CNBC Business | THE BIG PITCH

THE BIG PITCH

As TV ad revenues fall, advertisers are having to tap into new channels in order to survive

The ad industry is discovering new channels and new partners in its quest to get products seen by consumers. But is it really getting more creative? Boyd Farrow reports

The UK, long regarded as a major creative hotbed for the worldwide advertising business (the first newspaper ads appeared in England in the 17th century) is providing the clearest picture yet of the industry’s future, at least if the hunches of Google and Yahoo!, the warring titans of the new media, are correct.

Last December, Google – now the most powerful brand in the world, according to Millward Brown’s Brandz database – trumpeted a partnership with pay-TV company British Sky Broadcasting (BSkyB). The link-up envisages BSkyB’s fledgling broadband internet services being bundled up with Google’s search, e-mail and advertising facilities. The UK has warmed to digital TV, and Google and BSkyB eventually aim to deliver “tailor-made” ads to viewers’ set-top boxes during programme breaks. Essentially this will extend Google’s dizzyingly successful model of targeted online advertising to television just as TV is on the verge of an internet-driven revolution. Some analysts expect that within a decade, all programming – including movies and sport – will bypass broadcasters and be delivered to viewers directly by the programmes’ owners, funded by advertising. In the UK, as elsewhere, Google is driving the online ad market and “search advertising” particularly. With revenues exceeding €1bn in 2006, Google earns far more UK ad revenue in the UK than BSkyB.

Google’s announcement of its BskyB tie-up came days after Yahoo! struck a deal with UK mobile phone operator Vodafone to “create an innovative mobile advertising business to enhance the customer experience on mobile phones while providing both companies with a new revenue stream”. Vodafone is already working with social networking sites MySpace – owned by BSkyB’s majority owner News Corporation – and YouTube, which was bought by Google for €1.2bn last autumn. In March, Orange, owned by France Telecom, signed a deal with top UK social networking site Bebo. Additionally, in 2008, new mobile service Blyk will debut in the UK before it is rolled out across Europe. Those hard-to-reach “young people” will earn airtime in exchange for accepting ads on their handsets. Blyk’s co-founder, Pekka Ala-Pietilä, a former president of handset giant Nokia, said the decision to launch in the UK was made because it is the world’s second-largest ad market. Although smaller than the US, its advertisers are considered more sophisticated in recognising the market segmentation that new technology enables.

For technology-driven companies chasing “eyeballs”, the UK is the perfect laboratory. Partly because the BBC, the state-controlled main broadcaster, cannot accept advertising, the internet already accounts for 16.6% of companies’ total ad spend in the UK compared to about 5% worldwide, according to ZenithOptimedia, part of Publicis Groupe. In the first half of 2007, online advertising rose 40% in the UK (3% more than in the US) compared to the same period last year, according to the Internet Advertising Bureau. Moreover, 47% of UK households have broadband; this is 14% more than in Germany and 3% more than the US. Those with broadband shop online more often and spend more money than those with dial-up connections. In the first six months of 2006, online retail spending in the UK was up 40% on the same period last year.

Sir Martin Sorrell, chief executive of FTSE 100 company WPP, owner of the J Walter Thompson and Ogilvy & Mather advertising agencies, predicts that the internet will eventually account for 20% of worldwide advertising spend, at the expense of broadcast, print, radio and billboards. The UK will reach that stage within 18 months – when the internet will account for 22.6% of all ad spend – according to ZenithOptimedia. At that point, internet advertising will be worth almost as much as TV advertising.

ZenithOptimedia claims that in the next three years, internet advertising will grow at a rate six times faster than other types of advertising. In its recently published findings on worldwide ad budgets, the media agency predicted that internet advertising will grow by 28.2% this year and will overtake radio advertising in 2008; 8% of all ad budgets will be spent on the internet, compared to 7.9% on the airwaves.

ZenithOptimedia predicts a 5.2% increase in advertising spending this year, to €333.5bn worldwide. Of that total, €123bn will go to television, €92.5bn to newspapers, €41.3bn to magazines, €26.6bn to radio and €22.9bn to the internet. The agency predicts that ad spending will grow by 6.2% next year, because of the Olympics, US presidential elections and the Euro 2008 soccer tournament, and by 5% in 2009. The industry growth rate is slowing down in the US and Europe as the market becomes fully developed, while the ad markets in the Middle East and central and eastern Europe are growing the fastest due to rapid economic growth through oil revenues. The Russian ad market, for instance, was worth €4.7bn in 2006, but ZenithOptimedia expects it will be worth €6bn this year, and €8.9bn by 2009. In Russia, the internet will overtake radio in terms of ad money by 2010.

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