Online advertising - Opportunities for media owners_Value Partners


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While the economic downturn will impact all advertising media, digital advertising is in a relatively strong position to ride out the worst of the storm. However, while, in aggregate, digital advertising will continue to take market share the dynamics of the distinct sub-segments (search, classified and display) will be very different and effective monetisation for traditional media companies will not be straightforward. By Tabitha Elwes, partner at Value Partners, London.

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Online advertising - Opportunities for media owners_Value Partners

  1. 1. PERSPECTIVE Online advertising - Opportunities for media owners While the economic downturn will impact all advertising media, digital advertising is in a relatively strong position to ride out the worst of the storm. However, while, in aggregate, digital advertising will continue to take market share the dynamics of the distinct sub-segments (search, classified and display) will be very different and effective monetisation for traditional media companies will not be straightforward. Online Advertising has been one of the growth stories of the last three years, but Tabitha Elwes with a looming recession and major reductions in advertising spend how is the Partner online sector going to be affected? In 2000 to 2002 Internet advertising was heavily impacted by the economic slow-down with revenues falling 16% compared to 5% in non-internet advertising1. This time, situation is likely to be different. • First, in 2000 online advertising was not well understood, constituted a tiny percentage of budgets and was considered peripheral, an easy target for cost-cutting. • Second, the hype around the benefits of internet advertising was greater than its ability to deliver – today, increasingly sophisticated infrastructure, measurement and accountability, coupled with a shift in consumer behaviour, have made online activity core to most marketing plans. • Third, in a downturn media spend increasingly focuses on value and proven returns. The internet will have some protection due to its transparency, accountability and value for money. While 2009 is unlikely to see the double digit growth of recent years, it is realistic to expect some growth and that online will continue to gain share at the expense of other media. Divergent trends within online The relative resilience of online advertising masks divergent trends between sub-segments. To understand how this will manifest itself, it is important to understand the evolution of online advertising. Exhibit 1: Total European online advertising - category share (%) Display Paid search 60% Classified 40% 20% 0% 01 02 03 04 05 06 07 08 Phase 1 Phase 2 Phase 3 Source: Jupiter Phase 1 Initially, phase 1 centred on banner advertising and classifieds. Early adopters of banners were advertisers of ‘considered purchases’ (e.g. cars and travel) or electronically delivered products (e.g. financial services) focussing on direct response and calls to action. Their priority of reach was achieved by advertising on major portals. Online classifieds were adopted by segments such as recruitment and focused on directory sites and verticals. 1
  2. 2. PERSPECTIVE Phase 1 saw the growth and early dominance of paid search, driven by Google (who control over 70% of UK search). The transparency and cost-effectiveness of search attracted new advertisers, mainly small businesses, and was used by major brands to enhance traditional media (e.g. Cadbury buying Gorilla keywords to support its TV campaign). It is a long tail business. Phase 2 The rise of social networks had a huge impact on online advertising. It significantly increased the quantity of undifferentiated inventory and helped polarise the market between premium and remnant advertising. The expanding market exerted downward pressure on ad prices, particularly on low-end, commodity. Early attempts by social networks to leverage increasingly sophisticated behavioural targeting, highlighted a number of concerns about privacy and negative consumer reactions to ‘big brother’ style technologies. Exhibit 2: Split between Premium and Remanmant Advertising Premium • High CPM Value • Quality content • Targeted audience/ context • Longer user engagement • Relationship-driven sales Remnant • CPX or low CPM Volume • Automated sales by networks • Use of targeting technologies • Volume / low margin • Aggregation for scale Phase 2 saw a rise in the number of major brand advertisers (e.g. FMCGs and retailers) integrating online into their marketing plans. With the entry of these players came new advertising techniques, such as engagement marketing - sophisticated online CRM campaigns designed to enhance brand loyalty by creating new models of consumer engagement, often using functionality and targeting user groups delivered by the social networks. Phase 3 Phase 3 is expected to see a number of significant developments • First, the internet will become a more viable platform for brand-building with the coming of age of brand-building formats, such as online video, and the increase in online television consumption. • Second, advertisers and media buyers are expected to adopt ever more sophisticated behavioural targeting models, driving technology uptake and the value of targeted inventory. • Third, rising understanding of the benefits of linked offline and online campaigns, will lead to the creation of integrated functional teams, on buy and sell side, to enable seamless execution of cross- platform campaigns. We are also likely to see large international players, especially technology platforms, seeking to become one-stop shops. They will offer a wider portfolio of services to advertisers, covering search, display, behavioural and other targeting services, planning and publishing. The importance of scale is already driving aggressive M&A activity, enabling the likes of Google and Microsoft to become the founder tenants of intricate advertising eco-systems. 2
