I was at Stapleford Park, one of England’s better-appointed country-house hotels, at the weekend, for our office Christmas outing. It’s one of Peter de Savary’s conversions and is what I would call discreetly opulent. In other words, you’re separated from your money relatively painlessly – nay, very comfortably.
Anyway, I fell to saying in the visiting valets’ card-room (or wherever) that we might as well enjoy this sort of style while we can, as the economy won’t support it forever. My colleagues consequently called me the Grinch who stole Christmas. And they have a point – there should be no reason why a well-run company doesn’t continue to prosper in a weakening economy. Many a previous owner of Stapleford Park, after all, rode out recessionary times.
But I’m conscious that my bearish warnings for the economy of last week are being vindicated by the day. I’m told that the banks are making larger provisions for bad debt next year. And I notice that the estate agents and building societies are talking up property prices – usually a sure-fire indicator that things are about to go pear-shaped.
It’s advertising revenues that now really worry me. I’m told that recruitment advertising revenues have fallen off a cliff in November. Then on Monday, media-buying group Zenith let it be known at the PaineWebber media conference in New York that global advertising growth will slow to some 6 per cent next year. That’s compared with an expected 7.9 per cent for this year and represents a mark-down from Zenith’s previous expectation for next year of 6.4 per cent.
Zenith’s is only the latest of a series of warnings over advertising growth. Back in October, Granada Media’s shares dropped 6 per cent on concerns over ITV revenues. More recently, media conglomerates Pearson and EMAP have suffered for the same reasons, and even WPP – which benefits from the recession-resilience factor referred to above – took a slight knock last month from a Merrill Lynch re-rating.
This is, of course, a hangover from the strange ingredients that comprised the dot-com cocktail earlier this year. The recruitment corner of the advertising market was exposed particularly to the hubris of dot-com managements. But television, local radio and posters are all media that were unduly inflated by dot-commery – especially in the States, where Zenith expects growth of just 4.6 per cent next year, down from over 8 per cent this year and nearly 9 per cent last year.
It is, frankly, bloody hard to blame the advertising industry for plundering the dot-com boom. Satisfying demand is what you do in advertising. You ride that demand on the way up and you suffer when it falls away. As I say, diminishing the effects of the downside of that cycle is what separates the well-run from the drongos.
But I think that there are two major lessons to be learned from what has happened to the advertising industry this year. These are lessons that either have to be learned by the advertising industry, or taught by it to its client-base, depending on the quality of advertising management in industry and in agencies.
The first lesson is that there is a fundamental flaw in a business model that requires that a website relies mainly on advertising and other sources of income, such as licensing, rather than on users actually paying for an online service that they consider is of value in its own right. The mistake, if you like, is the encouragement that the market has given to the idea that everything on the Internet is free. This does not encourage a marketing system that reaches high net-worth individuals.
Advertisers and the advertising industry need to teach that to the surviving rump of the emergent dot-com world. One dot-com chief executive that I know, whose share price has been shot away in the current market crisis, is fed up with being told that the Internet won’t go away because of the current run on shares. But now that the online flakes – and the corporate financiers, incubators and venture capitalists who “advised” them – are out of the game, it’s true that it is incumbent on the quality players who are left to develop sounder valuation models based on access and subscription, rather than simple advertising revenues.
The second lesson is that, for all the commentary to the contrary, there hasn’t been a revolution in the way that industry does business as a consequence of online development. I’m struck by an imminent Department of Trade & Industry report, which I gather will identify 70 business “clusters” in Britain that can be used as catalysts for wealth creation. There’s biotechnology in Cambridgeshire, for instance, chemicals around Middlesbrough and caravan manufacturing in Hull.
Science minister Lord Sainsbury is on the case and is reported as saying: “I don’t think the Government can create new clustersbut [it] has a role in removing barriers [to growth].” The point here is that geography is still defining British and, I suspect, global industry. If the dot-com revolution offers anything, it is liberation from this post-Industrial Revolution limitation to business imagination.
That’s the qualitative challenge for the next generation of grown-up dot-com entrepreneurs. I expect it’ll take a full revolution of the business cycle to come through, but when it does it might just mean, for one thing, that country mansions are owned by industrialists again, instead of hotel groups.
George Pitcher is a partner of issue management consultancy Luther Pendragon