Connecting the Dots: How to Profit from the False Promise of Internet Advertising
By Tony Sagami
My first exposure to the advertising business was McMann & Tate, the agency where Darrin Stephens of Bewitched worked. Sure, I tuned in mainly to see the lovely Samantha Stephens, but I do remember that there was a lot of money to be made as an ad man.
Some of my college fraternity brothers must have come to the same conclusion because several of them went on to ad agencies, and a few of them had very successful careers.
However, the advertising business never made much sense to me. I understood from my economics background that the purpose of advertising was to increase the slope of the demand curve, but I can honestly say that I’ve never bought more Budweiser, more Ford pickups, or more Charmin toilet paper because of advertising.
And the new world of Internet advertising is even more puzzling to me. I completely ignore banner ads; in fact, I’m more prone to boycott a product if I’m bombarded with pesky popup ads or unwelcome email messages. I can’t count the number of times I’ve unsubscribed from these unwelcome sales attempts.
Effective or not, Internet advertising has become big business; total online ad spending hit $49.5 billion in 2014. However, outside of mobile advertising—the new untested frontier—the growth of online-advertising spending has slowed to a snail’s pace.
And it looks like it’s going to slow down even further. Giant advertisers like Procter & Gamble, Unilever, L’Oréal SA, Coca-Cola, and Visa have announced that they’re putting their annual advertising budgets—combined, worth $20 billion—under evaluation.
We’re talking big bucks here. P&G and Unilever, for example, spent $9.2 and $7.0 billion, respectively, last year but are now searching for ways to cut back.
Think I’m an ill-informed advertising Grinch? Don’t take my word for it; listen to what the industry insiders are saying.
The Sky Is Falling Warning #1: London-based WPP is the world’s largest advertising agency, and its CEO Martin Sorrell recently warned that advertisers are “examining their costs with increasing rigor.”
The Sky Is Falling Warning #2: Last week, online advertising agency ZenithOptimedia told Wall Street to lower its global ad spending forecasts for 2015 and 2016. (By the way, 2016 is a Summer Olympics year, which is typically a big event for advertising spending.)
The Sky Is Falling Warning #3: When Google reported its Q1 results on April 27, it revealed that the price it gets for its online ads dropped by 7% over the last year. Falling prices aren’t bad if you can make up for them with higher volume, but as the above table shows, search-based advertising grew from $18.36 billion in 2013 to $18.95 billion in 2014… nothing to get excited about.
Perhaps the biggest threat is the growing sophistication of ad-blocking software people like me use to reduce those pesky Internet advertisements. Software sales jumped by 70% in the last year.
Believe me, Internet advertisers are very worried about ad-blocking software. A fresh poll from Media Week showed that two-thirds of the readers of its industry publications are concerned.
As always, there are investment implications to these major trends. I suggest that advertising agencies, both traditional and Internet based, are stocks that you should consider selling if you own them. Or, if you’re a more aggressive investor, consider short selling or buying put options to profit from the industry’s falling stock prices.
Traditional Advertising Agencies
Omnicom Group, Inc. (OMC)
Lamar Advertising Co. (LAMR)
The Interpublic Group of Companies, Inc. (IPG)
Publicis Groupe S.A. (PUBGY)
WPP PLC (WPPGY)
Internet Advertisers
Facebook, Inc. (FB)
Google Inc. (GOOG)
Yahoo! Inc. (YHOO)
Twitter, Inc. (TWTR)
AOL Inc. (AOL)
Rocket Fuel Inc. (FUEL)
Tremor Video, Inc. (TRMR)
Millennial Media Inc. (MM)
The Rubicon Project, Inc. (RUBI)
YuMe, Inc. (YUME)
Criteo SA (CRTO)
I’m not suggesting you rush out and sell or short any of these companies tomorrow morning—click here to see what I think are the best put option targets right now. As always, timing is everything, but it will take more than a few twitches of Samantha Stephens’ nose to save the Internet advertising industry.
Tony Sagami
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.
I’ve never stopped advertising when times were tough or rough, but I am for the first time ever backing down, scaling down what I spend – because the demographics are just plain ugly. The various ad reps are at a loss to explain why I’m not the only one (telephone books for example) as much to their chagrin, I can see for myself how the books are getting thinner with more ‘fill ads’ for the phone book themselves and such. I’ve also stripped my internet site of expensive features that just don’t get used or practically require a full time staff member to analyze. And I’m not the only one as I talk to others in my trade all over the country, its really getting rough out here.
