Thursday, September 17, 2009

Irony Alert: Companies That Depend on Ad Spending, Spending Less Themselves

The LA Times reported, through TNS Research, that media companies, despite needing advertising to drive revenue in their balance sheets, are spending less to promote themselves. How ironic. "Walt Disney Co., News Corp. and Time Warner Inc. all reined in ad spending in the first half of the year. Spending by Time Warner was down 11.1% to $574.3 million; Disney expenditures were down 11.7% to $517.6 million; and News Corp. cut its ad spending by 6.9% to $672.3 million." These same companies might need to brace for a similar downsize in their own financial statements.

It is obvious why it is done, but it also can create a downward spiral. As revenues drop, companies reduce spending, including ad spending) to make the net profit higher. But lower spending reduces awareness, key to higher purchasing. Without this marketing, revenues continue to inch lower and costs get cut again. A vicious circle. Smart companies take the risk that future spending will turnaround the trend and are willing to take a short term hit in profits for long term profitability. How long ad spending drops will depend on the confidence these companies have that they can affect and return higher growth. I hope it is soon.

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