During times of economic contraction, businesses tend to pull back on what is considered discretionary spending. Often, the first budgets to be cut are advertising and marketing. With the recent steady flow of gloomy economic data, many are preparing for the worst, and that could deliver a big blow to the robust advertising recovery following the 2020 downturn.
The 2020 COVID-19 recession may have only lasted two months, but the impact it had on advertising was devastating. According to Magna, global advertising revenue declined 4.2% in 2020, which was a $25 billion decline from 2019. In the U.S., a record level of political advertising for the presidential election and digital advertising growth helped to prop up overall ad sales, and ad revenue fell by a more modest 1.6%.
As the economy came roaring back in 2021, advertising spend followed suit. In 2021, global ad revenue surged 22% and reached a record high of $710 billion. At the end of 2021, the economic recovery remained intact, and expectations were for additional growth in 2022.
And then the economic forecast darkened. While the U.S. ad market is anticipated to show resilience this year, thanks to the contentious midterm elections, growth across most media formats is expected to decline compared with 2021. Magna predicted that only national AVOD, OTT/CTV and cinema will see gains in 2022 versus the prior year.
Estimates for 2023 are even bleaker, with only national AVOD, OTT/CTV and publishing expected to grow compared with the prior year. It remains unclear whether there will actually be a recession, but if so, the depth and duration will play a critical role in determining how far the ad market falls in tandem. Economists have wide-ranging predictions for the severity and length of a possible recession and thus estimates for different advertising formats are mixed.
Not all media giants have equal advertising exposure. For instance, ad spend on streaming will likely continue to rise modestly, while linear TV would likely see the biggest declines. Paramount Global and Fox have more advertising exposure when weighed against rivals Disney and Warner Bros. Discovery. In 2021, ad revenue represented 40% of total revenue at Paramount and 42% at Fox. Meanwhile, ad revenue only accounted for roughly 15% at Disney and 17% at Warner Bros. Discovery.
Just about a month ago, media execs from NBUniversal, Paramount Global and Warner Bros. Discovery said they were seeing cracks in the ad market in the current macroeconomic environment. NBCU chief Jeff Shell mentioned at the 24th Annual Credit Suisse Communications Conference that after being “on fire” last year, advertising is weaker this year in comparison.
Echoing Shell’s sentiment was Paramount Global CEO Bob Bakish, who noted that advertising had been a little “choppy” as a result of the economy and inflation. And Jon Steinlauf, chief U.S. advertising sales officer at Warner Bros. Discovery, pointed to supply-chain issues as the “overarching problem in TV ad sales for the last 12 months.”
Even more worrisome are the dire warnings from digital advertising behemoths such as Meta. According to reports, CEO Mark Zuckerberg warned his employees earlier this month that the company was facing one of the “worst downturns that we’ve seen in recent history.” Almost the entirety of Meta’s revenue is brought in by its family of apps including Facebook, Instagram and WhatsApp, which have been ad revenue-generating machines.
While revenue among the three biggest social media giants has been declining since Q2 of 2021, digital ad revenue was still the bright spot in the ad market. But Zuckerberg’s warning struck serious fear into the hearts of investors. If Meta is seeing these impacts, the rest of the group is likely feeling the pain, too.
Though there are still many unknowns regarding the long-term trajectory of the economy, U.S. GDP growth typically has a direct impact on the growth of global advertising spend, and the negative GDP growth in Q1 has already begun to create cracks in the ad market.
With Q2 earnings season kicking off, investors are already on edge. Results from the top media companies and commentary from management will be even more important this earnings season, as it will provide more color and insight while investors attempt to navigate the uncertain waters that lie ahead.