Ad Budgets Under Pressure But Moving Foward

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NEW YORK ( -- For a time, technology companies were Wall Street darlings that could do no wrong. They racked up one
profitable quarter after another and their growth fueled the nation's economy.

Now as the economy sputters and rate cuts by the Federal Reserve Board become commonplace, the once high-flying techs are undergoing massive layoffs and belt-tightening measures, and their ad and marketing programs are under more scrutiny than ever. Companies are ditching unprofitable businesses and product lines, restructuring their organizations and revising ad plans, all while trying to revive struggling stock prices.

The latest example: 3Com Corp. on March 21 said it would discontinue its much-ballyhooed "Audrey" Internet appliance and exit the consumer appliance segment. The device was supported with a multimillion-dollar ad campaign via Interpublic Group Cos.' Lowe Lintas & Partners, New York, which also created the company's $100 million global brand campaign.

Last year, 3Com executives said that budget represented a doubling of ad spending. But in a recent Securities & Exchange Commission 10-K filing, 3Com reported sales and marketing expenses in the quarter ended Dec. 1 decreased $25.5 million, or 10%, compared

with the same quarter last year. And that's before 3Com's massive belt-tightening this calendar year.

Ad dollars first to go
For some companies, advertising dollars are usually the first to go when sales slow. In its February SEC filing, Apple Computer reported a 57% decrease in net sales due to lower spending on marketing and advertising. The company recently kicked off a multimillion-dollar TV and print campaign via Omnicom Group's TBWA/Chiat/Day, Playa Del Ray, Calif., for iMacs that burn music CDs.

In its February 10-K filing, Compaq Computer Corp., whose ad spending is expected to remain flat or slightly lower his year, reported advertising expenses of $370 million, $385 million and $336 million for the years 2000, 1999 and 1998, respectively. Compaq recently announced a reorganization that combined its business and consumer units.

Hewlett-Packard Co. spent $1.1 billion globally on advertising and marketing in 2000, down slightly from $1.3 billion in 1999. Company executives told Advertising Age that they expected a double-digit increase in advertising for the fiscal year beginning Nov. 1, 2000, despite dismal fourth-quarter earnings (Advertising Age, Nov. 27). But while layoffs and reorganization plans are underway, ad spending does not seem to be slowing down, as comapny recently launched its "Inventors" campaign by Goodby Silverstein & Partners, San Francisco.

Intel Corp. continues its $350 million global advertising effort for the Pentium 4 computer chip despite tepid PC sales growth and the dismal economic outlook. An Intel spokeswoman said the company's high-profile TV brand advertising efforts are more important than ever now, and that they'll continue to be part of the mix.

Tech companies contacted for this story did not return phone calls or respond to e-mail.

Not all is gloomy
Agency account and media executives on notoriously demanding tech accounts say they're not getting much guidance from clients who are closeted in endless budget and planning sessions. However, not all is gloomy in the category. IBM Corp. said it upped ad spending about 15% to 17% and recently launched a $210 million global campaign for its software division.

Microsoft Corp. remains on track to spend more than $250 million globally on its "Agility" software campaign, continue its $150 million drive on the MSN Internet portal, $50 million on UltimateTV and will soon break a major print advertising effort for Office XP. A multimillion-dollar ad and marketing campaign for Microsoft's Xbox videogame console will debut later this year. Microsoft is "staying the course" in terms of the amount of money being spent and the way it is spent among media, according to an agency executive close to the business.

A Microsoft advertising executive earlier this year said the company has focused its ad dollars on three major areas -- MSN, WebTV, UltimateTV and other consumer products; the Xbox; and business software. Overall, the executive said, all three areas represent a half-billion dollars in spending in the fiscal year ending June 30. It was unclear how Microsoft's ad budgets will be rejiggered for its next fiscal year, starting July 1.

DevX, an Internet portal that targets information technology professionals and software developers whom companies like Microsoft desperately want to reach, will benefit from any pull-back in broad-based advertising. "When times get tough, advertisers tend to back away from the broad reach, less direct [media] channels," said Peter Horan, DevX CEO and a former senior vice president at IDG. Mr. Horan said DevX will close its first quarter with $2.1 million in ad revenue and is on track to reach $15 million to $18 million by year end. The business hit $7 million in revenue for 2000.

"So far, so good," he said, noting ad bookings from Apple Computer, Oracle Corp., BEA Systems and IBM. Microsoft has expanded a program with DevX for its Windows XP launch.

Tech ad pages down
It's no secret the number of tech ad pages is down, mostly due to the implosion of so many dot-coms. For the first two months of this year, ad pages in the category were down 21%, according to data from the Publishers Information Bureau.

"Obviously, the category is weak," said Merrill-Lynch media analyst Lauren Rich Fine, who added that Internet World magazine recently noted its ad pages were down 70%. "What's really hurting some of the mediums is that these are pages that they were selling at very high rates, especially in the dot-com area -- the tech category had been bid up."

"With IBM increasing, not all is lost and you will see the category leaders use the opportunity to advance their market share and spend into it," she said.

Spending for the long haul?
But most tech ad executives maintain they're spending for the long haul and won't pare ad budgets.

Well, maybe. "That's a familiar refrain. It usually gets sung until it's time to make a quarter or not make it," said Jim Dougherty, advertising and business services, Prudential Securities.

National advertising in the computer category in 2000 hit $4.2 billion, up 73% over 1999, according to Taylor Nelson Sofres' CMR. This year, Mr. Dougherty estimates an increase of roughly 30% in category spending up to $5.4 billion -- less than half the increase in category spending seen in 2000. "A lot of what's going on in 2001 is related to the unbelievable comparisons that were set up in 2000," he explained.

Will tech advertising really dry up? "They [tech advertisers] will certainly keep up some pressure, but if there aren't any [products being sold], if that's just not happening, then you'll see a pullback," Mr. Dougherty said.

Staff writers Alice Z. Cuneo and Mercedes Cardona contributed to this report.

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