The destruction of creatives

It’s a simple equation - the better the economic growth, the more advertising. But 2020 saw something extraordinary happen: during the greatest recession since 1945, the ratio of advertising spending relative to US GDP actually went up1. How come, and given gangbuster economic growth in 2021, where do we go from here? Shouldn’t we be piling into value plays like advertising agencies, which are cheap and will benefit from any economic recovery?

Well, up to a point perhaps. We agree that the next few years will see a booming advertising market, not just in the US but worldwide. On our numbers, US advertising is likely to grow at a compound rate of over double digits between 2021 and 20252. But this won’t herald a return to the era of “Mad Men” and the two-martini lunch, more’s the pity. The truth is a bit more prosaic.

That growth in US advertising is despite a projected fall in the numbers for radio, newspapers and magazines. TV might escape with being flat. There’s even a smidgeon of growth in outdoor advertising. But almost all the growth is coming from digital and digital only. Who are the winners? Not agencies, but Amazon, Alphabet and Facebook. We have the combined market share of the three rising to 60% of the global advertising market by 2024 from just over 40% in 20203.

Digital advertising is simply a better product for advertisers than traditional media. It is targeted, measurable and generates better returns on investment spend for advertisers. Above all, it has “democratised” advertising, enabling the “long tail” of small and medium-sized businesses that could never afford nationwide TV or print campaigns to attract new customers and build a better relationship with existing ones.

WPP in its 2019 annual report stated that they were the largest buyer of advertising on both Facebook and Google4. On its numbers, it was just 4% of Facebook’s revenue. So when Unilever, one of the world’s biggest advertisers, suspended its Facebook spending in June 2020 it wouldn’t exactly have dented the Facebook juggernaut (nor do much to improve Unilever’s growth rates, one suspects, with the boycott quietly dropped in December5).

Never has advertising been more important for the long tail than during Covid. With retail outlets shuttered, it has become a truism that “customer acquisition costs” are the new rent. Whether you are selling hats, hamburgers or hotels, if you don’t have an internet presence you don’t have a business. Ecommerce penetration remains relatively low in the US compared with China or the UK, hence the potential for continued strong growth over the next few years. And given the current regulatory backdrop and concerns over privacy, the owners of first party data - again, that’s Facebook etc - have a very strong position relative to the competition.

The bear argument is that within a few years, digital advertising becomes pretty much the entirety of the advertising market, so that the growth rates of the two converge, and growth for the big three slows down. But we very much believe this will be a case of “stronger for longer” and that the size of the market is being underestimated. This is because non-measured marketing budgets - activities that support sales but don’t fall under the traditional media umbrella, like sports sponsorship, coupons or Columbia Threadneedle biros - are increasingly shifting to the more measurable world of digital advertising. We think this has the potential to more than double the size of the total global addressable market to $1.3 trillion.

Of course, it is perfectly possible to own a position in an ad agency alongside a name like Facebook or Alphabet. There is a price for everything, and there will always be a space for creative creatives creating creative creative. But the changing nature of the advertising market highlights some of the difficulties associated with “value investing” at a time of technological change. Much of it is associated with the idea of reversion to the mean - historically, advertising spend has grown at GDP about x1.5, so if the US economy grows at 10% this year, then growth will be 15%6.

But how do we even know what the mean is? For most of human history, the value of oil has been zero. By no means do we think it is going to get there again, however fast the rise of electric vehicles, but it would similarly be foolish to assume that demand for oil will grow at a similar relationship to global GDP growth as it has done in the past. Other fuel sources are available. No doubt, there were farriers in the 1920s who thought that the automobile and tractor were just fads, but they were wrong. This is the essence of “creative destruction”, a term coined by Austrian economist Joseph Schumpeter. Industries rise and industries fall - only this time, the rise of digital advertising means that maybe we should be talking just as much about the “destruction of creatives” as about Schumpeter’s more famous concept.