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Change will only continue to gather pace

24 October 2018 Daniel Knapp, Ph.D.

Editor's note: Daniel Knapp, Ph.D., and Executive Director for Media and Advertising at IHS Markit, was the subject of a recent interview on the future of TV and digital advertising. The interview appears in the 25th-anniversary publication of TV Key Facts from the RTL Group, the European broadcaster, which also conducted the interview.

What are the main advertising industry trends you observed in 2017 and 2018?

There is a simple and a complex story about the past two years, and they provide very different conclusions.

At first glance, the advertising market is in robust health and growth is business as usual. Global net advertising revenue is set to grow by 6.1% in 2018, the fastest pace since 2010. This surge is in part fuelled by the Football World Cup, Winter Olympics, and elections (e.g., midterms in the US). Political and major sports events are typical, reoccurring drivers of ad spend. These usual suspects are joined by continuous, long-term drivers, in particular strong growth in Asia Pacific markets like India and Indonesia, and the unstoppable rise of digital.

Yet underneath this simple growth story hides a more complex picture. Seismic forces are transforming the shape of the advertising industry. We are witnessing a fundamental change in the logic of spend, as companies move their investment from working media to technology, data, and software services in a bid to manage an increasingly complex landscape of consumers and devices. Non-interruptive forms of marketing that frequently escape accurate measurement are also on the rise. As consumers are getting oversaturated with a flood of advertising messages, marketer's claims to evoke an emotional connection with a brand seem increasingly problematic. Alternative ways of storytelling, such as original content production, sponsorships, branded content, or influencer marketing are on the rise.

The market is also impacted by a long-term change in the composition of advertisers that underwrite media owner revenues. Chief marketing officers (CMO) are under high pressure to deliver business results, not just marketing outcomes. They are increasingly measured on more units sold, not on the number of clicks or views that an advert has received. As a result, marketing expenditure is under severe scrutiny and needs to prove that it works. Some of the largest marketing sectors, like consumer packaged goods (CPG) and automotive, adopt zero-based budgeting policies that hurt advertising investment. Amidst these changes, there is a change of guards as direct-to-consumer brands are increasingly putting large incumbents under pressure. These brands are starting to disrupt every industry—while principally focussed on the US, they are becoming a global phenomenon in 2018. Like Warby Parker, Harry's or Dollar Shave Club, they follow a much more data-centric logic in their investments than other marketers. While they typically start in digital, as these brands scale, they increasingly also look to TV.

At the same time, the overall pool of advertisers is growing and has never been as large as before. However, it is largely Google and Facebook who benefit from that surge. Small and medium-sized businesses which previously only advertised per direct mail, or not at all, are flocking to the platforms and are major contributors to their performance. Whereas we forecast the global digital advertising market to grow by 11.3% in 2018, Google and Facebook are set to grow three times as fast, with a blended rate of 33.8%.

"Innovation" is a term endemic to the advertising industry, which always seeks to reaffirm its value to marketers. But not each innovation is making an equal impact in 2017 and 2018. Programmatic, key "innovation" of the last decade, has become a tainted term in 2018 due to brand safety and fraud issues, and many vendors replace it with the label "AI" for artificial intelligence. While often this amounts to little more than a rebranding, in 2018 the first real impacts of AI on the advertising industry are gathering pace—applications range from finding hidden patterns in consumer behaviour, testing, and refining creatives, to automating tasks that exceed human time and cognition. Another domain of innovation is voice. Voice has been hailed as the advertising platform of the future as Alexa, Google Home, and other devices continue to colonise consumer households apace. But dream and reality are still far apart: campaigns have mainly been experimental, and marketers are struggling to find a scalable and non-intrusive model.

What are the trends you observe in equipment/screen penetration and usage, and what are the main findings looking back 25 years?

Twenty-five years ago, the last of the MTV generation also became the internet generation—the adolescents exploring their identities via Music TV in the 1990s began using dial-up modems to access the world wide web. Modes of media consumption were distinctly associated with particular devices. The world of TV was entirely separate from the digital world.

Fast forward to the new millennium. The number of devices to consume TV and video has exploded, and most are now internet-enabled. In 2010, the average household in Europe had three internet connected devices, doubling to six devices in 2017 that range from TV, PC/laptop, smartphone, tablet, games console, and connected DVD/Blu-ray player, to newer categories like smart speakers and VR headsets. Yet we are moving from a period of device proliferation to a period of device stabilisation. Only 1.5 additional devices on average will be added to households in Europe until 2023. This means that the future of audiovisual consumption is largely being played out within the device ecosystem available in homes today.

