Bottom line for Adland

AFTER three grim years of shrinking revenue in the once glamorous world of Adland, the first tentative signs of a recovery are emerging. With the Iraq conflict at an end, and the Sars outbreak seemingly under control, corporate confidence is slowly returning to the £12 billion industry.

But there is a new and sober reality facing ad agencies and media companies. The marketing landscape has changed irrevocably over the past three years - and not to their advantage.

With corporate budgets tightening and boards questioning the bottom-line value of glitzy campaigns, many corporate advertisers are demanding better returns on their investments by shifting a greater portion of their marketing budgets into highly-targeted - and less expensive - channels.

So-called below-the-line advertising - direct mail, telemarketing, internet ads, billboards, text messaging and digital ads - are booming while traditional above-the-line media advertising remains in the doldrums.

Direct mail enjoyed a 1.4% increase during the first three months of 2003 while outdoor advertising increased 13.3%, according to data from the World Advertising Research Centre. That is largely because big corporate advertisers such as Virgin Atlantic, BT Cellnet, McDonald's, Charles Schwab, Nissan and Shell have been funnelling a larger portion of their marketing budgets into these cheaper forms of advertising.

If there is one thing they have learned during the advertising recession it is that below-the-line advertising can greatly extend the reach of a campaign by allowing them to target a more relevant customer base.

Media buyers, who book advertising slots with newspapers or broadcasters on behalf of advertisers, say clients now demand measurable value for their money.

It's evidence, they say, that the decline in television and Press advertising might not be just cyclical, moving in line with the world economy's highs and lows, but perhaps a longterm shift in the fundamentals of how products are marketed.

'The fact is, a lot of clients that used to rely pretty much exclusively on TV or other mainstream media now put more and more of their money into other channels,' said Ian Redman, business director with media buying group Mediaedge:cia.

'Below-the-line advertising is theoretically more accountable than broadcast advertising because it is more targeted and it is more customised. And I don't think that trend is going to change really, so in that sense I think it is structural.'

Digital advertising firm glue London is typical of the new breed of agency promoting itself as a powerful and cost-effective solution to the industry heavyweights. Glue - whose clients include Channel 4, the Central Office of Information, Virgin Atlantic, Ribena and McDonald's - has enjoyed a steady increase in new business over the past six months, largely at the expense of traditional mass media.

The company's campaign promoting new routes for Virgin Atlantic using digital video screens has just been launched at Victoria and Liverpool Street stations in London. The benefit to the airline, according to managing director Mark Cridge, is that it delivers maximum impact and allows the company to measure daily the return on its investment .

'Advertisers are realising it's not just about effectiveness, they've got to advertise where their audience is,' Cridge said. 'There's been a cyclical change from the excesses of the dot com boom - it's a different landscape from what it was in the late Nineties. But that's coincided with a structural change where people are consuming new media.''

At the same time national newspaper and magazine publishers have been struggling to maintain revenue in a climate epitomised by job losses in the City and fears of a slowdown in High Street spending. Advertising spend on national newspapers fell 5.3% in the first three months of this year On consumer magazines it was down by 5.1%. Hardest hit were business and financial magazines, which recorded a 6.1% decline compared with the same period a year earlier.

Since then consumer spending has come off the boil, retail sales slipping by 0.1 percentage points in May. Travel and motoring classifieds have also weakened. These sorts of statistics can make nervous advertisers shy away from costly Press campaigns, particularly when their own profitability is in question.

Kingsley Wilson, broadcast analyst at Investec Securities, says: 'Below-the-line is probably a cheaper form of advertising when you've got a limited budget because those kinds of adverts give you a better impact. But we've got to assume corporate profitability will recover when growth picks up and stops looking anaemic, and therefore advertising budgets will increase in a more-competitive environment.

'I wouldn't think anything has fundamentally changed between newspapers and broadcasters and other media, so I'm pretty sure it's more of a cyclical thing.''

Sir Martin Sorrell, head of the world's biggest advertising group WPP, points to the abnormally buoyant dot com days, the 9/11 terrorist attacks, and the US accountancy scandals as reasons for the continued decline and 'creeping structural change' in advertising.

He maintains that the global industry will not see a significant pick-up in advertising until two significant events next year - the Olympic Games in Athens and the US Presidential elections. These are expected to benefit media companies, which have long been considered a proxy for the state of the economy and an indicator of economic health.

The general view is that if there is a downturn in classified ads and corporate marketing simultaneously, then the overall economy must also be in the doldrums.

Media buying group Zenith Optimedia has forecast a third year of decline in the UK advertising market this year. It expects a fall of about 1.4% in 2003 in real terms, before rising 0.4% in 2004 - still the weakest growth of any European advertising market.

Television advertising in Britain, which accounts for 45% of all media spend, is expected to fall by 1.5% this year. The Press, which attracts 33% of advertising revenue, will be worst affected. Newspaper ads this year are predicted to fall 2% and magazine ads are likely to be down by 3.6% according to Zenith.

Even Europe's largest broadcaster, Germany's RTL Group, which controls Channel Five, has warned that it expects the British TV advertising market to remain stagnant for the rest of this year.

But there is more to the advertising recession than the spending cuts undertaken by multinational companies. The way people spend money and respond to advertising has also changed in recent years.

That is why advertising budgets have been switching away from Press and TV to other media that are proven to reach these vital non-newspaper readers and light TV viewers.

More people are using broadband and other high-speed internet connections, which in turn enables more marketers to use sound and motion to enhance their online ads.

The introduction of personal video recorders such as TiVo, which allow viewers to skip commercial breaks, is also prompting advertisers to question the effectiveness of television as an advertising tool.

'Television and newspapers need to restate their case as to why they deserve to be on schedules and what value they've got in communication terms,' Redman said.

'But it is becoming increasingly difficult for them to do that, and that's partly driven by technology. There are now so many more ways to reach people.'

Regardless of which way the economic cycle turns, the advertising industry faces a protracted period of structural change from which the winners are far from certain.

But one thing is clear. Advertisers have seen the future, and the mass media must now adapt or face the consequences.