  3. 3. PERSPECTIVE Exhibit 3: Online advertising eco-systems have started to emerge Advertiser Agency Technology Ad sales Web house publisher As the advent of phase 3 coincides with the economic downturn, growth will slow. This will affect different segments in different ways, • While growth in search is slowing, it is relatively protected by its position as a high value, low risk product, and its competitive advantage as a direct response tool. • Display will be more affected as heavy users of online (e.g. finance, automotive) will be disproportionately impacted by the down turn and advertisers may reduce experimentation particularly in brand building where online remains unproven. • Premium display is likely to be more protected than run-of-site and remnant inventory, as advertisers migrate to quality. • Classified advertising is also likely to be hit hard, particularly by the downturn in the property and recruitment markets However, relative to other media online will continue to outperform. Opportunities for media owners With declining share in traditional advertising, media owners need to optimise their approach to online while recognising it is unlikely to deliver. We believe, three factors will be key: scale, quality of audience, and service level. Those companies that are able to adapt to serve the needs of increasingly discriminating advertisers, will emerge all the stronger from the downturn, while falling asset prices are likely to present attractive opportunities for acquisition and partnership. Exhibit 4: Key success factors in online advertising + • Building sufficient reach to be amongst top sales points to compete for campaigns Scale • Building critical mass to sell in key verticals Importance • Qualifying traffic to segment inventory - increasing “quality” of sites and content Quality - increasing qualification of traffic (behavioural targeting, vertical led sales) - … whilst maintaining price / value • Focus on execution competencies - ad serving, account management, service and Service solution provision • Best practice approach to technology - - targeting, tracking, measurement, analytics 3
  4. 4. PERSPECTIVE For traditional media buyers there may be opportunities to leverage two important drivers of the next phase of growth: increasing cross media planning and implementation and the rising importance of long form professional video content on broadband networks. Exhibit 5: Key success factors in online advertising • Video still nascent (6% of display) reaching ~20% in 2012 • Advertisers value professional video highly Video - $50cpm v $0.3 for UGC - Engagement much deeper / longer - Scarce, but growing in popularity • To date, limited to multi-platform sponsorship and discounted bundling Cross media • In future, greater demand likely - integrated media planning - co-ordinated media buying - partial merging of media – e.g. TV ads run online Source: JupiterResearch, Spectrum Value Partners analysis However, even with effective focus on these areas the economics of online will almost certainly require an approach incorporating multiple revenue streams rather than sole dependence on advertising. About Value Partners helped build and consolidate For more information on the issues Value Partners’ corporate raised in this note please contact Value Partners is a global reputation and brand. Value or consulting firm comprising two Partners assists clients mainly one of our offices below. sister companies: Value Partners in the telecommunications & Find all the contacts details on www. Management Consulting and media, financial services, energy, Value Team IT Consulting & manufacturing and hi-tech Solutions. sectors. Founded in 1993, it is one of the In the late 1990s Value Partners first management consulting decided to expand its service Milan firms in Europe. It draws on 3,000 offerings beyond management Rome professionals from 25 nations, consulting to include complex, London working out of 16 offices in 13 innovative and business-critical IT Munich countries. Value Partners has services, today handled by Value Helsinki built a portfolio of more than Team. Istanbul 300 international clients - from São Paulo the original 10 in 1993 - with a Our end-to-end offering, which Rio de Janeiro worldwide revenue mix. answers our clients’ specific needs, Buenos Aires is the distinguishing feature. Mumbai Value Partners Management Companies choose us because Shanghai Consulting has successfully they know and trust our ability to Beijing handled turnaround and change develop business strategies and to Hong Kong management projects for major implement them through the best Sydney companies. These achievements suited IT solutions. Singapore 4