Q1 ad rundown: there’s cautious optimism amid impending changes

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As the first quarter becomes a memory, the outlook for the rest of the year is sharply divided between two things: the positive conditions for the ad market, and the growing unease about its impending changes.

This might be described as cautious optimism.

While it could seem a bit verbose, the call for nuance is warranted: The enthusiasm for online ad spending is now checked by the gradual phase-out of detailed tracking that fuels it. The surge in connected TV enthusiasm has hit a sobering plateau, as the industry comes to terms with its limitations as a stand-in for traditional display advertising. Moreover, retail media, the trend du jour, teeters on the brink of a transparency debacle, entangled with sites created solely for advertising.

Given these complexities, it’s unsurprising that marketers are treading carefully as they look ahead. Read on to discover the driving forces behind this cautious outlook.

Let’s get the good news first.

The prospects for ad spending this year are indeed bright. Analyst Brian Wieser has adjusted his forecast upward following a better-than-expected first quarter, and he’s now predicting a 5.6% increase in ad spending, up from his initial projection of 5.2% — and that’s excluding political ads.

Market research firm PQ Media has a similar view. It predicts a 7.7% increase in ad spending for the year, nearly doubling last year’s growth of 4% from 2022. The IAB was equally upbeat in its own feelings about the remainder of the year during its rundown of ad spending last year, though did not provide any numbers.

Wait, isn’t ad spending meant to be linked to all things macroeconomic and geopolitical?

Traditionally, yes, but the relationship has evolved. While a strong economy and a stable societal backdrop are advantageous for ad spending, they are no longer the sole influencers. Today’s ad spending dynamics are influenced by a complex interplay of both linked and independent factors.

Got it. So if ad spending is up, where is it going?

The short answer is online. Digital platforms continue to outpace traditional media, such as TV or radio, in terms of growth. What’s particularly interesting is what’s driving these shifts. It’s companies like Amazon and Netflix that are prioritizing online advertising over traditional avenues like TV, rather than the typical heavy hitters such as the automotive industry.

That explains why there was so much hoo-ha over an ad slowdown among tech advertisers last year.

Exactly. When the tech advertisers pared back ad spending last year the holding groups took it hard. They had to make do with the heaps of ad dollars all of a sudden. Fast forward to now, and there are early signs of this slowdown accelerating. Ad spending from tech advertisers at Publicis Groupe grew 11% over the first quarter of the year.

Does that bode well for the other holding groups?

Potentially, although Publicis often outperforms its peers, making it not the most typical gauge for the sector. Nonetheless, the recent upswing in ad spending at Publicis is difficult to overlook as an isolated case, especially as tech clients appear to be recovering from a challenging period. A notable factor in this recovery is China. Startups there are investing billions in ad spend to establish a presence in Western markets, targeting major tech companies. In fact, according to Wieser, these companies are contributing an extra percentage point or two to ad spend growth in the U.S. alone.

Understood. Let’s look at marketers. How are they adapting to all of these changes?

It’s fair to say that adaptation is still underway. A recent MediaSense study reveals that nearly seven out of 10 senior marketers (68%) consider themselves midway through or nearing the end of their transformation processes. However, there remains significant scope for enhancement. Only about half (51%) believe their organizations have become more consumer-centric over the past year. Furthermore, just a quarter (26%) of those surveyed are confident that their ongoing transformations have increased their effectiveness incrementally.

Ryan Kangisser, MediaSense’s managing partner of strategy, contextualized these findings: “There’s definitely a rebalancing happening in the industry as economic factors mixed with continued challenges surrounding measurement and attention is forcing brands to recalibrate the role of media.”

That’s not to say they’re looking to do less, Kangisser continued. Rather, they’re becoming more intentional about driving more from their investments through increased quality, brand suitability, impact and insight. Essentially, there is a shift from traditional budgeting methods to a zero-based approach, prioritizing tangible business outcomes over intermediate metrics, he added.

This all sounds relatively good. What’s the catch? 

This year is pivotal; the developments it brings will significantly influence the ad industry for years. From the rise of ad-supported generational AI platforms and the outcomes of the U.S. presidential election, to the end of large-scale third-party addressability, the landscape of advertising is set for a transformative shift.

Hang on, I thought macroeconomic factors don’t impact advertising?

Actually, the point made earlier was that while these factors aren’t the sole drivers of ad spending, they certainly impact it, whether significantly or minimally. Take China, for example. Regardless of the U.S. presidential election outcome, trade relations between the U.S. and China could change, potentially affecting the cost and availability of goods shipped to the U.S. If goods from China become more expensive or unavailable, it’s not guaranteed that the corresponding ad dollars will remain. They might be redirected elsewhere, which could impact overall advertising growth.

Speaking of third-party addressability, what’s Google’s role in all of this?

In a word, it’s big. Google continues to dominate conversations, both in terms of its plans for third-party cookies within Google Chrome, as well as the antitrust charges it faces for both its search empire and ad tech ecosystem on both sides of the Atlantic. Both of these market forces are a sword of Damocles hanging over every other party in the marketing ecosystem.

Downstream, these dynamics also underpin the compression in the middle layers of ad tech; namely how demand-side platforms and supply-side platforms (traditional partners in the supply chain) are now having to turn on each other — i.e., eat each other’s lunch — as their investors continue to demand growth.

What about gaming — it seems to be doing really well these days?

Gaming is more popular than ever, and yet 2024 has been a particularly awful year for gaming publishers. Sales are down year over year, prompting gaming companies to undergo mass layoffs so historically large that it merits its own Wikipedia article. Amid this upheaval, publishers are divesting from tangential products such as esports leagues to refocus on their core products of games and in-game items.

As gaming companies look to regain their footing, invaders from outside the traditional gaming space are looking to increase their presence in the space. In the entertainment world, Disney’s $1.5 billion investment in Epic Games signals its belief in gaming as a potential growth area; in tech, Netflix has leaned further into games in 2024, offering its iOS users access to both indie titles and core-gamer favorites such as the “Grand Theft Auto” series.

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