Data, Data, Who's Got the Data

The Insider says that

Unlike those who argue that Google's magical business will accelerate in a recession as advertisers spend only where they know they will get a great ROI, we think Google's growth will be hit by economic weakness...

Oh, Henry, who's arguing? This is just cocktail chatter. Without the cocktails, unfortunately.

Seriously, this is a really interesting question: what are the drivers of advertising spend? Certainly GDP growth and growth in advertising expenditures are correlated. The correlation is about 0.5 since the end of World War II, according to this data. (I wonder if the correlated part is the allegorical half that's wasted...) So an economic recession would often coincide with an advertising recession. But what's the mechanism for that decline? Decline in CPMs or decline in users of media? That is, is it driven by marketing departments or consumers? Is the decline caused by the economic decline, or are they both caused by some third thing? I can't answer these. I need a lot more data.

And there isn't a lot because advertising recessions are unusual. There have been only three since 1945, in nominal terms: in 1961 (decrease of 0.8% from the previous year), 1991 (-1.6%) and 2001 (-4.9%). Clearly the last one was the most significant: it was the disappearance of the dot-com spending. (If you hadn't had 2000's stupendous growth in dot-com related advertising there would have been no decline when it disappeared.) But yes, if there's a recession, we may have another ad recession.

Everybody gets hurt in an ad recession, but not equally. According to Piper Jaffray's research (sorry, no link), 2001 saw a fall-off in advertising expenditures of 6.7% from 2000 (why can't these people get together and agree on their numbers!) The loss in spend was not evenly distributed. In 2001 direct mail and yellow pages advertising did not decline. TV was hit the worst, magazines second, internet third, then newspaper and radio.

Accountable and local advertising did not decline during the worst ad recession since 1938. Why? Because businesses still need customers; they're just not willing to take as much risk.

The riskiness of forms of advertising--and by riskiness I mean the variance of cost to acquire a customer--in decreasing order, is:

1. Buying a spot with no metrics
2. Buying a measurable impression
3. Buying a click or call
4. Buying a lead or action
5. Buying a customer

Note that the risk decreases as accountability increases (Is this necessarily so? It would seem to imply that advertising dollars are rationally allocated--laugh all you want, but it seems to be true. I'll have to noodle that.) If there is an ad recession, the riskiest forms of advertising will be hurt the worst. Guerilla Marketing and other forms of marketing with absolutely no way to infer their reach just stop. Print/TV/Radio get hurt.

But there aren't many ways to buy a customer yet, so the money can't reach up that far. Buying leads and buying actions will benefit the most, growth-wise, but off a small base. I think perhaps Google benefits the most, dollar-wise.

When I say "benefits the most" I mean, of course, "gets hurt the least." Ad recessions hit all players to some extent. If there is one, Google will grow more slowly than they would have otherwise, but they will still grow.

[BTW, I am not advocating buying Google stock. In my opinion--which is worth what you're paying for it--Google is wildly overvalued, ad recession or not.]