In the fourth installment of our outlook on how COVID-19 will impact the advertising industry, we analyze potential scenarios for the radio 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 radio advertising, including looking at its historical relationship with U.S. GDP, and forecasts potential growth trajectories — ultimately drawing out strategic implications for the format.
US radio advertising spend closely tracks GDP growth
Growth in U.S. GDP and radio advertising spend has been highly correlated for the past 30 years (R2 = 0.57). That potentially spells bad news for radio advertising in 2020.
Radio advertising may be particularly challenged. The 2008-09 recession represented a reset in radio advertising. Radio advertising has yet to reach 2007 levels and may never, given secular trends pulling people away from radio. In fact, radio has continued to decline in recent years, representing further challenges for the industry.
If GDP forecasts and past relationships between GDP/advertising hold, radio ad spend is unlikely to reach 2019 levels by 2021
The various consensus scenarios for GDP produce highly variable radio ad spend projections, though all project that spend will not return to 2019 levels by 2021.
In the most optimistic scenario, radio ad spend is projected to decline 17.7% in 2020, then recover and grow 7.5% in 2021 for an overall CAGR of -5.9% from 2019-21.
Under the U-shaped recovery, ad spend is projected to decline 9.4% p.a. 2019-21.
However, things could be much worse: the W-shaped and L-shaped recoveries project overall declines of 12.0% and 19.0% p.a. 2019-21, respectively.
Given the variability of the projections, what strategic considerations should advertisers keep in mind?
Key takeaways and strategic considerations
Radio is in secular decline — The Great Recession accelerated the decline of radio that was already taking place. Expect more of the same from radio this time around.
Rise of streaming — The rise of streaming music and other audio content (e.g., podcasts, internet radio, audiobooks) may be accelerated by COVID-19 as people stay out of their cars and away from traditional radio. This may permanently impair radio listenership. Additionally, streaming giants like Spotify and Pandora have historically not had the capabilities and scale to meaningfully attack radio ad dollars, but growth projections show they soon will.
Radio is local — Radio relies heavily on local businesses, which have taken some of the biggest hits from COVID-19. Except radio advertising to remain adversely impacted so long as local businesses remain under stress.