Network TV Defies Economic Logic

With the new TV season about four weeks old, the media is putting together reports about trends. In brief, against the key 18-49 demographic NBC is leading with CBS and ABC down and Fox down sharply. The NBC gain comes off a terrible fall 2011 for the network that should be pleasing to their new majority owner, Comcast. Some say that the Fox commitment to the baseball playoffs dragged them down a bit.

Every year at this time, I always seem to get several e-mails or phone calls from people asking is this going to be the last year of a network TV upfront marketplace (the “upfront” is when larger network TV advertisers join a veritable cavalry charge of fellow big time marketers and place perhaps 85% of network TV dollars)?  If you asked me 5-7 years ago when the upfront would dissolve, I am quite sure that I would have say by now. Today, I make no forecast as the upfront and network billing stubbornly hangs on.

What is interesting is that for many years network advertisers bid up the price of network inventory despite a decline in average audience and sometimes absolute audience as well. This seems to defy economic logic. We do not usually in our business or personal lives pay more to get less. In economic theory, there is an arcane concept called a giffen-good where you buy more of something when the price goes up. Economists are hard pressed to come up with many examples of a giffen-good.  And the Nielsen numbers do not even begin to take into account the loss of attentiveness due to the steady growth of commercial avoidance.

Why does network TV keep rolling along despite cable alternatives, Netflix, Hulu, and thousands of digital and social media alternatives? It is impossible to quantify but it seems that people do not seem to know where else to put the money. The big players appear to use network TV as a security blanket. They often trot out the horror story of Pepsi a few years back, which dramatically shifted monies from conventional advertising to digital and saw their sales get clobbered.  Very quickly, they righted the ship with a normal dollop of conventional media.

Most players tweak their media mix each year but, even then, network TV’s share of ad dollars sometimes increases. When will a few major players blink and not spend as much? It is hard to say. Package goods have made wholesales moves in to promotion for the last decade. Yet, the networks have done a superb job of bringing new categories in to the mix, which has propped up revenues. But the outstanding value that network TV once represented is no longer there. With DVR penetration in the 40+ percent range and people hitting the remote during breaks, even sports attentiveness is suspect.

The forecasters all say that the network TV model is broken and not long for this world. Every year their case gets stronger on paper and every year, the networks watch as advertisers bid up the price of their inventory despite weakening delivery.  Over time, pricing becomes rational in almost any market. This one seems a bit overdue.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The War Within Ad Agencies

Over the last few years a war has erupted within U.S. advertising agencies. It does not get a lot of press but I have observed it personally and, in recent weeks, have been warned about it by media salespeople, a few clients, and media and creative staffers at agencies.

The issue that caused the friction is the role of digital in annual planning. For decades, deciding on a proper media mix has always been something of an art although analytic tools made it a lot easier until about 10 years ago. Then, we moved in to the Internet age and now even the most moribund brands are entering the digital era.

The problem that I have seen and hear about weekly these days is that the conventional teams in both media and creative can not get along with the digital teams in both disciplines. Part of this is due to a generation gap. At many shops, an old-line media director may be 55-60 years old and the digital media maven may be 29. The old boy or lady is used to summoning the staff and giving direction and playing the key arbiter on all media mix decisions.  Now, the digital people are fighting back and, increasingly, there is bad blood between them.

Sales people who sell properties with many platforms go to a shop and are surprised when only the conventional team shows up. After the meeting, they ask the media chief if they should try and go see the digital media manager or director. Time and again they are told something like “why bother.” If they push things a bit and say that their company’s offerings can straddle both disciplines, they may be dismissed or shown the door quickly. When they do get to see the digital players who tend to be much younger, a snarky comment about the old fossils down the hall is often part of the session. This is sad and really destructive. There is a childish turf battle going on and the client is not always getting the best plan of the combined brainpower that is often considerable.

