We knew it was going to be bad, just maybe not this bad.
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Robert J. Coen, one of the leading forecasters of advertising spending, recently reduced his expectations for ad spending growth in the U.S. to only 2.5% in 2001, down from his forecast a year ago of 6.5% growth. If borne out, the 2.5% figure would be one of the lowest annual increases in ad spending in a decade.
In making his forecasts, Coen, senior vice president and director of forecasting at media services company
, looks at many of the same indicators that Wall Street does in making his reports, most notably leading economists' forecasts for GDP growth.
Here, Coen explains why, given the economic conditions, he's not that surprised he's had to decrease his forecast so significantly. He also discusses the relative performance this year of different media categories from network television to the Internet.
TSC: A 6.5% to a 2.5% forecast is a pretty big downgrade. What prompted you to lower your estimates and could you forecast the number even lower?
When I forecast a 6.5% increase in June 2000, we were right in the middle of a boom in advertising and the economy. The economic consensus at that time was that we would have some moderation in growth in 2001, but that it would continue to be a healthy economy. In fact, last June, the real growth estimates were for 3.3%.
Then, when we got to December, there were more signs of sluggishness, although at that time it was primarily attributed to inventory buildup that had to be liquidated. And the economic consensus came down to 3%. With those signs, it was logical to be a little more cautious for the advertising spending forecast for 2001. That's when I came down to 5.8%.
What's unfolded since then has just been terrible. The economic consensus for 2001 has plummeted.
TSC: What indicators do you look at besides GDP growth?
There are a number of them, but the handiest source is the blue-chip indicator, a monthly survey of all of the major economists. It's their consensus for what they foresee for the upcoming year, and it keeps changing.
I also look at the real GDP growth, the inflation rate, production, corporate profits -- all of the different indicators in the economy that would be stimulative for advertising growth. They have been coming down considerably as more information unfolds.
And these dot-commers, these brands that have been growing and growing, were such a booming source of ad demand throughout 1999 and 2000. They even got to the point where they were almost as big a user of traditional advertising as the automobile industry. And it began to slow. Instead of having quarter-over-quarter increases of 300% or 400%, they were coming down to 75%-100%. We didn't know that the fourth quarter was going to come in as bad as it did until we started getting reports in 2001 which indicated that this category was beginning to collapse. And it's been getting worse ever since.
TSC: Is this one of the lowest ad spending projections you have ever seen?
In 1991 we had negative ad growth, and there were probably years back in history where there was nominal ad growth of 1%-2%. It's not the lowest but it is the lowest that we have seen in the last decade or so.
TSC: Is it unusual for you to lower your forecast and is it possible you might lower it yet again?
It's always possible that I'll lower it again, because when the year is all over, I'll report what I think is the actual, and if it really falls apart in the second half of the year, it'll have to be lowered again.
It's not unusual for me to lower a forecast. In fact, I'm continuously revising figures. It's practically axiomatic that I'm going to have to revise them.
TSC: Wall Street is hoping that the Federal Reserve rate cuts since January will stimulate the economy. Do you think these rate cuts will have any effect on ad spending?
Eventually they'll have some impact, but that's going to take a while because the effects of the cuts haven't shown up as clearly identifiable in the economy. They have to do something for the economy first, and then there will be a lag between the economy brightening and the advertising brightening.
Maybe it's about to come flying around the corner, but it'll still be a few months before it impacts the advertising trend.
TSC: I see that you project network and spot television advertising to do quite poorly, with network TV ad spending expected to decrease 2.5% and spot TV advertising expected to decrease 6%. On the other hand, you expect cable TV advertising to rise 8% this year and Internet ad spending to grow 10%. Why are these media faring so differently?
Network TV is actually doing relatively worse than we thought. We thought it would be flat. In the forecast I made in December, I expected it to be up 1%. It's traditionally going to be weaker in a year where you don't have the Olympics or a lot of special events, and we expected that. We've seen signs, particularly with this demise of the dot-coms, to make us believe that it is going to be a little bit worse than we thought.
Spot TV is even more affected. In odd-numbered years it goes down. In even-numbered years, when you've got a lot of political activity and big campaign funds, it goes up. When the numbers came in for the year 2000, we saw humongous increases, and all the money that they were spending on some of those contests, well, now we've got to pay for that. Those things tip up and then they tip down.
Cable hasn't done that great. We thought cable would be up 12.5% -- they were growing 20% a year and taking away audience from the networks, and the number of cable operators was growing. Now they are offering much lower unit prices. So relatively speaking, the guys who are running those cable networks are probably hurting worse than the ones that are running the broadcast networks. The total of the pie may have gone up, but there are more operators splitting it up, and they had previously planned and expected they were going to have a lot more to split up.
In terms of the Internet, we had looked for 60% increases this year, and we've just revised that down to 10%. It had increased 125% the year before, and 200% the year before that. It was something everyone was getting into and trying. That 10% could disappear very easily, too.
The money that was spent in recent years was primarily for banner ads, and most of it was on
. Revenue was doubling every year -- even more than doubling. That began to falter a bit. It wasn't immediately evident because it was on such a steep slope that by the time you looked at the fourth quarter of 2000 vs. the fourth quarter of 1999, it was at a level quite a bit above it. You can see that it is starting to come down and those numbers suggest that by the end of the year that Yahoo's revenues vs. the prior years are going to be off.
TSC: Are there any other media you want to single out and discuss?
Well, all of the mass consumer media are hurt by the problems that the dot-coms have created by just disappearing. Magazines were getting a lot of revenue from that, and so were the newspapers and radio. Dot-coms had accounted for 5% to 10% of revenue at a lot of these media. This loss of business has forced advertisers to lower their inventory prices.
TSC: What do you foresee for the future of the Internet?
As this year unfolds, the relative numbers are going to become less attractive. In the first quarter, Internet ad spending might have risen 25%, 30%, and that is going to start shrinking as the year unfolds. The established companies, the ones with good products and services to offer, are going to see a fair amount of revenue and eventually will get out of this valley.
If the technology could be developed to make the Internet a more viable medium, that would help. In its current form, it's not a very good medium for running ads. Most of the stuff that's called Internet ads, I question whether it's traditional advertising meant to persuade masses of people to your opinion. It's more like a signpost.
TSC: What's your outlook for 2002?
Right now, it's 5% growth, but that's like my 6.5% forecast for 2001 last June. When you make a forecast that far in advance, it's bound to change. The main reason why I began making these forecasts 26 years ago was because people in the industry asked me for some kind of a benchmark that they could start thinking about.
The consensus for the economy is that GDP will be up about 5% in 2002, and we'll probably see advertising come close to matching the economy. On top of that, the Winter Olympics will be a stimulus, and everyone in the House of Representatives will be up for reelection in 2002. It looks like there are a lot of reasons to be fairly optimistic about 2002, but it wouldn't be prudent to expect everything to go through the ceiling.