UK online ad spend: biggest leap yet

02/10/2007

Insight & Analysis | by Danny Meadows-Klue
Today's new figures confirm the switch to online continues to accelerate in Europe’s lead media market. The internet's share of all advertising swelled to almost 15% in the first half of 2007, with further record-setting leaps in real growth. Boosted in particular by massive increases in the supply of media from social networks, and the continued switch of acquisition budgets into search, the wider media sector is starting to feel the real impact of the digital networked economy as the models that underpin many print and broadcast players get called into question.

Read on for stats on spend, analysis, forecasts and key actions...  |  Swiss adspend set for a switch  |  Mexico hits the tipping point  |  Italy: On the rise in 2006  |  UK: acceleration underway back in 2005

As Digital’s team forecast, online ad spend growth held steady at above 40% year on year, giving the largest quarters and rises in the history of the medium, and forcing the TV and magazine industry into panic, issuing statements in defence of classic channels.

• First half of 2007: £1,334.3 million
• First half of 2006: £917.2 million
• Year on year growth: 41.3%
• Online adspend market share: 14.7%

With the UK market acting as a key indicator for European online adspend behaviour, the results will boost stock prices for Continental firms looking for models of their own country’s digital economy several years down the line. The research is particularly accurate because it relies on publisher revenue declarations (under non-disclosure agreements to PricewaterhouseCoopers), and is one of the only markets in the world to include a revenue declaration from Google.

Topline growth hides turmoil
Overall the UK ad market fared well, up 3.1% to £9.1bn in the first half of 2007, but this disguised the dramatic churn and channel switching between media that has made it the most turbulent and unpleasant of times for many media owners. In press classified advertising volumes continue to haemorrhage under the combined onslaught from the CraigsList free ad model, new pay by results engines such as Oodle, disintermediation as advertisers deal direct, the small business engines within Ebay, and the inescapable Google effect. Television’s increasingly shaky ground has become apparent, with many consumer brands we spoke to now talking frankly about switching campaign budgets to the web as audience reach stumbles but, worse, ad effectiveness falls faster. Media fragmentation, marketing savvy audiences, and massive changes in consumer behaviour are all impacting faster than most media groups can hope to adapt, paving the way for polarisation in profits and digital audiences. As Digital has been predicting since 2003, when the shake-out comes it will be larger and more brutal than most classic media (or their shareholders predict).

Direct mail passes the crown
Today’s stats also confirm Digital Strategy’s forecast that online would leap over direct mail in the Spring of 2007. Direct mail’s market share continues to fall (currently 11.8%), and will suffer much deeper cuts as more customer acquisition budgets switch to Google and Yahoo. Remember that none of the cash invested in email relationship marketing (those billions of customer emails sent daily) is counted in the advertising figures because there’s no media-buy involved. Add to that the massive investment most firms have now made, or at least begun, in their own web presence, and a much starker picture emerges; marketing has gone digital, and advertising is just part of that story.

Classifieds set to beat display
• Online classified advertising: up 72% year-on-year
• Market value for period: £277.7m
• Market share within online 20.8%
• Online display advertising: up 33% year-on-year
• Market value for period: £287m
• Market share within online 21.5%

As always, recruitment tops the classified charts, but the growth in automotive and property reflects a bitter impact felt in the regional press and magazine sectors as ad dollars follow the audience eyeballs.

Display’s share may only be a fifth of all spend (21.5%), but embedded formats (such as banners and skyscrapers), all rose at a faster rate than any non-digital channel, with the interruptive out-of-banner formats (including an umbrella of rich media technologies) continuing to deliver strong performance for advertisers in the hands of a much larger digital creative community.

Given the much lower typical advertising rate for an online classified ad, the leap in spend may seem a paradox, but our tracking suggests online will edge above display in the latter part of 2007, before the 2008 arrival of IPTV ad format revenues changes the model for media yet again.

Search: unstoppable
• Search advertising: up 44% year-on-year
• Market value for period: £762.3m
• Market share within online 57.1%

The advertising switch to search is now deep in a positive feedback loop that looks unbreakable. Massive search revenues from Google and Yahoo (and expected at MSN), are fuelling product development and acquisition on a scale never before seen in media. This is recasting the media landscape, with the search tools moving beyond the browser and onto the desktop and the mobile handset.

The combination of staggering profitability, market concentration, shareholder expectations and technical integration, have created a climate for sustainable and exceptional product development. By giving customers the tools and applications they want, the mega-brands of digital are securing unstoppable growth in the supply of search advertising inventory, as well as its migration into new physical, geographic and sectoral markets.

