What The Future Of Advertising Means For Investors

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Yesterday, Forrester Research published a report that slammed Facebook (FB) as an effective use of a firm’s marketing budget. Or, more accurately, they published said report with an open letter to Facebook from Forrester VP Nate Elliot that slammed the social networking site’s effectiveness.

The report was based on a survey of 395 marketers in the US, UK and Canada, which asked them to rank the effectiveness of various marketing channels from 1 (low) through 5 (high), and yes, FB did finish last of the channel options given. Top rated were “online ratings and reviews” with an average 3.84 and Facebook finished at the bottom with a 3.54.

Given the fairly narrow spread between first and last, the relatively high overall level of satisfaction and the fact that FB is still trying to optimize marketing effectiveness without overly upsetting users, I would say that the results themselves were fairly unremarkable. More than anything it shows, once again, the danger of paying too much attention to online ratings and reviews. If they are seen as just another channel for marketing dollars, do they really have any credibility?

 I do, however, tip my hat to Forrester for attaching an open letter with an inflammatory conclusion that ensured maximum exposure (I mean, I’m writing about it, aren’t I?) for their report.

Apart from prompting those thoughts, however, the report did lead to me pondering online advertising in general. Growth in the area has been explosive, and, according to the most recent IAB report it is still growing fast. Year to date revenues increased 18% from 2012, to $20.1 Billion. Overall then, the spend is increasing, but the focus on the still nascent mobile market and more performance-driven fee agreements has put pressure on pricing.

There is also evidence of a problem all too familiar to more traditional advertising channels. As with network television, advertising pays for the free content that people enjoy, but the ungrateful consumer still finds the ads annoying. In TV terms, the advent of Tivo was at one time predicted to spell the end of commercial TV. If people could access the content without the advertising, who wouldn’t? The same problem is now surfacing in relation to online advertising with the increasing popularity of programs such as AdBlock Plus. The rise and potential impact of AdBlock is covered in depth in this enlightening article by Andrew Leonard on Salon.com. The Tivo example would indicate that maybe fears are overdone, but some pullback in digital advertising revenues would come as no surprise.

It would seem from their Q3 results that Google (GOOG) is only too aware of this and has begun to focus on revenue sources other than advertising, with non-ad growth outpacing advertising revenue growth significantly (85% to 15%) in that period. Ad revenue still accounts for over 90% of GOOG’s income, so let’s not get carried away, but if history is any guide, Google is often in front of the pack.

With the upcoming Twitter IPO and questions about their ability to leverage popularity to produce an actual profit, all of these questions and concerns are likely to come to the forefront of debate in the next few months. Advertising is a business of trends and should the conventional wisdom about online advertising (“You gotta get on board!”) change, there could be a rocky time ahead.

If you think this is just idle speculation, then I refer you to the title of these daily columns, “Market Musings.” In that context, idle speculation has its place, but I am more concerned with what this potentially means for investors.

Advertising revenue as a whole is a function of the health of the economy and the degree of optimism felt by businesses. If there is even a pause in the growth of online revenues, then those dollars will probably be redirected within a marketing budget. In a continuing recovery, then, the likely beneficiaries are conventional media companies.

It is generally accepted that the best TV product, from an advertising perspective is live sports. Football, both college and pro, produces staggering viewing numbers, and most watch the events live, minimizing the “Tivo effect.” It makes sense, then, to look at media companies with an established presence in sports.

The most obvious is, of course, ESPN, the modestly self-titled “Worldwide leader.” ESPN is owned by Disney (DIS), who also own other cable channels and the ABC network. It must be said that DIS has already come a long way this year, being up over 38% YTD, and that much of that has been driven by increased earnings at ESPN. If you accept the above thesis, however, that company’s contribution to DIS profits is set to increase even further.

Comcast (CMCSA) is another stock that, on first glance, would seem to have already made its move. The stock is up 28% YTD, but if some online spend is diverted back to traditional media, their regional coverage of major sports on the Comcast Sports Net channels could attract more than its fair share. It could be that the best is yet to come.

I don’t wish to emulate Forrester and sensationalize a claim, but there is some evidence that the boom in online marketing is at least slowing. Mobile platforms will no doubt one day take much of that revenue, but, for now, it is hard to get my attention on a small screen without annoying me tremendously. Companies will, however, continue to market themselves and it would seem reasonable to expect the traditional media outlets to be the main beneficiaries in a kind of “back to the future” shift. Both DIS and CMCSA are ideally placed to benefit, and look set to continue to appreciate.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Business , Technology

Referenced Stocks: CMCSA , DIS , FB , GOOG

Martin Tillier


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