In the final installment of our outlook on how COVID-19 will impact the advertising industry, we analyze future potential scenarios for the digital advertising industry. Each advertising format will be affected differently, and it is important to understand the historical relationships between each format and broader economic conditions in order to assess potential recovery scenarios.
In this article, L.E.K. Consulting analyzes future scenarios for digital advertising, including looking at its historical relationship with U.S. GDP, and forecasts potential growth trajectories — ultimately drawing out strategic implications for the format.
Digital advertising spend tracks GDP growth
The correlation between growth in U.S. GDP and digital advertising spend is less strong than other ad formats, yet still has predictive power, especially over the past decade as digital advertising exploded while the country recovered from the Great Recession.
While the current economic contraction points to big declines in digital advertising spend, the secular shift to digital — supported by increased consumer time spent on the medium and the ability to better target and measure advertising — suggests that the medium may be insulated from a drastic downturn. Indeed, digital ad spend grew during the Great Recession.
The flipside of the argument, however, is that digital budgets are easier to switch on and off than budgets for many other media, particularly TV, potentially leading to a larger multiplier effect.
Digital ad spend could bounce back by 2021 if GDP forecasts and past relationships between GDP/advertising hold
The various consensus scenarios for GDP produce highly variable digital ad spend projections, though all project that spend will not return to 2019 levels by 2021.
In the most optimistic scenario, digital ad spend is projected to decline 5.0% in 2020, then roar back at a rate of 27.8% in 2021 for an overall CAGR of 10.2% p.a. from 2019-21.
Under the U-shaped recovery, ad spend is projected to grow 5.6% p.a. from 2019-21.
However, things could be much worse: The W-shaped and L-shaped recoveries project overall growth of 2.3% and -6.9% p.a. 2019-21, respectively.
Given the variability of the projections, what strategic considerations should advertisers keep in mind?
Key takeaways and strategic considerations
The shift to digital is mature — Advertisers have already migrated significant amounts of spend to digital formats. This will mitigate a major macro tailwind that fueled the growth in the wake of the 2008-09 recession.
Digital advertising is flexible — Digital advertising was the first format to feel the implications of COVID-19 due to the relative ease of pulling out of digital ads versus other mediums. The flexibility has positive implications as well. Under uncertain conditions, advertisers may look to more flexible formats such as digital, which is easier and faster to scale up than other formats.
Digital is less expensive and more efficient — Digital was largely resilient through the Great Recession due to its low cost. Advertisers turned to digital to keep up their advertising efforts while lowering their cost base. Small and midsize businesses also increasingly turn to digital as the most efficient and cost-effective use of advertising dollars, with higher ROI on average than other ad mediums.
Continued evolution — The digital advertising industry is continuing to evolve. Major trends such as the rise of ad-based video on demand (AVOD) platforms will reignite and fuel future growth.