Friday, an agency CEO called me to talk about the issue. His is not a big shop so the people work on top of one another and he only has a few digital media folks and a slightly larger creative team. At a recent new business pitch, the media director folded his/her arms (I have promised not to give out any clues about identity) and looked away while the young digital manager confidently walked through his presentation. When he concluded the client prospect turned to the media director and said something like “you don’t like him too much, do you.” The media veteran denied it but the client prospect told my friend that it sealed the deal against his shop. He also added that he and his marketing team have been struggling to work out how much of their budget should go to digital platforms and needed a new agency to help them. He finished, and I paraphrase, “if your people cannot even be comfortable sitting in the same room with each other, how can they hammer out a solid plan for us with lots of give and take?”  Needless to say the moderate sized marketer went elsewhere. My friend says that he will decide for 2013 how much of each client’s budget will go to legacy media and how much to digital. He is worried that he is not qualified to play Solomon. He will play it straight and do what he sincerely thinks is right for his clients. My idea is maybe that he needs to make a personnel change or two.

Similar knife fights go on among creative teams unless a strong creative chief can keep everyone in check. It is not so bad at small shops where the director calls the shots and does a lot of the work. But once you get to midsized, there can be a lot of backbiting. Again, the client suffers (it reminds me of the two major political parties not compromising and making hard decisions on our budget deficits and entitlement problems. The good of the country always seem to take a back seat).

Forever, people have always said that the assets of an advertising agency go up and down on the elevator each day. So, you need to hire people who are crossbred, are not set in their ways, and are willing to work together even if their pet discipline gets a smaller part of the pie than it did last year. Hybrid media and creative pros need to emerge and fast.

This leads us to another issue. Agency structures were designed for a world that is gone. All of us wrap our arms around technology or at least pay lip service to it. But, many agencies need to be reorganized if they are to bring in new talent. Ever wonder why people go to smaller digital only shops for certain projects? A lot of great emerging talent is there and they give fast and cost efficient service.  And, they are not going to thrive in a traditional setting where a mossback of a media or creative chief thinks that they are trendy if they put 4% of the budget in mobile.

The other day someone wrote to me that he needs someone to translate his print ads for mobile. I laughed out loud when I read it. He totally misses the point. There are no walls to content. Something has to be developed that is uniquely designed for the mobile medium. He stubbornly wants to put a square peg in a round hole.

Look, we all know that we are in a transition period. But, the old guard need to take the “learn digital or die” warning seriously. The next few years will be choppy for both the economy and the agency business. If you are to survive or your shop is, you need to come up with some hybrid type model that takes us to the next great upheaval.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Inequality Puzzle in the U.S.

We are in the middle of a heated political season. Candidates are talking about the top 2% of wage earners quite a bit and how they may have to shoulder the burden of tax increases if we are ever to balance the Federal budget. It is all nonsense. There are simply not enough of them to cover the enormous expenditures no matter how confiscatory a tax rate you gave them via new legislation. Tax reform? Absolutely! Cut expenses and reform entitlements? You bet! A blend of the two seems imminent despite the political ravings of both major parties.

Most dub the top 2% as households earning in the range of $250,000-275,000+. That is indeed a nice income but, of course, it depends. If you live in Manhattan and are sending two children to private school and paying local taxes, you may find money tight and live in a cramped apartment. In a small Texas town you would be a leading citizen and living the good life at that salary level. As a statistical wonk of sorts, I decided to do a deep demographic drilldown on the people whom you don’t hear about as much—the top 1%. The results are eye opening and surprised me and I should know better having spent my entire life analyzing demographics.

Here are few factoids that set the tone for what is going on:

--The top 1% has an AFTERTAX INCOME OF approximately $1.3 million while the bottom 20% gets $17,800. Nobel Laureate Joseph Stiglitz expressed in a recent CNBC interview that the top 1% makes more in a week than the bottom 20% does in a year.

--The top 1% of US households has 225 times the wealth of the average US household. This is roughly double where we were in 1983.

