Answering your Questions: Ad Budgets will be Big Enough for Digital.

I’m going to start something new with this column today. Rather than just writing about things that I happen to think are important and relevant to the digital advertising and media industry, I’m going to write about issues that you have asked questions about in the Comments to my previous week’s column.

Last week, Colin Gillis from Canaccord, one of the top digital media equity analysts out there, posted in the Comments:

Items I would like to hear addressed include 1) The comments from Publicis CEO Maurice Levy that ad budgets are not able to support the rapid expansion of online services (might it be that just 10% of these companies survive?) and 2) the U.S. is arguably a laggard in the reallocation of spend from other media, particularly in comparison to the U.K. – is this because the agency habits are slow to change, corporate customers are still brand managers, or some other reason?

Colin, here are my thoughts:

Will ad budgets be big enough? In spite of the face that it appears that we are in a period of “overbuilding” and “overfunding” of digital start-ups with business plans that require advertising support for 100% of their future revenues, I am much more optimistic about the long-term capacity of the ad industry to support new digital services than Levy. I believe that future ad budgets will support many more new kinds of digital services and many new providers of services that we would never before think of as media companies. While a large amount of this spend will certainly come from incumbent media channels – print, analog television, analog radio – it will also come from new efficiencies added to the business enterprise supply chain.

Digital marketing can do much more than just making advertising and promotion more effective or efficient, it helps automate sales forces. It helps companies better manage inventory and their suppliers. It helps companies better manage their distribution channels. Sometimes, it even helps companies virtually replace some of these major enterprise cost centers.

So, when we wonder whether there are really big enough ad budgets in the world to provide every consumer with a free, ad-supported mobile phone, let’s not forget that digital commercial communication will create enterprise value far beyond just messaging, branding and promotion. Of course, I also believe that Levy is dead-on when he suggests that upwards of 90% of the start-ups out there are likely to fail. That’s just the way that the start-up world works and the beauty of venture capital. Many seeds will get water, but few will become trees.

Why does U.S, online ad spend as a percentage of total ad spend lag behind markets like the UK, sometimes significantly? Good question. (Yes. I am of the school that there is such a thing as a dumb question.) Depending on which numbers you use, U.S. online ad spend currently represents something on the order of 5-6% of total ad spend while in the U.K. it is already over 10% of total spend. There are several reasons for this difference, I believe.

One, media agencies are more mature in the U.K. While the emergence of the media specialist is still a relatively new phenomenon in the U.S, – the past 10 years – media houses broke out from the full service agencies in Europe and in the U.K, at least five years earlier. This brought more media-centricity to ad planning sooner and more power to media houses sooner. Media specialists have always been the strongest champions of online, recognizing the power of the channel to reach more people more efficiently and more effectively than other many other media. Thus, stronger media specialists = more spend on online.

Two, the geographic concentration of media decision-making can accelerate change. While New York is certainly the ad and media capitol of the U.S., an enormous amount of media decision-making and media spend is distributed throughout the country, from L.A, to Detroit to Dallas to Atlanta to Chicago to San Francisco to Miami to Minneapolis.

It’s not so in most other national media markets around the world. In the U.K,, it is all about London. In France, it is all about Paris. While Germany is a bit distributed, it is only among three cities. Markets like the U.K, with more geographic concentration in media spend have more concentration of thought leaders and case studies and knowledge base for new innovations. The power of someone like Danny Meadows-Klue, one of the real pioneers of the online ad industry in the U.K, and Europe and certainly one of our very best evangelists, to influence a market is dramatically enhanced when he can touch more of the power base more often in a shorter period.

Three, the U.S, doesn’t always win. Yes. I know that we here in the U.S. have been taught that we should be first at everything, but sometimes were not. That’s life. The competition makes it fun.

By Dave Morgan
Dave Morgan is Executive Vice President, Global Advertising Strategy, for AOL, LLC.
Courtesy of http://www.mediapost.com