ROUNDTABLE: After the attack - Turnaround? No time soon

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After the attack: An edited transcript of the Advertising Age roundtable with Robert J. Coen, senior VP of Interpublic Group of Cos.' Universal McCann; Christopher Dixon, managing director and global media strategist at UBS Warburg; David Peeler, president-CEO of Taylor Nelson Sofres' CMR; and John Perriss, chairman-CEO of Zenith Media, the buying arm of Cordiant Communications Group and Publicis Groupe.

Advertising Age: This isn't exactly an ideal situation, but we'll try our best to take a look forward and see where we're going.

Christopher Dixon: At this point, the future is unknowable. We don't yet know how the U.S. government is going to respond. We don't really know how the consumer is going to respond going forward. It's important as we look out to the advertising industry to recognize that 2001 is essentially a write-off. No one has a clue as to what's going to happen in the fourth quarter.

David Peeler: Advertising is as much about psychology as it is about anything else. It's how you feel about yourself, it's how you feel about the products, it's why you buy certain things. The consumer psychology is very fragile right now--clearly, an understandable situation. If it's going to have a detrimental effect, that's what I'm concerned about from an advertising perspective, because that translates into media dollars.

Robert J. Coen: By the middle of November, we may have such a shortage of availabilities on the networks that scatter prices go through the roof. I don't think that's necessarily going to happen. But there are unknowns, there are possibilities on both sides. Too much of what I hear from the press in everything that's reported emphasizes the bad side, the low side.

Peeler: Even if the fourth quarter isn't great--let's say it slips another percent or two, and we end up down somewhere in the 6% or 7% range for the year--what has that done? There's an argument to be said that what that has done is kind of accelerated all of the bad news in the advertising marketplace. You could argue that stock market prices are back at the '98 level. Well, we're still at the '99 levels in terms of spending. So, there is some good news in all of this.

John Perriss: The continuing decline in corporate profitability amongst the world's largest advertisers has caused them to take a view which I didn't think advertising would do anymore, which is to take the short-term cut to marketing budgets, such as advertising, in order to maintain profitability. I've talked with a number of our major clients both outside of the U.S. and in the U.S., and they all openly admit they were put under pressure by their boards to meet quarterly earnings targets, and they took the easy option and cut the ad budget. Which is something I didn't think would happen again.

Until that corporate profitability shows signs of returning, we're not going to see an upturn in ad spending. Every day I look and I see companies still cutting. There's a second part of this sort of double-whammy effect to come here, which is companies are now adjusting their cost base to restore margins and restore corporate profitability. As those job cuts tumble through into consumer confidence, there's yet a worse wave to come to our industry.

Dixon: Best case that we can do next year is maybe back to trend line mid-2000. That is, maybe global advertising spending in 2002 at this stage gets to $295 billion to $300 billion. That's if we get very, very lucky. Corporate confidence is just as important as consumer confidence.

There are categories that are going to be spending. In the entertainment business we're going to continue to see a focus on the DVD business. You'll also see there's some big movies. The studios, of course, have changed the kind of movies they're releasing, but "Harry Potter" is still going to be promoted by AOL Time Warner, and there's a lot of joint ventures out there. There's going to be some efforts by advertisers to change the tone of their businesses and to change the tone of the messages to respond to the consumer in new and different ways. And at the end of the day, if you're not selling products, the companies aren't showing profit.

Ad Age: Bob, you've had probably the most upbeat prediction for this year. Any chance you might revise that?

Coen: Well, I'm not going to revise it until December. What's the sense? But going back, I had an expectation of a gain in the U.S. in nominal dollars of 5.8% back in December, which wasn't considered upbeat at that time. 2000 was a boom, and we had a bust in 2001. Not across the board, but the big bust as far as I'm concerned came from these dot-com companies that spent nearly $6 billion in 2000 in traditional media. That was abnormal. And that was out of nowhere. In 14 months we got a new automobile industry appearing on the scene, bidding up the prices.

Most of the consensus forecasts were for a re-expansion in the [gross domestic product] in the fourth quarter. So it looked like we were at the bottom and we were just beginning to get started going. But it was coming a little too late in the year for it to really bear any results in 2001.

