Examination of Witnesses (Questions 412
- 419)
TUESDAY 20 JUNE 2006
INSTITUTE OF
PRACTITIONERS IN
ADVERTISING
Chairman: Can I welcome the Institute
of Practitioners in Advertising and thank you for your patience
in waiting; in particular, Hamish Pringle, Director General, Jim
Marshall, Chairman of Starcom UK, and Wayne Arnold, Managing Director
of Profero. I will ask Rosemary McKenna to start off.
Q412 Rosemary McKenna: We have heard
a lot this morning about the revenue worries of the television
companies, but just how are consumers' media consumption habits
changing with the growth of the new media platforms and services?
Mr Marshall: I think the simple
answer is that historically the media dictated how people used
the media, now the consumers are dictating how they are using
it, so the power has shifted from the media to the consumer. Consumers
now are becoming increasingly editors of the way they use media,
it is as simple as that, and actually this is a seismic shift,
in terms of the whole world of media, how it is operating now
and how it is going to operate into the future.
Mr Arnold: I think what we are
seeing is a very dramatic change in how people, particularly the
younger generation, are consuming content now, so 88% of 15 to
24 year olds now have access to the internet, and even if we take
45+ year olds plus, on average there is 67% internet penetration.
There has been a big shift of people's time in front of various
screens, so now if you take an average working week, roughly about
24% of their time, of their media consumption, now is happening
in front of a computer screen, compared with where it was maybe
only three or four years ago, when probably it was about 5%. Obviously,
that is a big, dramatic increase and change in terms of what content
people are digesting, from what was linear content to now a very
interactive content in various forms, from search in Google through
to Yahoo! through to watching EastEnders.
Q413 Rosemary McKenna: Of course,
that generation will take that with them; it is not something
that is going to be static, but there is still a generation who
are not accessing media in that way. What will be the impact then
on the advertising revenues for the various media companies?
Mr Arnold: I think one kind of
statistic which sums it up quite nicely at the moment is that
24% of the average media consumption now is happening online compared
with something like only 5% of the money being spent on line,
according to the latest IPA Bellwether Report by the IPA. So there
is a big gap between what is being spent on advertising and actually
what is happening from a consumer point of view, so how that will
pan out we will have to see. A logical assumption is that there
is still a big potential for money shifting from traditional media
to digital media to fill that void between time spent online versus
advertising money actually money there.
Mr Pringle: If you look at the
spending patterns of the top 25 advertisers about a year ago,
you will see that on average they spent 2% of their budget online,
and if you take out Hewlett-Packard, which spent 43%, the average
of the rest was 1% of their total budget, with Procter & Gamble
at the top. To reinforce Wayne's point, you can see there could
be quite a dramatic shift of money by the big advertisers from
the traditional media into this online environment.
Mr Marshall: I think not only
could be, I think there will be, undoubtedly. There has been staggering
growth of revenue into the internet, but, as Andy Duncan said
earlier, 50% of that has been on search, and I calculate, say,
25% in classified. If you look at the FMCG sector, which is the
largest sector for television advertising, covering advertisers
like Unilever, Procter & Gamble, Kellog, and Kraft, they are
spending hardly anything on the internet, which says, going forward,
that they will increase that, and that will come from other media.
Mr Pringle: This point about classified
versus display advertising is very, very important and has not
been fully grasped yet. I think you can say that advertising breaks
down into two broad categories, the `advertisements that go to
people', which is display advertising, and there are `advertisements
that people go to', which is classified advertising. Historically,
classified advertising has been about one-third of the total business,
but what we are seeing now, with online search, and paid-for search,
is a truly exponential growth in classified advertising, so it
may be that the advertising shift is going from display to classified
in quite a big way, and from traditional media to online in a
big way. I think that raises very big questions for broadcasters
and other people who are trying to fund their content through
advertising sales, because, as far as I can see, there is not
much advertising sale in a pay-for click right now. If a huge
chunk of the market goes that way, it can have big implications.
Mr Marshall: It is also changing
the dynamics as well of advertising. As Hamish says, we have always
categorised the advertising sector as being two sectors, which
is classified and display, but what the internet has created is
what I would almost describe as `informational advertising', where
people are going into the internet not necessarily to buy something
but to get comparative information about products. What the internet
is doing is empowering the consumer, with huge amounts of information,
and that is a different form of advertising.