Search isn’t just riding high on the ecommerce sector, which itself swelled to (£32bn in 2006). It’s now, finally, getting a window into brand spend as Google and Yahoo argue that the pay-per-click model is key in the brand activation that translates the awareness of a television campaign into website traffic for the TV advertiser: more slices carved out of TV budgets, and cut with precision and accountability.

The web? Just the job
Job advertising continues to be the lead category, among the ad revenues which can be pinned to certain industries. This time around, recruitment accounted for a quarter of all web advertising spend (24.7%), up 5.3 points, and started to suggest that the main period of switch can be mapped out. Although volumes will continue to migrate, some spend will stay in both newspapers and magazines, although advertising form and structure will change towards brand messages about the recruiter (supported by their own recruitment websites as well as the myriad networks of third parties).

Finance sector matures
In contrast, while the finance sector was still up almost 40%, its share slipped down 3.9 points to 11.7% moving it into third place for the first time in many years. Hold back from thinking financial advertisers are losing their enthusiasm for the web: instead, much of their growing budgets and energies are being transferred into non-advertising strategies that focus on boosting customer acquisition through search engine optimisation (SEO), and boosting conversions through improved customer journey modelling within their own sites. Recent big spenders in finance that we surveyed focussed on the limits of online advertising in a saturated market and how they needed to fuel web customer acquisition with supporting tools.

Consumer goods: still missing a trick
As for consumer goods (CPG) ad spend making only tiny progress, the audience switch to IPTV will see a stepchange in CPG advertising.

Brand motoring budgets: another tipping point
Motoring firms get it. That’s the conclusion you have to draw as automotive rises to become the second largest single category of advertising brand. With a market share of 12.5%, the sector includes classified motoring listings as well as big budget video display spend. Smarter models of integrated marketing have placed the web at the heart of the mix for many motoring clients, and the media industry has responded, with rapid product innovation from motoring magazine brands, online pureplays, as well as the Ebay and Google’s vertical strategies.

Where next?
Digital Strategy’s forecast for the full year remains at £2.95bn, as does our forecast for online’s share growing to over 22% and overtaking television before the end of Q2 2010. Other forecasts are being revised upwards to follow, with the World Advertising Research Centre (where they compile the stats for all media on behalf of the UK Advertising Association) now predicting around £2.75 billion for 2007.

The UK market continues to enjoy staggering growth, let’s not forget that the like for like growth has been over 40% every year since the doctcom recovery began. What’s particularly interesting is the way search is holding its own, dominating all other formats and becoming a media channel in its own right. The UK online ad sector acts as an indicator market for the rest of Europe, and I’ve been confident that search would reach a similarly key role across Western Europe and Scandinavia.

The explosive growth of social media is finally being effectively monetised as media owners harness behavioural and contextual ad technologies to trigger a step-change in the profitability of consumer generated content.

At Digital, we’re still bullish about the market and see no sign of slowdown in the switch to search from classic customer acquisition channels, or the switch to online in business to business marketing.

2008 will be the year when TV advertising finally hits the web, and the explosion of online TV offerings from content players and aggregators this summer, will start to deliver material audiences, and with this a new viable advertising platform.

For mobile advertising we still see 2009 as the year the industry reaches its tipping point, but wider mobile marketing (sms and digital outdoor advertising) will continue to enjoy a massive wave of growth across the second half of 2007 and all of 2008.

What should I do? Key takeouts

Advertisers: Question whether your strategic media mix reflects where your audiences place their attention. Question whether the integrated marketing models you run are designed for today or 2003. Invest in talent, training and retention of digital staff. Learn about the strategic models that can integrate your media and heavily invest in data analysts to learn exactly what works and how: put the science into marketing and create a culture of optimisation of the results.

Media owners: If not already in place, invest fast in building a digital strategy that helps protect your brand franchise. Focus investment on building sustainable product rather than protecting short term ad revenue. Train teams at every level, and invest in talent.
Offline agencies: Find strong digital partners and build integrated plans to protect your client relationships and continue delivering value. It’s too late for many to migrate to digital and hire the teams needed, so by focussing on partnerships there’s a way of protecting client relationships.

Digital agencies: Invest in talent, training and staff retention. Build strategic models for media that can work across thousands of campaigns, and focus on analytics as a way of learning exactly what works and how: put the science into marketing and optimise the results.

Investors: Continue to follow audiences and product development rather than short term profits or revenues. Review portfolios against the Web 2.0 criteria and scrutinise evidence to look for sustainable success. Continue to anticipate the impact of disruptive technologies and shocks to the supply chain, and assume that the ad models of CPM and CPC will melt into smarter currencies in the medium term. Pay particular attention to markets that will be pressured by wiki and search models.

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