Before [Sept. 11], I was convinced--and I'm still pretty much convinced--that we can come in with 2001 being a flat year. We might be extremely surprised at how well 2002 turns out, compared with 2001. Historically, whenever you've got bad times, you can be sure somewhere along the line everything's going to boom up in the other direction. This whole advertising thing is a supply-and-demand competition. If anybody starts stirring that pot and bidding up the prices of things, spending goes up.

Peeler: Some categories of spending will do well. There are some media that'll do better and some that'll take a short-term hit. If you look at the newspaper industry, clearly its going to be adversely hit by the pullback in airline advertising and hotels and resorts, because those are big categories for them. But things like radio and other media that can adapt real quickly to quick changes and creative patterns may do a little better.

Perriss: We are moving globally to a classic kind of recession mode in terms of how people behave. Our sector, along with a few other service ones like investment banking, in effect has been in a recession for nine months. Which is strange because out there, most consumers are still in a high spending mode, putting aside [Sept. 11's tragedy].

So it's a very strange recession. It isn't, frankly, '81. I've been 33 years in the ad business, and I've never seen a set of circumstances like this, where you have business almost at an all-time low. And we don't really look for any upside prior to probably third and fourth quarters of next year. Which is why our forecast of 2002 would pretty much go along with Christopher's view of the world. When the upside comes, it'll be terrific. But we'd better gear the business up to assume that where we are [now] is where we're going to be.

My concern is that people who are in employment also start to get very nervous. People start to hoard money because they hoard money as a rainy day fund. They're what I call the "fearful employed." They're fearful they're going to be unemployed real soon.

Dixon: Not all is gloom and doom. I agree with you, as you look out over the next eight months, that we're not going to see any significant turn--notwithstanding exogenous events--until the second half of next year at the earliest. But there's a couple of areas you need to just put in perspective post-[Sept. 11th].

War is actually good at protecting telco. Companies like IBM are getting orders. To the degree that we can see an accelerated bottom for the overall weakness in the tech and telco sectors, we may see some improving corporate confidence in those areas.

The other stimulative effect is clearly what's going to happen with the euro. We have a de facto real currency that's coming into the market in January. And some have said that this could potentially be stimulative to the consumer. So clearly, there are some other things going on other than the ongoing slowdowns.

[But] any analyst or any company that tells you that they're going to make a dime or lose a dime in the next six months is lying. They don't have a clue.

I was talking to one of the very large entertainment companies who will go nameless, and the CFO told me he has no idea what his third-quarter results are going to look like as a result of the events of [Sept. 11]. It's three weeks before the end of the third quarter, and he has no idea.

Coen: The one thing that I hadn't heard anybody talk about is media prices, and the fact that the year 2002 is going to be Winter Olympics. It's going to be a year with tremendous political activity. And this year, believe it or not, has been a year when prices have gone down the tubes.

I'm amazed every time I hear somebody talk about how terrible 2002 is going to be. We never had that upfront that everybody said we were going to have.

We've fallen so far short it's ridiculous. I looked at everything. They were talking about a $7 billion upfront for these four quarters. I looked at all the data, analyzed it. It'll be lucky if it gets to $6 billion.

So now somebody is looking ahead and saying, "Oh, it's going to be worse." I've seen a lot of these broadcasts about how bad cable is going to do. Somebody's talking to themselves. Once the demand picks up, these prices are going [up].

Ad Age: Budgets for 2002 are being set. Will this delay the decision-making?

Coen: Well, decisions will be made at the last minute. You can buy a million-dollar Super Bowl commercial probably right before, on Christmas Eve, if you really want to get in there.

Ad Age: Looking forward to 2002, are there any sectors that may look like an opportunity? Any fundamental change going on?

Dixon: As we look at it over next year in the U.S., we're looking at the magazine business coming back a little bit. Obviously, some of the newspapers--we're thinking the big, broad national brands such as The New York Times--should continue to do well. Radio is coming off, particularly as we move into some easy comparisons in the first quarter of next year. Radio was a beneficiary of the dot-com spending, a disproportionate beneficiary, so radio should actually recover earlier. And we would put radio to kind of be the early indicator as to how overall spending's going to be done.