Q414 Rosemary McKenna: Reading your
CV, what about the `pop-ups', which really annoy me, creatively,
I have to say. That is a different form of advertising, is it
not?
Mr Arnold: When you talk about
digital advertising, there are multiple formats, there is everything
from big brand sponsorship, such as Yahoo! being the official
broadcaster for the World Cup this summer, right through to one
man and his dog basically selling his pork sausages on Google
with the odd keyword. What is happening is that the industry is
growing so quickly, and pop-ups was just a format that appeared,
and, I should say, we should abandon them as soon as possible,
because, quite frankly, they do not add value to the consumer
experience. As the market develops, what you will see is basically
more mature advertising models appear online, and so we are hopeful
that the actual advertising will enhance the content in some way,
improving the page rather than interrupting it. Hence you are
seeing a advertisers taking interactivity a lot further, actually
encouraging users to participate with their brand. For example
seeing an advert for Honda on TV for 30 seconds is fine even if
you are not interested in buying a Honda car, but actually if
you are interested in buying that car you are quite happy to watch
a ten-minute TV commercial about it. Online enables you to do
that with the interaction and the use of websites, the use of
video, and the increase of broadband makes the content much richer,
so the key really is to make the advertising as interactive as
possible so that you are enhancing the experience.
Q415 Rosemary McKenna: Is there still
a big gap in how the generations view new media?
Mr Arnold: If you look at the
basic figures, for the 15 to 24 audience, the prime driver is
entertainment first and communications second, and entertainment
is things like Big Brother, as has already been talked
about, and the communications are from SMS through to e-mail.
If you look at the older generation, 45-plus, the primary reason
is information-gathering, so again using the car market is a good
example. From the latest figures that we have seen, 80% of people
have already made a decision about what car they are going to
buy when they turn up in the showroom, and that is because they
have gone online first; that is true for automotive, and it is
the same for health, and it is the same for holidays. That has
been the major shift, entertainment versus information.
Q416 Rosemary McKenna: How do the
advertisers get their income from my use of the internet? As you
just described there, the 30-second advert for a car, then you
go onto the internet, you go into Google and you search for all
the different types of car and you make up your mind; how do the
car companies get the advertising money?
Mr Arnold: Ultimately, it's as
it always has been, it is the number of sales—how many cars
they are shifting. One of the biggest challenges, and it always
has been in media advertising, is how you measure the impact.
So you try to measure the impact of a TV commercial, and you measure
the impact of maybe somebody spending five minutes on your website,
and there are a number of ways you can do that. The reason why
Google has been so successful is because the medium is so accountable,
so car manufacturers can measure the number of clicks for the
website, the number of registrations, the number of people offering
test-drives and, ultimately, the number of people buying cars.
It is the same measurement matrix as previously, it is just a
bit more transparent.
Q417 Chairman: We are seeing fragmentation
in terms of a huge growth in the number of channels and then,
on top of that, advertising being diverted from television to
the net. The consequence of that for the traditional, main, commercially-funded
television channels must be very serious. Do you believe that,
for instance, they are going to be able to maintain the public
service obligation that they are under if they are looking at
a pretty bleak future, in terms of revenue?
Mr Marshall: I guess the question
relates largely to ITV, and the short answer to that is, on current
evidence, no. Their revenue model is still based largely on advertising
and a consequence if their audience declines, which is partly
to do, clearly, with the increase in the number of channels I
think there is some argument about the quality of their product,
and also, on the basis of what overall TV advertising revenue
is doing, which is not growing at the moment, I think that is
partly cyclical, and to do with some quite difficult economic
climates at the moment, in terms of consumer expenditure, but
I think it is also structural. We would never foresee particularly
dramatic growth in television advertising in the foreseeable future
and, on the basis of that, then ITV will either have to suffer
a dramatic reduction in profit levels, which I doubt they will
be able to justify to their shareholders, or they will have to
cut back on their programme investment, which, inevitably, will
be their first-run drama and entertainment. I think that is the
equation and it is not a difficult equation to calculate.
