PARQOR is the handbook every media and technology executive needs to navigate the seismic shifts underway in the media business. Through in-depth analysis from a network of senior media and tech leaders, Andrew Rosen cuts through what's happening, highlights what it means and suggests where you should go next.
In Q4 2022, PARQOR will be focusing on four trends. This essay focuses on the themes, "Linear channels seem doomed. What happens next?" and "There is no such thing as a CTV household, what happens next?"
One of the big themes of recent media earnings calls was the mix of softening demand and recessionary headwinds in advertising spend. Generally, the story from Q2 of softening demand scatter market continued in Q3, media companies expect it to continue in Q4, and they are planning for a big rebound in 2023. But, advertising holding companies are not projecting a dip in revenues in Q4 2022, and are projecting growth in 2023.
There is also the story of Apple’s Anti-Tracking Transparency (ATT) playing out in social advertising, and negatively impacting YouTube’s revenues year-over-year while Google’s search revenues remained flat (and both have tended to move hand-in-hand since Google started disclosing YouTube revenues). ATT is also impacting the likes of Meta, Snap and Spotify.
I argued two weeks ago that “focusing on bearish macro trends may be mistaking the forest for the trees”, and quoted GroupM’s Brian Wieser: “If an economy produces brands that are disproportionately likely to spend money on advertising to replace brands or companies that were proportionately less likely to spend on advertising, you get growth.”
His basic point was a pullback in spend is a signal for “something”, and his read is it’s a signal that the 200 “retail-cartel” investors are being disrupted by the 10MM smaller, e-commerce brands. But the question that has been growing is, what if that’s not the signal? What if the slowdown reflects linear advertisers rethinking their linear spend altogether?
Key Takeaway
The pullback in spend by advertisers reflected in media companies' Q3 earnings may be more nuanced and more significant than macro headwinds or fears of a recession.
Total words: 1,200
Total time reading: 5 minutes
A Paradigm Shift
In his most recent essay, Next in Marketing’s Mike Shields mentioned a conversation on Twitter Spaces where Lou Paskalis, president and COO of MMA Global, “predicted that linear TV, which is already taking a beating, will be a major recession casualty, as brands look to shift to dollars to everything that is trackable and addressable.”
The implication is there is a disconnect between legacy media promises to investors that 2023 will see a rebound in linear ad spend, and the reality of advertisers re-evaluating their linear spend as their needs shift to targeting and addressability.
Shields interviewed Vinny Rinaldi, Hershey’s head of media and analytics, who highlighted how linear inventory has a weaker position with advertisers: “it takes three times as many ad spots to reach the same amount of TV viewers as it did in 2016”. In other words, it’s more expensive and less effective. He shared that in 2023, Hershey’s will allocate less than 25% of Hershey’s media budget to TV, down from 78% five years ago.
Hershey’s is not alone. P&G CFO Andre Schulten recently told investors on its Q3 2022 earnings call:
“On the media investment, I think we really need to shift focus. It is difficult to describe media sufficiency in dollars, especially when we are actively shifting our spending from linear non-targeted TV into programmatic and into digital spend, that is a lot more targeted and a lot more precise in terms of delivering reach and quality of reach where we need it.”
Schulten added:
“we committed to drive superiority of our brands. We will not step back from that, and that for us means higher reach, higher quality of reach, higher targeting capability, which we've built around the world, and that's the measure of success for us. If we deliver that, the dollars are an outcome, not the determining factor of efficiency of investment.”
It’s a significant paradigm shift: dollar spend is no longer the measure of efficiency annual campaign success. Instead the focus is now on outcomes and spend will now be measured in terms of investment in reach across platforms. If executed correctly, P&G brands should be able to hit the reach objective at lower total advertising costs than what P&G has historically spent on linear.
One implication for legacy businesses is that investments in reach are evolving towards becoming more real-time. That creates a tough dilemma for legacy media: the value of 2023 upfronts to P&G (which spent $5.1B in the U.S. in 2021) will matter less than their scale in streaming and the targeting and addressability solutions.
In turn, that raises the question of whether their targeting and addressability solutions will be able to compete against the walled gardens of Google/YouTube and Amazon? Because if they can’t, Hershey’s Vinny Rinaldi may be one of many canaries in the linear TV coalmine.
The Problem of Frequency
In his regular opinion column for MediaPost this week, Simulmedia Founder and CEO Dave Morgan raised a red flag on this second point: Ad frequency is “poorly managed” in ad-supported streaming because the “processes and technology are not in place” to help each buyer understand what ads each person or device has seen.
He added:
“If processes and technology are not in place to help [buyers of campaigns] each understand what ads each person or device has seen, it is vertically impossible to expect that the viewer ad frequency experience can be managed. If there are three different pathways to the inventory and each operates with a three-per-day frequency cap, the user might very well get the same ad nine times each day.”
It’s a problem I wrote about in August, and also back in June for The Information in “The Question Plaguing Connected TV: Who’s Watching?”. The video advertising marketplace has turned streaming advertising into a game “four-dimensional chess”:
“Solving this problem requires cooperation and collaboration from the multiple stakeholders, particularly the publishers, devices, sell-side platforms and buyers. It’s not rocket science, but it will take focus, hard work and time. Solutions to the problem will have to be prioritized.”
And if it can’t be solved, Google/YouTube, Amazon and Netflix “will make a good user ad experience a competitive advantage for attracting and retaining” both viewers and advertisers away from legacy media solutions.
What is that “something”?
So, there is tangible evidence that the pullback we are witnessing is advertisers rethinking their spending. The P&G earnings highlight the obvious danger for legacy media companies: their ability to aggregate scarcity of reach — effectively, the value proposition of upfronts (which I wrote about in June) — is now both economically and operationally less valuable to advertisers.
P&G’s new strategy also raises the question of why holding companies are not projecting lower growth for 2023. Because CEO Jon Moeller told investors: “we're moving a lot of the marketing activity set in-house. And so the cost for that in terms of, for example, purchasing media moves out of the advertising budget and into the overhead budget.” Meaning, dollars intended for advertisers are now a variable cost – and not fixed under marketing budgets – and they will be measured based on both the ability to achieve reach and drive return on investment.
So the implication is that ad holding companies should indeed be projecting lower growth when P&G and others are cutting back on brand advertising, and moving more dollars in-house. And therefore, the pullback in spend suggests that “something” going on in the ad marketplace is nuanced. In fact, as Dave Morgan’s essay highlights, it’s so nuanced it’s still figuring itself out.
That may be the answer to why holding companies are not projecting lower growth for 2023. The changes are still working their way into the system, and “the publishers, devices, sell-side platforms and buyers” are figuring out how all the pieces fit together. The implication is that, if we’re looking for a real signal that legacy media advertising revenues are in trouble, we need to wait for the 2023 upfronts.