Peeler: The category of advertisers that are still doing well--and I think the trend will continue--is direct-to-consumer pharmaceutical advertising. That's a category that's defied the downturn. And the entertainment industry. Those are two categories that'll still continue to spend.

Coen: One of the things that I've seen, beginning about 1997-98 when all the high tech came in there and bid up media prices, has been a gradual shrinkage in the clout and the spending levels of the packaged-goods marketers. We're in a position now to all of a sudden begin to see the P&Gs and the [Krafts] and all of these packaged-goods people come back to a more dominant role. You may underestimate the situation if you cross them out. They may actually lead the recovery.

Perriss: I would agree again--because people still eat and wash clothes and wash their hair, regardless of the economic cycle. So there's been a great sudden increase in the importance of those traditional advertisers.

Ad Age: Are we in a recession? And when do you anticipate the trough?

Dixon: There's no question that we're in an advertising recession. The question here is how long does it last? And if we recognize that 2000 was the peak levels, when do we get back to those levels? Is it 2002, is it 2003? Well, that's the big question. And it's very difficult to put your finger on it right now given the uncertainty.

Peeler: Those of us who are in this industry know that we've been in a recession since January in terms of the media world. I mean we've all been cutting budgets and being more aggressive in our forecasts. So I don't think it's a surprise to us.

Dixon: There's a lot of focus here on the market. The stock market has effectively discounted much of the doom and gloom. When this turns--and it will turn, it may be late 2002, it may be 2003--there's an enormous amount of operating leverage that exists at these media companies. And there's every reason to believe that there will be significant improved profitability at the agencies as well as at the various media companies.

Coen: Along these lines, we're not in an economic recession. The consensus is we're coming out of one--out of a slowdown with no expectation that the U.S. economy will do anything but show greater, stronger real GDP growth in the upcoming quarters. Things look great from that standpoint.

But I go back to the conferences we all attended in 1998. And I see going back, that was where we didn't spot what was happening. We're in an advertising correction. I don't know whether we're in an advertising recession or whether we're just getting paid for the excesses of 1999-2000.

Ad Age: We keep hearing about advertisers making decisions after they see numbers, after they see budgets. Has advertising turned into a lagging indicator now?

Coen: It's always been a lagging indicator; it has never been a leading indicator. It holds up well after the start of a recession because nobody realizes that they're in trouble But it's not a leading indicator.

Ad Age: So have we just gotten better at realizing when we're in trouble? Or is 2000 proof that we haven't?

Coen: They're watching things a lot quicker. But sometimes I don't know whether they're able to move as quickly and getting a consensus to change things.

Dixon: I was struck this year in the Wall Street community that a number of Wall Street analysts all of a sudden started to talk about the dynamics of the upfront market. And the upfront market's always kind of amusing because you never know what the sellout rates are going to be, you never know what the pricing is going to be. And basically, if you listen to the companies telling you what they're going to do, they'll always say it's up. Either their pricing was up or their volumes are up. And of course, the agencies will always say we got great deals and it was down.

This year it was a little bit strange because we have an awful lot of analysts who've not been through the cycles before and I think were misreading the tea leaves.

Ad Age: Your best guess, off the cuff, best shot at the tea leaves: What is 2002 going to look like? Let's not even think about the fourth quarter right now.

Coen: Well, I wouldn't be surprised if when the numbers are all added up at the end of 2002 that 2002 finally passes the peak level of 2000.

Dixon: We'll be on the way to the levels of 2000. And again, I don't want to put out growth here, because what we really don't know is how low does it go in 2001? What's more important here is that a global ad number of around $290 billion, this is for measured media, a U.S. number of approximately $141 billion to $142 billion, is achievable. And that's kind of the benchmarks that we're looking to at this time, with a turnaround really not developing until the second half of the year.

Peeler: You know, I'm optimistic. There will be some turnaround in the second half of next year, as much because the comparables this year are going to be not bad. And so I'll say next year will be up 3%.

Perriss: Well, 2002 flat in the U.S., with 2001 virtually tiny, tiny, and probably one or two decimal places of growth. And globally just up a little in the realms of slightly less than 1% probably. It's 2003 before things come good for us.

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