The bull case for advertising is back on

Boom times are back for advertising and marketing services, even though the pandemic is not over and, sadly, it is not under control in some major parts of the world.

The world’s largest digital media owners, led by Google, Facebook and Amazon, reported that revenue rose by about 40% globally in the first quarter of 2021, according to Brian Wieser, global president of business intelligence at Group M. 

The rate of growth was remarkable, because it was not against an easy comparison—Q1 2020 was largely unaffected by Covid—and most major economies, including the US and UK, did not grow strongly in the first three months of 2021. The digital acceleration since the start of the pandemic increased as we moved into 2021, as ecommerce, streaming, gaming and other online consumption boomed. 

Advertising forecasters have upgraded their growth predictions for this year as lockdowns ease (although, with hindsight, it is evident that many experts were too bearish a year ago). Warc’s latest forecast for the Advertising Association estimates UK ad expenditure in 2021 could exceed 2019 levels. Economic growth was always likely after the sweeping shutdowns of spring 2020 but the pace of the advertising recovery has been surprising—a quarter earlier than expected, WPP said, after it returned to growth in Q1 2021.

It is wise not to read too much into a few quarters, because the data is still piecemeal. However, there is reason to be optimistic, because the technology revolution has been fuelling the growth in advertising, marketing and media since before the pandemic.

“Economic activity may correlate with advertising, but is not necessarily causal,” Wieser says, noting that there has been a big increase in the number of new digital businesses that have been created, as more shopping has moved online and they want to invest in advertising and marketing to drive sales and grow their brand.

He suggests the pandemic may have hastened some positive changes, by speeding up what the economist Joseph Schumpeter called “creative destruction”—felling weaker businesses and clearing space for nimbler and smarter ones.

And the shift to ecommerce has so much further to run. “More than 80% of commerce is still offline,” Phillip Schindler, chief business officer of Google, noted on parent company Alphabet’s last earnings call. 

The downside of the tech giants’ rapid growth is that the share of ad revenue for everyone else has been shrinking. But as Warren Buffett, the veteran founder of Berkshire Hathaway, reminded investors at his recent annual meeting, none of the world’s 20 largest companies in 1989 is in the top 20 today—and things will keep changing.

The outlook for advertising and marketing services is good, because brands of all sizes will always need advice and support on strategy, communications, customer experience and innovation. 

New agency-type businesses, such as S4 Capital and You & Mr Jones, have proved it is possible to grow quickly by focusing exclusively on digital services and offering investors what Sir Martin Sorrell has called “a royalty on the growth of digital marketing transformation”.

More established agency groups have been struggling to adapt in recent years but we may look back on the pandemic as a clarifying moment, as they have been able to downsize underperforming parts of their businesses more quickly and now, with recovery on the way, to invest more in faster-growing areas.

JP Morgan Cazenove said in a recent note: “The slowdown in the advertising agency space can be explained by a number of short-term factors, that structural concerns are overstated and that the role of the agency—to help clients optimise their marketing spend across the marketing funnel—remains just as relevant as in the past. In fact, digital advertising spend grows the overall market.”

The bull case for advertising is back on.

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Gideon Spanier is UK editor-in-chief of Campaign.