- Agencies boost guidance
- Privacy rules thwart digital platforms
Something strange is happening in the world of advertising. On the one hand, the corporate universe is clearly cutting back marketing budgets. This is obvious to anyone who follows the performance of tech titans. Last month Facebook parent Meta (US:META) reported its first decline in quarterly revenue, and warned that “we seem to have entered an economic downturn that will have a broad impact on the digital advertising business”.
Snapchat owner Snap (US:SNAP) missed its earnings target the week before, causing shares to drop by a quarter, while advertising revenues at Twitter (US:TWTR) have remained largely flat, despite Wall Street expecting growth of over 10 per cent.
Amidst the carnage, however, the world’s biggest advertising agencies are looking jolly. WPP (WPP), Publicis (FR:PUB), Omnicom (US:OMC) and Interpublic (US:IPG) have all upped their market guidance in recent weeks, off the back of strong results. WPP was particularly positive, having secured $3.4bn (£2.8bn) of new billings in the first half of 2022 compared with $2.9bn a year ago, although it made no commitment to optimism beyond this year.
So why the discrepancy? One possible explanation relates to timing. Chris Beauchamp, chief market analyst at IG, said "inertia" could be the cause. “Facebook advertising is viewed as something you can switch on and off relatively quickly, whereas advertising campaigns tend to take longer to change and move around.”
However, this does not fully explain why advertising giants are feeling confident enough to upgrade their full-year guidance. Moreover, Nick Waters, chief executive of marketing consultancy Ebiquity (EBQ), said the performance of advertising holding companies tends to be a two-quarter leading indicator for the economy as a whole.
It seems, therefore, that something about agencies – with their lingering air of Mad Men glamour and powerful client bases – is proving more resilient than Big Tech’s ad factory.
Online privacy rules could be a contributory factor. Marketing products online is increasingly difficult, as Apple (US:AAPL) now forces app developers to get permission from users before tracking them and serving them personalised ads. The situation is expected to get even trickier when Google bans third-party cookies from its Chrome browser in 2024, following similar moves by Safari and Firefox.
These changes are a major headache for tech platforms such as Facebook. Waters said small businesses that use Facebook for marketing have been experiencing lower conversion rates and higher cost per conversion. As macro pressures worsen, therefore, the incentives for such companies to keep advertising products on giant tech platforms seem to be waning.
Ian Whittaker, an advertising consultant and former equities analyst, went as far as to argue that the drop in ad spend was a platform-specific problem, as opposed to a reflection of wider economic difficulties.
Only time will tell. However, agencies tend to deal with bigger advertisers than Facebook, the latter famously targeting small- and medium-sized businesses. Therefore, their client base should prove more resilient during a recession. “Going into a downturn, the very smartest advertisers will hold their nerve and keep spending,” said Sam Tomlinson, media & entertainment lead at PwC.
History shows this to be true. According to an article published by the Institute of Chartered Accountants, in the 2008 recession advertising expenditure dropped by 13 per cent. “Yet statistics showed 3.5 times more brand visibility for companies and organisations that maintained their marketing output.”
In an attempt to keep up with Big Tech, the likes of WPP have funnelled huge amounts of money into digital transformation in recent years. This has borne fruit: in 2021, WPP’s digital advertising revenues surged by 32 per cent and digital advertising on pure-play platforms now represents over two-thirds of the group’s total advertising sales.
However, creative flair – often overlooked in a world of data analytics and conversion rates – could have a resurgence as digital marketing gets harder. “Advertising has moved too far away from the broadcast channels,” said Ebiquity’s Nick Waters. However, he has “started to notice…that the pendulum might be swinging a bit more towards creativity”.
There are hints of change in company announcements. S4 Capital (SFOR) – the new brainchild of Sir Martin Sorrell – recently got into difficulty because staff costs in its creative department had started to spiral. WPP appointed a ‘chief creative officer’ last year, and Publicis said in July that creative activity had recorded “one of its best quarterly performances”, particularly in the automotive and financial services sectors.
As neatly summarised by Videndum (VID) – which supplies cameras and lighting equipment to the broadcast and entertainment industries – the content creation market is “larger and growing faster than [it was] pre-pandemic”.
It’s far from certain that advertising agencies will still be quite as chipper six months down the line. Tellingly, WPP refrained from providing guidance for 2023 in its latest set of results, and its share price suggests the market is not optimistic. However, amidst the doom and gloom of Silicon Valley, some of the successors of Mad Men could prove hardier than suspected.
