Will advertising revenues drop in a recession? Who will win and who will lose?

In business it is commonly understood that advertising is the first thing to be cut in a business downturn or recession. Henry Blodget, former Wall Street Internet stock analyst, believes we are headed for a deeper recession and that advertising, even web advertising, will be hurt. My take? Advertising in general will fall, but CPC Internet advertising will increase.

Display advertising will be hurt

Newspapers will be the first to feel the pain. Newspapers are already getting hammered and it is only going to get worse. TV and Radio will also feel the pain, but to a lesser degree. Advertising mediums like these don't have good feedback mechanisms. It is really hard to accurately calculate how effective an advertising campaign has been. You pay your money up front and hope for the best.

Web based CPM advertising will be hurt too

Web based display ads and banner ads are the online equivalent of print display ads. The costs are substantially lower, but the results are still hard to measure. Cost Per Mil (CPM) ads are not well targeted like search advertising. There is also no user interaction like there is on Cost Per Click (CPC) ads. Big web sites like Yahoo, AOL, Cnet, Marketwatch, and others get most of their revenue from display/banner ads. Advertisers are likely to cut back first on print ads, and later on web based display ads.

CPC advertising could actually increase

With CPC ads you pay nothing unless someone clicks on your advertisement. This is a huge advantage for advertisers who really want to increase sales but can't afford to gamble on a display ad. CPC ads are easily justifiable and trackable. In a recession, with declining sales, there is enormous pressure to do anything possible to get sales moving. CPC advertising, principally on search engines, will be very appealing to advertisers.

A recession could accelerate the trend to web based CPC advertising.

The trend towards Internet advertising has been growing for years. Still, less than 10% of all advertising dollars are spent on the Internet, up from about 6% a few years ago. The trend will continue and probably accelerate with a recession. This is great news for search engines like Google, Microsoft Live Search, and Yahoo Search.

The Yahoo problem

Yahoo is a huge web destination with great traffic numbers. The problem is that most of their traffic (over 80% last time I checked) is generic, untargeted page views. Meaning, their traffic is to a Yahoo home page, Yahoo email, or some other generic content page. This traffic is hard to monetize effectively because it is not targeted. Search traffic is easy to target and commands very high advertising rates because it is so tightly targeted and effective.

Where is the opportunity?

Ad targeting technology that targets ads to the user, not the content they are looking at, will be a huge winner. Imagine if Yahoo, or any other big content site, could better target their advertising to users. They could go charge much higher prices for their CPM ads, and convert lots of generic page views into advertising dollars.

There are lots of companies working on this from lots of different angles. Quantcast is doing deep click stream analysis and layering on demographic data for better targeting. MatchMine is taking a different approach. By analyzing the content you like, and recommending more content like it, they build a profile to help you get better content, and help advertisers target their ads.

Behavioral targeting for advertising is already a hot area, and likely to get even hotter. Especially if an economic recession hits the advertising world.

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Comments

[Farhan Lalji]

Great post. Think that if overall marketing budgets get hit, you could see a small increase in CPM ads and a bigger increase in CPC ads as ad dollars shift away from other (even more) untargetted channels - TV, magazines, billboards). Thing the big players get it and thats why BT, as well as tracking click-throughs and having marketplaces where bids respond to clicks, are such a big thing at companies like Yahoo.

[Carlos Lagemann]

I loved this post! It's great!!!

[justawanderer]

Don,
Honestly, I had not used Live/MSN search much until about two months back when I started using and I was immensely surprised to find that the search results are fairly as relevant as Google, if not better. I also felt that Live search is perhaps a tad bit faster than Google?

Another thing I don't understand is, I saw *very* very relevant ads on almost every query I executed on Live. Is this a rather new development at Live? Something that happened in the past 2-4 months? Or has this been the case all along..and just that I was ignorant and noticed it just now?

If it is a new development over the past 2-4 months, then I see this as hugely positive for CPC business of Live.

Would love to hear your comment on it.

Thanks for the insightful blog!

[Sandeep Sharma]

Timely article! Recession would impact "overall" advertising budget is very logical but some company (with deep pockets) see this as opportunity for better impact and tend to spend more. More search players may emerge as people try for better returns on dollar spent. I think people may also click more to get better deals and this may increase CPC for certain consumer products.

[Mark Dekker]

Thanks for the post.
I think because of a possible recession, targeted ads like cpc should increase as opposed to the scatergun effect of traditional tv, newspapers etc....
Pay Per View and Audio ads could fill this gap me thinks.
thanks