertising

The death of network TV?

•Where did males 18-34 go? They are not coming back…

Online block out and media zone out

Where is the Mass Market?

All brands are targeted – even the big brands (P&G, Coke, Crest)

Decrease in traditional media (TV, magazines, newspapers) and increases in new media (cable TV, specialized magazines, online, video games, PDAs and cell phones)

Spending is expected to increase for all new media – by 2010 will represent more than traditional media.

The Disintegration of Traditional Mass Marketing Communication

1965

3

Today

97

2035

?

It’s Getting Harder and Harder to Reach Consumers

The number of commercials needed to reach 80% of U.S. women, ages 18-49

1960 2001

Prime time audience paying full attention to commercials

72% 41%

Unaided recall of one or more commercials 34% 9%

Minutes of ads per primetime hour 7 12

Number of commercials per in program break 1 4-5

Daily commercial exposures 52 97

Source: Media Dynamics

Consumers Are Less Attentive to the Messages Sent to Them

Forty-year shifts in media attentiveness / exposure: 1960- 2001

Source: CNW Research, July 2002; BusinessWeek July 12, 2004

Of Equal Importance,Consumers Are Gaining More Control

Over the Messages They Choose to Receive

In 2002, over 1 million US subscribers had Personal Video Recorders (PVR)

Percent of PVR users who skipped:— Ads during network primetime: 71%— Ads during cable primetime: 65.3%— Beer commercials: 33%— DTC ads and movie trailers: 47%— Fast Food, Credit Cards, and Network Promotional ads:

93%

Do You TiVo?

Millions more are poised to subscribe to Digital Video Recorders or DVR’s. It is estimated the number of DVR’s in operation could double to 5.8 million by end of 04:

Satellite provider Echostar offers DVR free to monthly DVR subscribers,

Comcast will offer DVR to 21 million subscribers before the end of 04, and,

Time Warner is now rolling out DVR service to 30 of 31 Cable markets (including NY and LA).

Source: Yankee Group and SG Cowen Securities

Do you TiVo?

By 2007 (within current 5 year plans) almost 30 Million HH’s (about 20% of all US Households!) will have PVRs and DVRs (10 MM Satellite, 10MM Cable and 10MM PVR’s)… which will allow them to zap through 60% of the commercials, ignoring an estimated $6.6 Billion worth of advertising:

“The DVR has the potential to blow apart the entire network (and cable) business model”

YearsYears Total # of Mags.Total # of Mags. Single Copy Single Copy SalesSales SubscriptionsSubscriptions Advtsg Advtsg

SpendingSpending

1997 7712 66.1 MM 301.2 MM $9,821

2000 8138 60.2 318.7 $12,370

2004 5340 50.8 302.0 $11,342

2007 Proj.

47.0

Compound Annual Change 1997-2003

-4.4% 0.1%

And The Consumer Magazine Business Doesn’t Look Very Robust Either…

Magazines 3%

Newspapers 4%

Internet 12%

Radio 28%

TV 53%

Source: SRI, Media Scan – Fall 2002, Age 12-64 - Weekly

The Internet Is Consuming an Ever Greater Portion of Available Media Time

Usage Measured between 6:00AM and Midnight

Source: Mediacom Canada

The Internet’s Importance in Consumers’ Lives Continues to Grow

Adults: 33%

Among teens: 56%

Among young adults: 54%

“Internet is more important

than TV”

Source: eMarketer

2000 2001 2002 2003 2004

North America 7,600 13,500` 20,385 28,585 38,002

Asia/Pacific 5,825 12,565 20,125 30,931 49,607

Europe 1,505 5,964 11,341 18,690 26,810

Latin America 139 562 1,174 2,018 3,208

TOTAL 15,069 32,591 53,025 80,224 117,627

Broadband and Wireless Growth Means Even Greater Internet Usage In The Future.

Broadband households worldwide by region (000)

One-Way Versus Two-Way Communication

McKinsey has estimated that in 2001, 90% of marketing dollars were allocated to essentially “one-way” forms of communication, while the remaining 10% went to “two-way”, more direct / interactive forms of communications

But by 2005, McKinsey estimates that only 51% of marketing dollars will go to “one-way” communication, while the percent of marketing dollars going to 'two-way' communication will have shot up from 10% to 49%

And then there is measurement….

Marketers are often still using the same old tools – tools like demographics and CPM.

What they should be doing is using measurable consumer-behavior and the profitability of high-value consumer-segments to determine marketing programs.

Awareness/Differentiation Awareness/DifferentiationPlusLoyalty/RetentionRetail SupportFrequency of PurchaseCRMAdvocacy/ViralDialogTransaction

From To

But There Are a Few Smart Marketers…

Smart marketers increasingly have multiple Marcom objectives

Marketers Are Becoming More Concerned With Loyalty and Profitability

How Many Buyers

How OftenDo They Buy

What DoThey Pay

Awareness/Differentiation

Loyalty Profitability

From To

New Marketing Models are Emerging

Source: McKinsey Presentation to Mars

Selling a single product to as many customers as possible

Treating all customers in the same way

Over-reliance on TV and duplicated spending on awareness building

Using the Internet for TV or print-like advertising

Sporadic and anecdotal customer insight or feedback

Oversimplified marketing objectives (circa 1950)

Allocation models using CPM measures

Selling a single customer as many products as possible

Differentiating based on customer value (high vs. low) and relationship type (known vs. unknown)

Specific roles for each marketing communication channel – no more duplication

Using the Internet as a relationship marketing channel

Structured information capture and use of learning

±10 granular marketing objectives across multiple marketing discipline

Allocation models built on holistic marketing facts and messy reality

Where Is It Going???

ROI

ROI

ROI

Because of These Changes, the Agency Business Itself Has Changed Drastically…

Was network TV-centric… Now splintered with hundreds of advertiser options/consumer choices

Was agency-centric… Now most income from direct, healthcare, interactive, promotion

Was a business valued for its contribution to client business… Now a “commodity” low on list vs. distribution/promotion/pricing

Was a business in which the CEO was deeply involved… Now CMO and Procurement rule relationship

Was a business that used consumer research to quantify differences… Now one Brit planner tells a story

Was a business where you had months to create an idea… Now you get days

Was 15% commission… Now all cost-plus fee, negotiated with procurement

Was a business filled with talent… Now starved for talent