Spotlight on Media & Entertainment: Future of Advertising Spend

Executive Insights | SPOTLIGHT ON MEDIA & ENTERTAINMENT
L.E.K. Consulting / September 2015 LEK.COM
FUTURE OF ADVERTISING SPEND
What is the latest with ad spending? »
The advertising landscape
continues to evolve, with new
mediums, shifting spend and
agency consolidation creating a
more complex ecosystem.
In this new Executive Insights
Spotlight on Media
Entertainment series, L.E.K.
Consulting answers the
following questions:
• What are projections for
future advertising spend?
• How is advertising spend-by-
medium shifting?
• How will future economic
conditions affect advertising
spend?
• Are agencies continuing to
consolidate?
Future of Advertising Spend:
How Has It Evolved, and How Will It Continue to Evolve?
or

Executive Insights | SPOTLIGHT ON MEDIA ENTERTAINMENT
How does U.S. ad spend break down by medium? »
Steady as She Goes: US Advertising Spend Expected to Grow
at ~4% CAGR, Reaching ~$231B in 2022
Source: L.E.K. analysis, Magna Global, Pivotal Research, PQ Media
Total US advertising spend (2000-2022F)
Billions of dollars
152
CAGR %
(01-06)
CAGR %
(06-09)
CAGR %
(09-14)
CAGR %
(14-19F) (14-22F)
Forecast
141
145
148
159
165
173 172
163
138
147
152
159
163
171
175
186
190
201
3.6 3.8
204
216
219
231
00 02 04 06 08 10 12 14 16F 18F 20F 22F
0
40
80
120
160
200
$240
4.2
-7.2 4.4
After some rockiness
corresponding to the global
economic recession, U.S.
advertising spend has returned
to historical growth rates in
recent years.
Projections indicate that future
ad spend will continue to
increase at moderate rates,
growing between 3.5% and 4%
per annum through 2022.

What is the outlook in other markets? »
Digital advertising spend is
expected to drive total U.S.
advertising spend through
2022, although growth rates
will likely slow down slightly
from historical rates.
Interestingly, digital spend
dollars are not being redirected
from TV ad spend but rather
from other media, including
newspapers, magazines, radio,
outdoor, out-of-home and
cinema.
Growth in TV ad spend is, in
fact, expected to accelerate in
the coming years, increasing
from 2.6% annually from
2000-2014 to 3.2% from
2014-2022.
Digital Takes Charge:
US Market Shifting to Digital but, Importantly, Not at Expense of TV
Source: L.E.K. analysis, Magna Global, Pivotal Research, PQ Media
Mix composition 00 05 08 09 14 19F 22F
TV 34% 37% 39% 41% 43% 40% 41%
Digital 5% 7% 14% 16% 28% 37% 38%
Other 62% 56% 47% 43% 30% 22% 21%
Total US advertising spend by media type (2000-2022F)
Billions of dollars
CAGR %
(00-14) (14-19F) (14-22F)
0.8
152
141 145 148
159
165
173 172
163
138
147
152
159 163
171 175
186 190
201 204
216 219
Total 3.83.6
2.6TV 3.22.3
14.2Digital 8.110.1
(4.3)Other (0.5)(2.0)
0
40
80
120
160
200
$240 231
00 02 04 06 08 10 12 14 16F 18F 20F 22F
Forecast

What is the global outlook? »
U.K. advertising spend has been
similar to that in the U.S. in
recent years, with moderate
overall growth driven in large
part by strong growth in digital
ad spend.
Similarly, strong growth in the
digital space will drive future
growth, with TV expected to see
slightly higher growth rates for
2014-2019 than 2008-2014.
The Queen Goes Digital:
UK Shift to Digital During Recent Recession Will Continue
Source: L.E.K. analysis, eMarketer, PQ Media
Total UK advertising spend by media type (2008-2019F)
Billions of dollars
CAGR %
(08-14) (14-19F)
21
18
20
21
22
23
24
26
28
29
31
33
08 10 12 14 16F 18F
Total 6.52.6
TV 4.03.7
Digital 11.915.8
Other 1.6(4.9)
0
5
10
15
20
25
30
$35
Forecast
25%
27%
24%
48%
18% 37%
57%
36% 28%

What impact will the economy have on growth? »
Forecasts of global advertising
spend indicate that APAC and
EMEA will drive future growth,
with the industry reaching
~$679B by 2019, up from
~$506B in 2014.
Latin America is projected to
have the fastest growth rate,
coming in just shy of 10% per
annum, although its relatively
small base limits its impact on
the overall market.
The North American market
appears to be the most mature
and saturated, with moderate
growth projected for 2014-
2019.
Changing Center of Balance:
Global Growth Largely Driven by APAC and EMEA Markets
Source: L.E.K. analysis, Wilkofsky Gruen Associates, Magna Global, PQ Media
Global advertising spend forecasts (2008-2019F)
Billions of dollars
483
392
423
442
460
479
506
531
569
600
643
679
08 10 12 14 16F 18F
0
50
100
150
200
250
300
350
400
450
500
550
600
650
$700 Forecast
CAGR %
(08-12) (12-14) (14-19F)
1.3Total 6.12.5
(8.6)LatAM 9.610.0
(0.8)EMEA 6.03.3
4.7APAC 7.96.9
(0.3)North
America
3.83.7

