I wrote recently about the performance of the agency groups and the varying performance between them. One near-common theme was that the decline in tech advertising spend was a key reason for some downgrading of guidance.
At first sight, that seemed like a credible and logical explanation but I suspect there may be more going on than meets the eye. That not only has implications for what happened with the agencies but what is likely to happen next.
One clue pointing to greater complexity than the narrative presented was the financial performance of Next 15, a mid-tier player in the agency and consultancy space.
Next 15 has traditionally had a heavy weighting towards big tech companies as its clients. Therefore, while the group has diversified its revenue streams and made several acquisitions, you would have expected it to be caught up in the maelstrom. That is not the case. The company has just reported its first-half results and kept its financial guidance.
The second was looking back over a presentation by Thinkbox, the UK television advertising body, that showed “online born” companies (so anything from start-ups to the likes of Google) comprised 20% of all UK linear TV ad spend in 2021 and showed 42% growth during that year.
Looking through Thinkbox’s list, though, what was clear was that the biggest advertisers were not the biggest tech names but often more “challenger” brands that had gone for very high growth. While this was a UK-focused study, I suspect it would have been the same message in markets such as the US and elsewhere.
Another factor to consider here is tech does not always mean tech. What do I mean by this? Well, an online finance firm may be classified as either tech (if one looks at its platform) or banking (if you look at its function).
There is not one unified definition and so different groups are likely to use different definitions to describe clients in the same category.
In practice, that means that certain “traditional” sectors may be defined as weak not because the traditional players have pulled back spend but because challengers have been forced to cut back.
What does this all mean? Firstly, with regards to the agencies’ performance in H1, I suspect the issue for at least some of the groups that warned was not that it was the spending from the likes of Facebook and Google that disappointed, but more that certain agencies would have been overexposed to challenger brands and companies more on the start-up range. That would have impacted some agencies more than others.
I think this may also explain the spate of warnings, namely that while it was known these companies had slashed spending, there was maybe a belief that, as the comparable became easier post-Q2, at least some spend would return. It seems like that has not happened.
Secondly, while some of the more challenger tech brands may slowly start to spend more, they are unlikely to be aggressive at spending again.
That reflects the changing mantra from growth to cash preservation, in part the fingers-burned syndrome but also the recent messaging by the Federal Reserve that interest rates will stay "higher for longer".
As I have flagged a number of times, the number one reason why tech valuations collapsed from Q2 2022 onwards, and therefore why these advertisers cut back spend, was the rapid rise in US interest rates, which completely flipped the valuations churned out by the consensual discounted cash flow valuation model (contact me for more details on this – it is too long to go into here).
So, while for 2024 we are likely to see continued ad growth from some sectors, the tech sector boom that fuelled advertising growth and recovery in 2021 and H1 2022 is unlikely to recur.
That is particularly likely to be the case if my view that inflation may be structurally higher than pre-Covid is correct because of the structural factors (restoring of supply chains, redundancy, higher wage costs, increased regulatory burdens etc).
If I am right that certain agencies depended more on this category of client than others, then that is likely to reinforce the divergence between groups when it comes to performance.
Ian Whittaker is founder and managing director of Liberty Sky Advisors
He writes a regular column for Campaign about the advertising landscape from a financial standpoint. It is is not investment advice.
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