A complex web of interrelated macroeconomic conditions – including inflation, supply chain issues, and the impact of the war in Ukraine – are threatening to push the West into another recession. And the tech companies which are reliant on ad revenues are feeling the impact.
Disappointing Q2 filings from Snap and Twitter last week sparked a further fall among the ad-funded tech stocks. Both companies blamed a weak ad market, and warned that more pain is on the way. Share prices for Alphabet, Meta, and Pinterest all saw significant drops, with investors predicting that they too will be hit by advertisers tightening their purse strings.
But in the agency world, it’s a very different story. Three of the world’s largest agency groups – Omnicom, Interpublic Group, and Publicis Groupe, each released their Q2 earnings last week, and all three upgraded their forecasts for organic growth across 2022, having outperformed expectations in the first half of the year.
This paints a confusing picture for the current ad market – is ad spend growing, slowing, or shrinking? A deeper dive into the financials offers a few hints.
Not all bad for ads
It’s a general rule that total ad spend will correlate to some extent with overall economic growth. In periods of growth, businesses have more money to spend on marketing, and their consumers have more money to spend on their products. In a recession, the reverse is true.
But not all media channels are equally affected. Research has shown for example that newspaper and magazine ad revenues are much more affected by the state of the economy than TV ad revenues. This is down to a mix of the types of advertisers which each media channel attracts (newspapers rely on retail and classified advertising, which both tend to fall in a recession), and the types of campaigns they’re suitable for (TV is best for brand building, which is less recession-sensitive).
Social media companies and apps, which are frequently used for direct response campaigns, are similarly more liable to see slowing ad sales when the economy is struggling. Similarly revenues for any ad tech companies which focus mostly on performance formats like display will be more sensitive to a slowing economy.
And Snap’s CFO Derek Andersen says that programmatic sales are particularly vulnerable, because they’re so easy for buyers to turn off when they need to make quick cost savings.
“Advertising spending, in particular auction-driven direct response advertising, is among the very few line items in a company’s cost structure that they can reduce immediately in response to pressure on their top line or their input costs,” said Andersen. “As a result, as many industries and verticals have come under top line or input cost pressure, advertising spending has been amongst the first areas impacted.”
All of this obviously affects agencies too, since programmatic buying and direct response campaigns are a part of their business. And while it’ll take more time to filter through, advertisers may choose to reduce spend on brand building campaigns too as a cost cutting measure.
But the modern agency handles much more than just advertising. In a note to its clients a few weeks back, investment bank Berenberg warned that it expects an advertising recession is on the horizon, predicting a five percent fall in global media spending in 2023. But the bank also said it expects agencies will fare better than the rest of the ad industry, thanks to their various diversification efforts.
Omnicom CEO John Wren referenced this in his earnings call. Wren said he has been through three recessions during his time at Omnicom, and that he believes the business has never been more “fit for purpose” when it comes to weathering the storm. ” We continue to invest organically in things that we believe will add to our revenue next year and beyond. And those investments are getting made as we speak,” he said.
There are signs of this being that case at IPG too. On the agency’s Q2 earnings call, one analyst questions CEO Philippe Krakowsky about staff cuts at ad agencies R/GA and Huge, asking whether this was a sign that IPG is anticipating a slowdown in business. Krakowsky answered that IPG as a whole is still hiring, but that “the skill sets we’re bringing in may not necessarily be the ones that we would have been bringing in had we been talking about this three years ago”.
So while agencies will be hit by a slowdown in traditional ad spend, they’re increasingly able to ramp up investment in other areas of the business to mitigate the damage.
It’s [not] the economy, stupid
Finally, it’s important to remember that while the economy is certainly a factor, it’s not the only thing affecting social media stocks.
Snapchat in particular has been feeling the effects of Apple’s App Tracking Transparency update, which has hindered its ability to target and measure campaigns. Twitter meanwhile has been contending with the disruptive influence of its on-again off-again relationship with Elon Musk. Twitter said in its Q2 earnings that “uncertainty” relating to the acquisition was dragging down ad sales. And it wouldn’t be surprising if Musk’s vocal speculation about the level of bot activity and ad fraud on Twitter contributed to the slowdown.
And while agency executives acknowledge that global economic conditions do risk hurting future ad revenues, several are also hopeful that the damage to ad spend won’t be too drastic.
GroupM earlier this year put out a report in which it argued that so long as economic activity grows at a faster rate than inflation, then inflation is a positive contributor to advertising growth. This sentiment was echoed by IPG’s Krakowsky during the agency’s earnings call. “I think clients continue to see marketing as a way to mitigate [inflation],” said Krakowsky. “And we do have the capacity in many cases contractually to sort of share that with them as we see its impact. So I don’t see it impacting revenue at this point.”