--If you look at the INCREASE in capital from 1979 to the present, 88% has gone to the top 1%. The bottom 95%, which includes some upper middle class on down to poverty level folks, has garnered just under 3% of this capital increase. So, the top five percent has 97% of the increase.

In discussions with a few friends, we used this analogy to explain what is going on with the dispersion in the increase in capital. This is hardly original but makes the point:

Suppose there is a room full of 100 hungry people. A few men wheel in the world’s largest pizza cut into 100 perfectly equal slices. One fellow signals to them and he is given 88 of the slices and leaves. Four others step forward and they take nine slices as a group and depart as well. The remaining 95 people split the last three slices with some getting a bite or a few crumbs and most nothing .

Now, let me be clear. In a market economy, there will always be an unequal distribution of wealth. Some people work harder, some are smarter, some are more talented, and, let’s face it, some are just luckier than others. But going back to 1979, things seem to be getting more and more polarized in the US and the middle class is getting hollowed out.  It does not seem to matter if a Democrat or Republican is in the White House or which party controls Congress.  Inequality gets wider and the movement is relentless (see Media Realism, “The Gini Coefficient and the Future”, 1/21/10).

Since I wrote about the Gini Coefficient (level of inequality) 22 months ago, the US inequality had grown wider than in previous decades. If we keep up at this pace, I would forecast that our level of inequality would soon rival that of Iran, Uganda, and Jamaica. I would not want the US to join that foursome!

So, is America still the land of opportunity that lured our ancestors to these rocky shores?  For many of you reading this post, it certainly has been. But what, we might ask, of our children, our neighbors, and the generations to come?

Here are a few observations from my perspective:

--The politicians are fighting the last war. They keep harping on re-establishing the industrial base in the US. It can improve but millions of good paying blue-collar jobs are gone forever.

--Mining firms are now experimenting with robots to do underground digging for various minerals. This is great, as it will lower costs and put far fewer human lives in peril. When this technology is fully viable, thousands of good paying jobs are gone for good.  This is only one minor example. Technology of all kinds, not just robotics, is eliminating all kinds of positions. Think of the communications industry that has supported many of us. Remember paste up men, secretaries, and travel agents? Technology will not stand still so millions more jobs will be eliminated in the next few decades. Can we replace them?

--Our tax code is like a Swiss cheese. A 1% family can hire a top-flight team of lawyers and accountants to minimize IRS exposure. Nothing illegal here but perhaps some form of AMT, Alternative Minimum Tax, for those in the top 1% would require that they pay a flat 25% regardless of their deductions or exotic investments. This would not do much for the deficit at all but would instill a sense of fairness.

--Middle class people have most of their wealth tied up in their homes. As home prices have cratered, their net worth plummeted and some actually went to negative net worth as their money owed exceeded the current value of the house. Conversely, those in the top 1% often have relatively little of their wealth tied up in personal real estate.  Someone worth $100 million could have two $5 million homes but not feel it when the value of each dropped $1.5 million. They make more than that in tax favored annual dividends. So, the real estate bubble and crash of the last decade may have exaggerated things a bit in terms of inequality.

--The Federal Reserve is keeping the big banks afloat and, as a sidebar, is subsidizing the top 1%. High wealth individuals can borrow millions at 1.3% or so, buy high yield stocks, whose dividends can largely pay off the loan, and deduct the interest. The rich generally always live within their means and are the investor class. But, the artificially low interest rates from the Fed almost guarantee that they will get richer as they have access to ridiculously inexpensive money. Compare that to the millions struggling to make minimum payments on their credit cards at 18% interest. No one forced the struggling to use the credit card but the disparity seems out of whack to me.

--Why do you hear so little about inequality? Most people are not doing great but they seem numb to it. Are they too busy having a few beers and watching football? Occupy Wall Street had a brief blip going after investment banks but that died pretty quickly and did not get broad traction with most citizens (See Media Realism “Fado, Fatima and Futbol, 11/14/10).