How strong is the connection between GDP and ad spend? »
Not surprisingly, U.S. advertising
spend growth has moved mostly
in unison with real U.S. GDP
growth over the last 45 years or
so, with declines in ad spend
corresponding to the five U.S.
recessions during this time.
Moving in Unison: US Ad Spend Moves in Line With GDP, With Typically
More Pronounced Declines
Source: L.E.K. analysis, U.S. Bureau of Economic Analysis, OECD, Universal McCann
US ad spend growth vs. real GDP growth (1970-2014)
Percentage
U.S. real GDP
U.S. real ad spend
2008 collapse coincided
with changing
content-consumption habits
-20
-15
-10
-5
0
5
10
15%
1975 1980 1985 1990 1995 2000 2005 2010 20151970

How big is the multiplier effect? »
A regression analysis reveals a
strong positive correlation
between U.S. ad spend and real
U.S. GDP growth, with ~75%
of the change in U.S. ad spend
explained by changes in real
U.S. GDP.
GDP Ups and Downs Drive Ad Spend: Strong Correlation Between Real
US GDP and Real US Advertising Spend
Source: L.E.K. analysis, U.S. Bureau of Economic Analysis, OECD, Universal McCann
Historical growth of total ad spend vs. real GDP growth (1970-2014)
Percentage
Regression Stats
Adjusted R2
= 74.6%
P value = 0.00%
US real GDP growth
US real ad spend growth
-3% -2% -1% 1 2% 3% 4% 5% 6% 7% 8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%

What has happened with large ad agencies? »
Advertising spend has declined
more during recessions than
GDP declines.
On average, a one percentage
point change in U.S. GDP has
resulted in an average swing of
4.4 percentage points of
advertising spend over the past
seven unique years of U.S. GDP
decline. And the average of the
past three recession years is a
large (8.3%) decline.
However, the magnitude of the
decline had varied significantly,
from as small as ~(2.0x) to as
large as ~20.4x.
Multiplier Effect:
Next Recession Could Be Very Bad for Ad Spend
Source: L.E.K. analysis, OECD, Coen
US recession real GDP decline and real ad spend change
Percentage
U.S. GDP
U.S. ad spend
Ad spend
decline/GDP
decline
-15
-10
-5
0
5%
In 5 of the past 7
recessionary years, GDP declines
have been 0.5% or less
4.4
Average
4.4
1974
-0.9
-3.8
-0.5
-2.2
-0.2
-4.1
-0.2
0.7
-1.9
3.8
-0.1
-4.4
20.4
1975
(3.7)
1980
(2.0)
1982
44.3
1991
-0.3
-5.4
17.9
2008
-2.8
-15.1
5.4
2009

What has overall MA activity looked like? »
Consolidation of large holding
companies has slowed in recent
years. Only one deal has been
consummated since 2008,
compared to seven completed
deals from 2000 to 2007.
The failed merger of Omnicom
and Publicis in 2014
demonstrates the inherent
difficulties of combining massive
multinational agencies.
Tightening Their Belts:
Large Agency Consolidation Has Slowed Since the Recession
Source: L.E.K. analysis, Ad Age
2000-2007
7 deals
Value: ~$15B
WPP Acquires:
Young Rubicam
Price: $4.7B
IPG Acquires:
True North
Price: $1.6B
WPP Acquires:
Grey Global
Price: $1.8B
Dentsu Acquires:
Aegis
Price: $4.9B
Publicis Acquires:
Saatchi Saatchi
Price: $1.9B
Havas Acquires:
Snyder
Price: $1.9B
Publicis Acquires:
Bcom3
Price: $2.2B
Publicis Acquires:
Digitas
Price: $1.3B
Publicis and
Omnicom
merger
collapses
2008-2014
1 deal
Value: $5B
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

What have we learned? »
Despite slowing consolidation
among major holding
companies, they continue to buy
smaller agencies.
Although the number of
acquisitions is down from its
peak year in 2007, MA activity
has picked up since the depths
of the global economic
recession.
Publicis and WPP have been the
most active buyers since 2005,
with their 66 and 60
acquisitions, respectively, almost
3x greater than the next most
active buyer (Havas and
Omnicom at 23 each).
Buying Bolt-Ons: Major Holding Companies Have Acquired 202 Smaller
Agencies Since 2005
Source: L.E.K. analysis, SP Capital IQ
Acquisitions by agency holding companies (2005-2014)
Number of transactions
Interpublic Group
Dentsu
Havas
Omnicom
WPP
Publicis
202
2005-2014
10
24
34
26
10
17
24
21
19
17
05 06 07 08 09 10 11 12 1413
0
20
40
60
80
100
120
140
160
180
200
220
0
10
20
30
40
11
19
23
23
60
66

This edition of Executive Insights
clarifies issues surrounding
agency consolidation and
spending forecasts, as well as
their relationship with overall
economic activity.
Optimistic forecasts and shifts in
spend toward digital make the
advertising market particularly
attractive.
What Have We Learned About Advertising Spend?
1.
Forecasts for U.S. advertising spend project moderate growth over the next
seven years, with annual growth estimated at between 3.5% – 4% per annum
through 2022.
2.
The global advertising industry is expected to continue to shift toward digital,
although not at the expense of TV advertising, in which moderate growth is
expected going forward.
3.
There is a strong correlation between U.S. advertising spend and real U.S. GDP
growth, with advertising spend growth seeing larger declines during recessions
than GDP.
4. Consolidation among large holding companies has slowed since the global
economic recession, but they continue to buy smaller agencies.
Our Outlook:
Advertising Spend Will Continue to Be Attractive
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of
their respective owners.
© 2015 L.E.K. Consulting LLC

Spotlight on Media & Entertainment: Future of Advertising Spend

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Spotlight on Media & Entertainment: Future of Advertising Spend