Guest comment: Ad spending in a recession- More competition needed

The current and widespread decline in employment and trade has affected every sector of the economy. It is unsurprising then that online ad spending, which has until recently experienced immense growth year- over- year, has since shown a marked decline in growth, with all indicators pointing to a continued and perhaps prolonged downturn. 

As consumer demand for goods and services trends downward, advertisers must redouble their efforts to extract maximum value from their ad expenditures.

Spending in a Downturn: Why Search?

In 2008, worldwide spending on internet advertising totalled an estimated $65.2 Billion. Why continue spending on search? In a downturn, consumers comparison shop and increasingly, the internet is where they begin their search.   In Europe, this trend is cross-border and is seen by the European Commission as a key factor in stimulating greater price competition.

Smart brands do the same.  They look for the best option, evaluating where they place their search ads and the cost to do so.  Given the opportunity, they use the internet to market aggressively; getting their products and services directly in front of consumers who actively seek them. They recognize that advertising markets function best when players operate strategically and efficiently.

In practice however, that there is only one option in search. Advertisers, unable to comparison shop, are subject to the operating rules of the dominant provider. One player, Google, controls about 70 percent, and increasing, of the search advertising market in the U.S. and enjoys comparable dominance in many countries worldwide.

Efficiency

A reasonable measure of the efficiency of advertising is characterized by a meaningful ROI.  A brand electing to increase spending should realize growth in sales or prices or both. In the current economic climate, those seeking to maximize value within budgetary restrictions probably aim for relatively modest returns, but at the lowest possible cost.

This calculation is skewed when competition is distorted through the market power and practices of a key player, particularly if its competitors are effectively foreclosed from the market through long-term contracts or a lack of access to resources such as data.  When Yahoo! attempted to partner with Google, the deal was sharply abandoned just hours before the Antitrust Division of the U.S. Department of Justice was set to start enforcement action on the grounds that it would further Google's monopolization of key online advertising markets.

Competition

The competition rules are designed to protect consumers by ensuring that prices and output are determined by the market.  Markets function best where there are many suppliers and many buyers, and there is sufficient information for both sides to make rational commercial decisions.  These conditions are noticeable by their absence when it comes to online advertising. 

Google has a dominant position in search, search advertising and search syndication, as well as in related markets. 

The fact that competition is already so heavily distorted places a special responsibility on Google to conduct its business in a fair, reasonable and transparent manner.  Yet, according to a survey conducted in December 2008 by the International Advertising Association, 92 percent of respondents asked for more transparency in how online advertising companies set opening bid prices for keyword auctions and 90% want more transparency about how winning bids are scored (International Advertising Association, 2009).

Online ad spending is still realizing some gains. Anticompetitive conditions however, distort ROI and make it less likely for dollars to be deployed strategically, limiting the likelihood of gain for some, and for others, survival.  If one supplier –is allowed to exploit a competitive advantage to the detriment of the marketplace it will not matter if economic conditions improve; the online marketplace will experience long-lasting harm.

By David Wood

Legal Counsel

ICOMP

www.i-comp.org

About ICOMP

ICOMP is an industry initiative for organisations and businesses involved in Internet commerce, particularly online publishers, advertisers, Internet service and network providers, and agencies active in online advertising. ICOMP sponsors conferences and press roundtables, issues policy briefs, conducts consumer research, and advocates generally for a more competitive, transparent, privacy friendly, and secure online marketplace.

More than 40 companies, trade associations, consumer organisations and individuals have endorsed ICOMP’s principles. These members represent 14 countries across Europe, North America and the Middle East. Microsoft is ICOMP’s initial sponsor. Burson-Marsteller acts as its Secretariat, and Lord Alan Watson is ICOMP’s first Chairman.