Pay per click is way down from late 2007 to a fraction of it’s former self. Since Feb there has been a notable slowdown. Ad money is very tight.
There is a great book that came out in about 1995 called “Silicon Snake OIl” which I highly recommend. It predicted this very scenario. It also touched on the imoron secenario in concept although the idiot phone wasn’t around then. In a nutshell, the internet is useful and entertaining, but when you have a whole economy based on Yahoo’s and’clicks” you are in deep doo doo.
I had always thought that an advertising agency was probably a great way to launder all that drug and prostitution money, and provide nice cover jobs for the prostitutes that are a step or two up from being ‘models’.
In the early days (internet wise) it was very easy to sell products and get leads. Before and a year or so after the crash I was spending for my little company $18K / month on pay-per-click ads on a variety of search engines. Suddenly it became a big waste so my spend was reduced to about 200 dollars per month. Last month I wagered a couple thousand on google adwords–is did not pay off. Things have changed!
I was channeling Billy and being a bit of an ass when I asked Stucky, what is American culture. Biily said foreign culture is little more than food. I suggested that American culture is little more than commercial products and monthly holidays designed to sell them. Calvin Coolidge said that the “business of America is business.”
If you review your cultural memories, many of them have to do with nostalgia for commercials and advertising ditties. Even sexual preferences have been impacted by teevee and movie programming designed to sell you on national campaigns in support of the rulling elites’ central planning goals – two kids per household, single person households, gay marriage, feminism, the sensitive male, women drinkers, …
I walk through Sam’s and I can recognize products I’ve never bought yet would buy without much mental conflict because I have internalized the advertising that tells me the product is good because I recognize the brand. Everybody recognizes the reconstructed Government Employees Insurance Company, advertising brought it back from the morgue.
The Kardashians are an advertising house, they advertise themselves and the products they collect royalties from. We know Kanye because of them and we accept deviant behavior because they endorse it. We follow Bruce Jenner and we are prepared to accept his sex change because Kim backs his decision, his journey rather, 100%.
Advertising spares us the work of convincing our friends and neighbors to buy something we like or do something we want them to do. It affects our manner of dress, eating habits, small talk, attitudes, acceptable behavior and personal associations with blacks, Chinese, Hispanics and Arabs.
Advertising helps us decide which people we want to rule over us. It gives us comfort to know we have chosen well in spite of the dire straits we may find ourselves in later.
Advertising will not die. Advertising agencies will fail but new agencies like the Kardashian Clan will spring up to take thir place and our culture will change along with them.
Speak for yourself. I don’t pay much attention to advertizing if I can help it. I don’t like it and I tend to NOT buy whatever I’m saturated with at any given moment. I avoid it online. Am I the only one who switches channels, changes format i.e. satellite to FM to AM to Media-In line, or just pops the Mute button when the ad feces start? I listen to a local AM/FM station (I think they’re clear channel, the radio corporation that bought EVERYTHING) and I just hit Mute when the ads start. I would rather listen to silence than more ads. I don’t watch TV in the home, so I don’t get much exposure anymore, although they play FOX/CNN/Whatever at work, so I hear the BS there. My current favorite hate is reserved for the energy company ad that says we’re on the verge of energy independence. All the drug ads on TV now are really amazing. It was bad a few years ago, but it seems like mesothelioma has passed the baton to wall-to-wall Liberty Insurance ads and Drug ads that offer treatment for minor issues with major side effects, like personality swings and bleeding from every orifice. Not sure I need to embrace a 2 page list of side effects in exchange for lessened hay fever symptoms or less splotchy skin.
Never, ever, EVER watched the Kardashians (Just cuz’ you look hot with 10lbs of pancake makeup does not mean I care what you have to say. Also, with a name like that, which Star Trek series did they escape from?), don’t care what Kanye does, rarely buy the new hot thing, and wrote in my last residential candidate cuz’ the two hand-picked ones sucked too bad to even pretend it was worth it.
Thanks for your response G-man. We are all salesmen. I heard somewhere that we are selling our self at every encounter. The Kardashians have just taken it to a higher level. Talk about making something out of nothing.