MARY ALICE SHAVER University of Central Florida

MARY ALICE SHAVER University of Central Florida

Advertising in one form or another is centuries old. What we think of today as the advertising industry became formalized in the late 19th century with the formation of advertising agencies. In the early days, the fledgling agen- cies literally contracted for newspaper and magazine pages, which they then sold at a profit to businesses that wanted to reach a particular audi- ence. These early arrangements evolved into full-service agencies that han- dled all areas of client advertising from research to creative execution to placement of the finished advertising in the appropriate media.

When we calculate advertising expenditures, however, the figure in- cludes not only agency work (generally the majority of expenditures) but also advertising from businesses themselves (which may have their own in-house agency that works only for that business) and advertising placed by individuals. The finished product may be anything from a slick televi- sion or magazine ad to a specialty product. Many agencies provide full service to a client, doing everything concerning advertising and promo- tion. Others may be specialty—or boutique firms—that do only certain types of advertising.

Advertising expenditures for 2002 are estimated at 466.1 billion U.S. dollars (U.S.D.; Coen, 2002). The U.S. portion of that figure is just more than one half at 239.2 billion U.S.D. These 2001 figures are slightly lower than 2000 due to the sharp declines of 2001 caused by the severe economic drop worldwide. The drop in U.S. advertising in 2001 was the first time ad dollars had declined since World War II. The year 2002 is estimated to have a 2.4 % growth in the United States and a 2% growth overall in world markets (see Table 12.1).

There are two basic audiences for advertising. The first is the consumer audience that is exposed to the advertising through many types of media vehicles. The second are the manufacturing and service organizations who

Worldwide Ad Growth Between 1990 and 2002

TOTAL WORLD Year

U.S.A

OVERSEAS

Billion US$ % Change 1990

Billion US$ Change Billion US$

466.1 +2.2 *In current local currencies.

Source: Coen, R. (2002, January 1). Universal McCann’s Insider Report.

use advertising to make contact with the audience of present and potential consumers of their goods and services. In this configuration, the advertis- ing agency (whether a free-standing agency that serves many clients or an in-house agency that serves just its own company) becomes the facilitator. In cases such as classified advertising, the seller deals directly with the me- dium in placing the ads. This would be true for some—but not all—locally placed business run-of-press (ROP) advertising and it would also be true of an advertising director for a small business in which that director and per- haps a small staff take the place of an in-house agency and perform its func- tions for the business.

Advertising plays a particularly strong role in supporting the media in the United States. Advertising revenues pay for virtually all broadcast me- dia, 70% to 80% of support for newspapers and an equally high percentage for magazines. Although there are subscription costs for nearly all newspa- pers and magazines, this revenue stream pays only a small amount of the actual costs of production and distribution. Advertising revenue also sup- ports outdoor advertising. As yet, advertising does not play a major role in the support of Internet content, which is largely supported by the various

12. ECONOMICS OF ADVERTISING

news media. This may change in the foreseeable future. In the past decade, promotion and event marketing has taken an increasing amount of many companies’ advertising budget, resulting in a loss of ad revenue in the tra- ditional media. Direct mail has grown incrementally stronger in the past two decades, again, taking revenue from what used to be considered the major media. Taken together, direct mail and Internet have captured much of the retail business and threaten both traditional stores and marketplaces as well as challenging the traditional media placement. A look at the per- centage of advertising revenue going to newspapers, for example, finds that it has dropped from 26% in 1984 to 22% in 2001. Newspapers and tele- vision are barely edging out direct marketing in percentages of advertising revenue received (see Fig. 12.1).

The picture is equally fragmented within the television industry as well. What used to be advertising revenue garnered by the three major networks has become revenue shared among many new networks. Cable, rather than national networks, has gained in this change.

When one examines the major trends in advertising today, there are two prominent challenges to the traditional patterns. The first is the move (be- gun as early as the 1960s with the death of many national magazines) from a mass to a niche market. The second is the successful challenge of new media to the old in terms of revenue, attention and importance.