Remarkably, remnants of that old distinction between content and devices remain—this time not by necessity as in the late 1990s, but by consumer choice. Clearly, TV content is now being consumed on an array of different devices, and linear consumption on TV sets has slightly declined in all Big 5 European markets (France, Germany, Italy, Spain, and UK) in 2017 in favour of on-demand consumption. But within on-demand consumption, content type is generally tied to device type. Over 50% of YouTube consumption, and around 80% of Facebook video consumption, is mobile. Yet most Netflix consumption takes place via the living-room TV. Consumers chose the TV set to enjoy traditional, TV-like content, whereas shorter online content is consumed on mobile devices.

What will define the future of TV and video/broadcast and digital advertising?

In a complex advertising landscape, TV is benefitting from its continued ability to deliver brand advertising at scale. Robust measurement, a safe environment, and vast reach continue to make TV irreplaceable for brand marketers. A broader change in cultural climate following the Cambridge Analytica scandal and allegations of election meddling have tainted the reputation of digital advertising. Fraud in programmatic does not help, either. Many marketers consider TV as a safe haven in a digital Wild West.

While Google and Facebook are eyeing TV ad spend through their video offerings, the relationship between TV and digital is more complex, and often beneficial for TV. Even digital-first advertisers require TV in order to build sustainable brands and connect performance-driven campaigns with broad awareness.

Yet the nature of TV is changing as it becomes increasingly detached from the classic broadcast distribution model. Incumbents face competition from IP-delivered providers such as digital platforms that roll out ever more broadcast-like offerings. New types of content creators emerge, and new narrative styles proliferate that eschew established 30- to 90-minute formats, in particular driven by creative forms coming out of mobile video.

From an advertising perspective, enabling seamless measurement and buying, as well as flexible ad formats, is of vital importance to capitalise on changing audience trends and accountability demands from advertisers. The combination of linear TV and online video inventory advanced by some broadcasters is a crucial step. The programmatic model is going to sweep further into TV, enabling granular, audience-based buying and household-addressable messaging. The US and UK are already advanced in this area, and we forecast global programmatic TV to grow by 180% in 2018, reaching a total share of TV advertising of 8% by 2023. The rise of connected TVs presents a huge opportunity to scale programmatic and addressable TV offerings. By 2023, we forecast that 1.2 billion connected TVs will be installed in homes across the globe.

But as strong as individual broadcasters are in terms of quality of content, audience reach, and advertising relationships, they increasingly need to look for partners, especially in online video. We forecast that 12% of TV advertising revenues will be generated via online video in Europe by 2023. Generating scale through partnerships for inventory aggregation, ad monetization, and data analysis is pivotal for broadcasters to compete with the digital behemoths of Silicon Valley. Initiatives like AdConnect and EBX in Europe, and Open A.P. in the US, are vital steps on this path. Another route for partnership is the combination of TV, telecoms, and advertising. AT&T has pursued this through acquisitions, but in particular in Europe, partnerships and alliances are also viable.

What is and will be the role of social media platforms in digital advertising, looking (25) years ahead?

Time ticks exponentially faster in digital. The forces that dominate the digital ecosystem today did not exist 25 years ago. Google was founded in 1998, Facebook in 2004, and Instagram in 2010. If anything, change will only continue to gather pace. This is a setting far from ideal for making predictions. Nevertheless, we can identity a number of themes that will bear on the mid- and long-term future.

Although Silicon Valley seems unstoppable in its dominance today, its protagonists are themselves constant targets of disruption. No company illustrates this as clearly as Facebook. Recent financial results have hinted that engagement on the core Facebook platform is flat or declining, and user growth in the US and Europe is stalling. The acquisitions of WhatsApp and Instagram are bets to hedge against erosion of the core product. They reflect an image-centric and video-native way of communication (Instagram), and the trend among younger users to replace public communication on social networks with private or semi-private exchanges in closed groups (WhatsApp).

In essence, even global platforms have to stay on their toes constantly and defend themselves against disruptors. However, in contrast to other companies, their cash reserves are so large that defence has mainly become a question of where and when to allocate the needed capital. These platforms are in the unique position to buy into their future markets and products. We therefore must understand these companies also as investment vehicles, not purely in terms of the products they represent today.

Yet social platforms have also become protagonists in a digital backlash. Brand safety issues, lack of transparent measurement, stricter data-protection rules, and the weaponization of social media by bad actors has changed consumer perception and increased regulatory scrutiny. Young media users are retreating into private or semi-private forms of communication, which will make platform-based ad monetization harder. The possibility of breaking up monopolistic or oligopolistic structures through regulation is the biggest threat that social platforms currently face.

Lastly, its short but rich history suggests that the internet evolves in cycles of centralisation and decentralisation. The social platforms running on cloud infrastructures we know today represent a phase of centralisation. But new technologies like blockchain and distributed computing highlight that we are at the beginning of transitioning to a decentralised environment that promises greater control and value capture for both users and content owners. Any disruption of control over data and audiences, monopoly on advertising supply, and erosion of scale is a threat to social media platforms and would alter their role in digital advertising.

Daniel Knapp, Ph.D. is Executive Director, Media and Advertising, at IHS Markit
Posted 24 October 2018

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