Online advertising sustains ad industry size despite economic downturn

October 9, 2008
by Alex Hoye

Online outshines offline

Signs of the credit crunch become evident when you compare online growth to the same period in 2007. The 06-07 growth of 41.3% (£417.1m) is larger than the 07-08 growth for the same period of 21% (£348.2m). This can partly be attributed to the economic downturn, but also the maturing of the online advertising industry, with mostly SME late starters to jump aboard the online advertising bandwagon.

If you also compare this to the change in market share of offline advertising mediums there is clear evidence that online advertising is sustaining the size of the advertising industry. The diagram below illustrates this perfectly with the overall advertising market falling in size by 0.7%, and the only offline advertising format showing any growth over the same period being the barely relevant cinema.

To me, the most notable point is that H2 2008 will be an important watershed in advertising history as online advertising will likely overtake press display (£1737.7m) due to a whipsaw of what I anticipate to be another decline in print advertising versus a more resilient trend in online. With that, only television (£1951.8m) remains as an individual offline format, which online will almost certainly surpass in 2009. The rise to dominance of online is likely driven by the economic downturn as marketers strive for direct return and accountability as oppose to brand awareness offered by offline press display and television.

Emma Jenkins, Head of Interactive Marketing at Procter & Gamble supports this suggesting “I think you’ll see some people moving their money away from marketing streams that are less accountable, and moving into digital areas – search is a great example of that… in terms of capping the dollars you spend but making sure that every dollar is absolutely accountable.”

Search continues to dominate online spend

Emma’s mention of search is pertinent considering the continuing domination of search in the online advertising sector breakdown. Paid search alone now accounts for 58.3% of online advertising spend a slight increase on the 57.1% share in 2007. This demonstrates, as Emma says, the accountability of search and the value that it holds during an economic downturn.

Display growth driven by rich media formats

Another point of note in the online advertising sector breakdown was the continued increase in the Banners / Embedded advertising formats from 15.3% in 2007 to 16.5% in 2008. This increase can mostly be attributed to a growth in online video ad formats thanks to the growth in broadband access. The release of improvements for developers and bandwidth with Flash 10 and Microsoft’s Silverlight will likely see this trend accelerate. Interestingly all other display formats have actually fallen in share of online advertising spend in the 07-08 period. Amongst the other categories online classified advertising showed strong growth particularly in the recruitment sector with 37.1% growth of recruitment classifieds. I expect this figure to fall in H2 2008 with only 29% of companies planning to hire staff between July and September 2008 (KPMG).

Unexpected industry results

The vertical industry stats show some unexpected movers and shakers which I suspect will look very different in the H2 figures.

Recruitment again came out on top as well as being the share point winner increasing 8.2 points in share to 32.9% from 24.7% in 2007 . Unexpectedly property has the second biggest share point growth with a 5.4 point increase meaning it overtook finance and technology. Like recruitment, property is unlikely to hold strong in H2 2008 with the average mortgage rate rising from 5.88% in August 2007 to 6.1% in August 2008, suggesting we will see fewer properties on the market. Both of these sectors were largely growing through the increasing spend in online classified adverts. The increase in online classified adverts has most likely come as a direct transfer of budgets from offline press classifieds (-9.9% share of advertising market) to online classifieds.

One of the less surprising results is the decline in online advertising share of finance. This industry sector came out as the biggest share point loser at -5.5 points. This is predictable with the financial sector being the first hit by the credit crunch. Automotive again showed steady growth maintaining second position with a 0.5% share point increase. Technology did drop a place to 4th with a slight share point decrease, however, it must be remembered this is a smaller slice of a larger pie, and they were also the largest spender on online display. As you can see all other industry sectors showed a significant drop in market share size. The only exception to this was the government sector, which shows that perhaps government organisations have taken on board criticism for a slow take up of advertising technology.

Overall the industry sectors highlight some very odd trends that are unexpected considering the current economic situation. However, perhaps the sectors most under threat from the credit crunch are trying to make advertising more accountable by spending more online than offline, as suggested by the decrease in spend on offline advertising formats.

What next?

Looking ahead to H2 2008 it looks likely there will be a major shakeup in the share of specific industry sectors of online advertising spend. Many of the major players in terms of online advertising spend looking likely to be hit hard as the economy moves into a recession. We could possibly see technology and automotive companies taking a bigger slice of the pie as the recruitment and property industries are hit hard in the second half of 2008.

Moving into 2009 it looks more and more likely that we will see online advertising overtaking press display, and possibly even television advertising. This could be further accelerated by the economic downturn, as marketers watch the pennies and seek measurable marketing online. The elimination of limitations for display advertising online thanks to the increase in broadband take up and development in online rich media technology may also accelerate this growth in overtaking press display. A more interesting development will be seeing how the increased usage of online on demand television such as the BBC iPlayer and the advancement of project Kangaroo affects offline television advertising spend.