--The American Dream may have become a nightmare to some but it still lives in the spirit of most people. Unless life has truly broken someone, most still feel that things will be better for them at some point and for their children. This spirit is vital and uniquely American.

If you want to keep on top of this issue and not have to wade through the weeds as I do constantly, you might want to consider occasional visits to Emmanuel Saez’s website—“Striking It Richer: The Evolution of Top Incomes in The United States.”

Over the decade to come, this polarization of wealth and income will affect marketing and communications in a big way. That, my friends, is a topic for another post.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Emerging Market Middle Class & The Leaky Barrel

A few days ago I received a surprise phone call from a sports salesman. It had been many years since I had spoken with him. He was quite agitated and said he needed my help. Apparently, a long standing client and his largest was cutting back on his sponsorship package in a very high profile sporting event. The client was essentially cutting his commitment in half for the next three years. The advertiser’s CEO was moving funds outside of the US into some emerging markets.

My old acquaintance was livid. I understood his annoyance at losing significant billing but I had to tell him that this kind of thing was going to happen more and more to people selling to mature brands in the U.S. Local and regional media will likely be hit harder than national network media, I added, which really made his day.

Here is what I think is slowly beginning to happen. Many mature brands in the U.S. are treading water. They are firmly entrenched and work on paper-thin margins. Volumes may be high but there is not great pricing power. So, because capital always tends to move where it can get the greatest return, many marketers are spending advertising and promotional dollars overseas.

 Both consulting firm McKinsey & Company and the United Nations have produced reports saying that private consumption in emerging markets is at about $12 trillion per year. By 2025, that projection will top $30 trillion. So put yourself in the place of a CEO or global marketing officer of a consumer brands outfit. You would be foolish not to market your brands aggressively in Bangkok or Jakarta or Sao Paulo rather than maintain your share of voice in Pittsburgh.

China and India combined are together adding 70 million members of the middle class every year. We, sadly, appear to be losing several million middle class citizens each year due to a struggling economy. There will be ups and downs for sure over the next 20 years in emerging markets but the net result has to be a tidal wave of consumption across all types of goods be they luxury, disposable, digital or mechanical.

Also, a mere six countries—China, India, Indonesia, Brazil, Mexico, and Russia have just over half of the world’s population. And, other than China, which will soon have an aging population, the others all skew younger than the U.S. and most of the West and Japan.  Also, keep in mind that the really explosive growth percentage wise will come from smaller countries in Asia and Latin America.

People focus a lot on tech and look at companies such as Apple or Samsung or Google. But, a rising middle class brings other categories explosive growth. How about something mundane like soap companies? They are growing like wildfire in Latin America and Asia. It is very simple—as you become middle class, you use more personal care products.

Imagine a young lad growing up on a small subsistence farm on an Indonesian island. He has an aptitude for math and after finishing the local school eventually finds his way to Jakarta and works as a clerk in an insurance office. At night, he takes accounting classes at a business college. He now shaves daily (a gain for Gillette, a P&G brand), uses whitening toothpaste twice a day (Colgate) and showers each morning with Dove (Unilever). These companies are beautifully positioned as millions more enter a middle class lifestyle each year. Why does KFC open a store in China daily and McDonald’s 2-3 per week there as well? Because, simply, the sales potential is enormous. Coke is now in all but three countries on earth (Burma, Cuba, and North Korea) and growth is interesting as per capita consumption levels are 80-100 years behind the U.S. in most emerging markets.

Years ago, I worked every now and then with a real character. He was undisciplined but a very dynamic presenter. New business was his forte. He pitched like crazy because he said clients were like a leaky barrel. You poured some new ones on top regularly but always lost some from the bottom each year.

My many friends in the media business are about to become acquainted with the leaky barrel. But, in this case, ad dollars are going to be leaving the North American continent forever. They are going to have to be very resourceful to find replacement revenue for some of the old stalwarts who are finding emerging markets to be a happy hunting ground for profitable sales growth.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com