IPG Media Lab
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IPG Media Lab

What The Next Recession Could Mean For Marketers

A major shift away from TV advertising could cause ripple effects across categories

To the storm ahead…

Editor’s note (04/06/2020): Although this piece was written long before COVID-19 solidified the possibility of a recession, most of the reasoning and hypotheses proposed here still very much apply.

Incessant talks of a looming recession in recent months have clouded over industry forecast, and the ad industry is no exception. Over the past decade, audience attention has been shifting away from linear TV and moving to digital channels, especially for the younger generations. According to data from Magna Global, national TV ad sales fell 2.2% in 2017, and Magna estimates that they will fall at least 2% each year through 2022. A recent piece published by The Information argues that the incoming recession would further accelerate the cord-cutting movement, thus pushing the ad industry to catch up with this shift in audience attention.

Furthermore, TV ads are mostly being propped up by advertisers from industries dependent on reaching audience at mass scale, and once a recession hits, that co-dependent relationship could speed up the shift away from TV advertising and cause ripple effects across industries. If and when that happens, some emerging technologies today may just be the future economy engine to pull us out of the next recession.

Signs of a Coming Recession

For the past few months, prognosis and warnings of a near-future recession have been grabbing headlines everywhere. A recession is defined as two consecutive quarters of negative economic growth and it tends to operate on a 10-year cycle. Given that the last recession happened in 2008, it seems like we are on track to encounter another one soon.

Chart Source: Vox

Of course, there are many other market signs stoking the fears of a looming recession. The escalating U.S.-China trade war is casting a long shadow over the global economy prospect, and there seems to be no sign of a quick resolution. Instability in major global markets, such as the U.K. potentially exiting the EU with no clear plan to transition, certainly does not inspire much optimism for the global economy outlook either. Additionally, the yield curve, a historically proven bellwether to economic downturns, has inverted starting March, signaling a likely recession within the next 12 to 24 months. While the U.S. employment rate is currently at its lowest, economists and investors worry that business investment is slowing, despite the tax cuts that were supposed to give it a boost.

To some extent, a recession is like a self-fulfilling prophecy — the more industry insiders and investors talk about the possibility of a recession, the more cautious and conservative the market becomes, which then often leads to a stagnant and contracting economy. Granted, there are other factors at play as well, and nothing is guaranteed to happen. But given the various factors listed above, it is more than likely that before long a recession will manifest out of a diminished collective confidence in the global economy.

Impact on TV Ads

The last recession had a significant impact on the advertising business across categories. Following the 2008 stock market crash, newspaper advertising spend in the U.S. fell by 27% in Q1 2019; radio fell by 22%; magazine by 18%; outdoor by 11%; and network TV by 5%, according to Nielsen data. While TV and OOH ads eventually bounced back, till this day print and radio ads never managed to restore their former glory. A big reason for that was due to timing: the 2008 recession coincided with the dawn of the mobile era ushered by the first wave of mass adoption of smartphones. Resultantly, the aggregators of consumer attention shifted from newspapers and radio to online channels. Fast forward to today, more U.S. adults use social media as their primary news source than newspapers.

Advertising spend naturally follows consumer attention, and a near-future recession could once again push audience attention to shift. Instead of from physical print media to digital media, this time it will likely be from pay TV to over-the-top streaming services. The cord-cutting movement has been building momentum for a few years, but last year it truly started to accelerate. According to the latest forecast by eMarketer, the number of U.S. households without a traditional pay-television subscription will soon equal those that have one. Altogether, over 1 million customers cancelled their pay TV subscriptions in Q1 this year after 3.2 million customers cut the cord through last year.

Moreover, a significant portion of the cord-cutters are not replacing pay TV with over-the-top live TV services like DirecTV or Sling TV, but rather choosing to spend their TV time watching ad-free SVOD services like Netflix and Amazon Prime Video instead. If and when a recession hits, the streaming services would look like an affordable and appealing alternative to pay TV to a budget-conscious consumer base, thus further accelerating the cord-cutting movement.

Chart source: eMarketer

There are a lot of streaming services ready to take up the mantle from the pay TV industry. Besides the aforementioned Netflix and Amazon, new entrants from Disney, Apple, AT&T’s WarnerMedia, NBCUniversal, and the newly merged CBSViacom are all ready to launch within a year, which will offer consumers more options to replace their pay TV subscription. Some of those services will be part of a media bundle, such as the $13/mo bundle Disney announced for Disney+, Hulu, and ESPN+, which no doubt adds to their appeal and makes a strong case for ditching pay TV, especially during a recession when consumers are looking to cut costs.