Mr Pringle: The overriding point,
of course, is that, if you look at the IPA's Bellwether Report,
you do see a very close relationship between GDP and advertising
expenditure, and they move pretty much in line with each other.
There is a finite amount of money in the market-place, so I think
the idea that somehow or other this new media landscape is going
to create new funds is fanciful. What you are seeing is a shift,
changing brand shares or market shares between different media
types. We have said already that this shift is maybe quite dangerous,
because if classified rises and display suffers then not only
have you got money moving into different media channels, away
from the traditional broadcasters, you have got it moving into
a space where it is very difficult to make money anyway in the
traditional advertising model, because of the power of search.
Q418 Chairman: When we heard Pact
say, a little earlier, that they regarded the future at the moment
as being very exciting, it could actually be quite worrying. If
the cake remains the same size and is divided up amongst many,
many more players, both channels and on the net, the ability of
channels to invest in original programming content is going to
be considerably reduced?
Mr Pringle: I think it is very
exciting; there is no doubt that it is exciting, and I think there
is still huge potential in the export markets. If UK plc happens
to be quite good at this stuff then that is the horizon that we
should be looking at, because, as we know, there is a great tendency
for the UK to fight itself to death inside its own borders, so
I would not be optimistic for them within the UK confines, but
I might be optimistic outside.
Q419 Chairman: It was also suggested
to me recently that, traditionally, advertisers have put commercials
on the main broadcasters, which is a relatively untargeted way
of reaching people, but with the growth of niche channels and
also the net advertisers now have an ability to target specific
groups much more closely than they have in the past, will that
too damage ITV?
Mr Marshall: I think there is
an element of that. I think the most damaging thing for ITV is
that five years ago there were 150 programmes which delivered
an audience of 15 million or more; last year there were none.
ITV's great USP is its ability to deliver large audiences, and
that is being eaten away. ITV has got a lot of competitive issues
at the moment, not least of all, of course, what the BBC is likely
to be doing in the future. It is under severe threat, I think.
Mr Pringle: I think there is another,
interesting way of looking at all this, going back to Wayne's
point about the amount of time that young people are spending
in front of screens, which is a huge proportion of their waking
life. If they carry on those habits into adulthood screen-based
media is going to be a very dynamic and fertile area. There is
a rosy future for those broadcasters which are content providers
and can use these new screen-based platforms for their video content,
if they could find a way of monetising that, either by subscription
or advertising sale or product placement and sponsorship, and
so forth. But I think the point about ITV in particular is that
they do not seem to be heading that way, apart from their purchase
of Friends Reunited. They are not really in the subscription
game, they are not really in those online markets yet.
Mr Marshall: Their strategy of
putting together what they describe as a family of ITV channels,
which is the launching of ITVs 1 and 2 earlier, 2, 3 and 4, has
been successful. I think their business outside of ITV1 has been
successful, but ITV1 still constitutes such a huge proportion
of their overall revenue, and the way it has been eroded in the
last couple of years has been at such a rate that it does constitute
a problem. As Hamish says, they do not have the same access to
the other revenue sources, such as subscription, that other channels
have. Sky, for example; I think over 85% of its revenue is now
from pay-per-view and subscription.
Mr Pringle: That is why we say,
in this media ecology, we are so concerned about the BBC settlement.
Most people believe that the BBC is already overfunded, and we
have seen all the consequences of that, and if it continues to
be overfunded for the next period that is another huge pressure
on the likes of ITV and other commercial broadcasters. They have
made their pitch at RPI plus, is it, 2.3; that has to be negotiating
stance!
Mr Marshall: To put it into context,
I think Honda was mentioned earlier and Honda's main plank of
its advertising is its branding of the `power of dreams', and
that is all about reaching very large audiences very quickly,
and that largely has to be through Channel Five and ITV, and,
to some degree, Channel 4. Niche targeting is great but it is
still not a substitute for the big branding advertising, and if
that gets eroded it starts to impact on what then Honda does through
other media, including online.
Mr Pringle: Someone said recently
that people never type "search" into a search box, they
type a brand into a search box, so we are optimistic that in some
way brand or display advertising will survive, but there has to
be a platform for that.
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