Bronte Media

Here’s a theory I have been mulling for a little while: Instead of online advertising being ‘insulated’ from an overall recession could it instead be a leading indicator?

Here’s an easy guy to pick on - a VC:

“Our experience is that on the search side, any performance-based media is less likely to be affected because marketers are paying on a price per lead. Our feeling is that as ad budgets get cut–and if the economy gets soft they will get cut–performance will less likely be cut than general impression or branding ads,” said Geoff Yang, a venture capitalist and partner at Redpoint Ventures”

I believe the contrary. That precisely because it is so measurable, performance-based media will be the first affected.

Why? Buying cycles are so short, and advertisers actually measure their return on investment.

In newspapers, TV, magazines etc. buyers commit to buying ads quarters in advance. That is why media companies see declines in their businesses on average two to three quarters after the actual recession starts. With online advertising, and particularly search, that is not the case.

Print classifieds spending, for instance, has always been much more levered to GDP growth and decline than other types of ad spending.

A big flaw of any analysis is that since online advertising is ‘better’ than other mediums, folks will simply reduce their spending elsewhere and keep online unhindered. But online advertising has always won ad spending by justifying itself solely on its own merits and performance.

You have to keep in mind the definition of a recession. People spend a lot less. Companies in aggregate don’t grow. Jobs are lost.
We may or may not be in a recession (I am not qualified to evaluate) but, to use the mortgage example once again, people won’t take out or refinance the mortgages with as much frequency and the number of companies offering to refinance and originate the mortgage will be fewer and the value of that customer (since on the whole there are a lot more vanilla mortgages rather than exotic ones that generate huge fees) is less.

That completely changes the economics of ad buying for the mortgage industry at each step of the funnel (conversion rate and profit per conversion. Where it mightn’t play out is number of mortgage searches because people are shit scared theirs might blow up and so will be doing research).

There has already been a huge decline in mortgage lead prices in the past year. Which should be evidence that the Internet ad industry is a leading indicator. We haven’t seen Dow Jones or Reuters have similar downgrades but they will no doubt happen toward the end of this year.

So count this as another rant line: That online advertising is a leading indicator of a recession rather than an industry insulated from the economy.