As TV audience moves to streaming services, some of TV’s ad spending will naturally move to ad-supported streaming services as well. However, many of the prominent streaming services operate on an ad-free subscription model, while others that do carry ads tend to have less ad inventory than linear TV. To make matters worse, an increasingly fragmented media landscape means that emerging media like podcasts and esports are also competing for cord-cutters’ attention, thus diluting the chance of TV ad spending being recuperated via ad-supported streaming services, such as Amazon’s IMDB TV or the one Plex is planning to launch. One major difference between 2019 and the recession a decade ago is that the digital advertising industry has matured and is now in a prime position to take on the TV ad dollars.

Altogether, it seems reasonable to predict a serious downturn for TV advertising should a recession hit. Similar to how the last recession dovetailed with the rise of digital media to deliver a death blow to the print and radio ads, shifting viewing behavior and diversifying source of entertainment more or less guarantee that the pay TV industry won’t recover either.

Implications for Big Industries

As a mass medium, the one-to-mass nature of TV advertising has always been well-suited for the industries that depend on reaching audience at scale, such as CPG, auto, and retail. As analyst Ben Thompson pointed out in 2016, all of these industries are all looking to “reach as many consumers as possible with blunt targeting at best, all benefit from scale, and all are looking to earn significant lifetime value from consumers.” Naturally, these industries have traditionally been the largest spenders in advertising. As Thompson called out, the top 200 advertisers in the U.S. lean heavily on TV advertising that they make up 80% of television advertising, despite accounting for only 51% of total advertising (and 41% of digital). Their intertwined interest in TV advertising as a key marketing channel is essentially what has been keeping the traditional TV industry afloat despite sharply declining ratings.

A potential collapse of traditional TV due to an exodus of pay TV subscribers means that those industries will be forced to find other effective ways to reach consumers while battling the new-comers capitalizing on the disruptive trends in each of their respective verticals. Given their scale-dependent business model, these industries will likely flock to Facebook and Google, two giants of the digital advertising that can provide the same kind of mass reach that they are accustomed to operating with. Smart incumbent brands will figure out how to adjust their media mix and communication strategies to adapt to the digital ad ecosystem. The ones that don’t will face increasing challenges in reaching new consumers and could fail to sustain the advantage they enjoyed in the era of mass media.

Implications for DTC Brands

A potential recession will likely have a strong impact on the rising DTC brands as well, though the implications are comparatively more complex. On one hand, because the DTC brands are born on the internet and well-versed in utilizing consumer data, branded content, and digital ad tools to target and engage their audience, a diminished TV advertising would mean little to their marketing strategy. If anything, their digital-native nature would offer them a considerable advantage over the market incumbents that are forced to shift their TV ad dollars to digital channels.

On the other hand, a recession will likely entail a contraction in VC investments, which are the key source of funding for most DTC brands. Certain categories of D2C brands are already starting to look a bit over-saturated, and if the incumbents start to ramp up their media spend on social and digital channels following a shift away from TV advertising, the marketplace will become even more crowded, making it even harder for any upstart brand to stand out. If the VC funding dries up, a round of acquisitions and mergers to consolidate the DTC space and ensure the competitiveness of the category leaders seems inevitable. Either way, a recession would effectively bring an end to the current stage of DTC growth as well as the fragmented landscape they currently compete in.

Post-Recession Value Drivers

The rise of smartphones and the mobile economy was often credited for getting the global economy out of the 2008 recession. Looking ahead, could emerging technologies once again be able to pull us out of the next one?

Depending on the timing and the execution of rollout, automation technologies could be either the new engine that starts the economic growth once again, or be the trigger for a downward spiral into deeper economic troubles due to the mass labor displacement it could engender. As a double-edged sword, automation is most likely to be a key economic driver in the long run, but its short-term consequences are hard to predict due to the varying regulatory and market forces at play.

Some say 5G and foldable devices will help spur another round of mass upgrade cycle and inject some renewed interest in or even reinvent the mobile economy. Increasingly, however, the personal computing industry has started to look beyond mobile and bet on wearables and AR headsets as devices that will define the next digital paradigm. And with that, new attention aggregators and media formats will inevitably pop up, prompting another round of learning and testing among brands and advertisers to keep up with the ever-shifting consumer attention.

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Richard Yao

Richard Yao

Manager of Strategy & Content, IPG Media Lab