September 19th, 2017
The advertising industry has always been a staple in the American psyche. Harking back to the days of Mad Men, it is easy to envision men dressed in tailored suits deciding which slogan would be the most successful in selling baby powder to a new mom. Today that image is nothing but a memory. Advertising has gone through a variety of stages, from newspapers to radio, to TV. Today the industry is in the midst of another seismic shift, offering opportunities for profit and an unexpected chance for small players to compete in an industry once dominated by giants.
So how much will advertisers pay for you to pay them? The short answer is a lot. Although total spending is difficult to track, the United States is the clearly the largest advertising market in the world. A conservative estimate proposed by Statista puts total spending on advertising in 2016 at $190 billion. To put that in perspective, $190 billion is roughly twice the total nominal GDP of Ukraine and almost exactly the projected total nominal GDP of Greece in 2017. All this spending helps fuel the largest consumer market on the planet.
For years this money has been spent on a wide portfolio of target points including television, radio and billboards. However, the traditional allocation of funds is rapidly changing in line with consumer habits. In fact, 2017 is projected to be the first year that digital marketing will overtake TV advertising with a whopping $77.27 billion according to eMarketer. This is of course driven by the astronomic rise of social media and technology.
TV advertisers have struggled for years to engage with a younger audience and social media platforms, specifically Instagram, have emerged to fill the gap. Analysts predict that over 70% of brands will have an Instagram presence by the end of 2017, a 40% jump in a single year. This is to court the over 700 million users on Instagram in April as the social media platform prepares to hit the 1 billion user mark in the near future. This rise in usage is especially significant given the correlating drop in TV viewership by the same age group. According to Deloitte Global, by 2020, 18-24-year-olds will be watching only 2 hours of TV per day. Experts also found that in 2015, nearly 25% of millennials stated that they didn’t watch live TV at all. Although updated research has not been published, many analysts believe this number to be higher today given the continued development of streaming services. Company reports confirm these trends. A recent report from MTV states that total viewership has declined by over 60% since 2011. This was a company that many believed had a close relationship to younger viewership.
Perhaps more significant than viewership is the effectiveness of social media marketing and product endorsements. According to Digiday, Instagram users with a minimum of 1 million followers have an average engagement rate of almost 2%. For many TV advertisers this is unheard of, as they shell out millions annually for rates usually well-below 1%. This is in part because of the personalized nature of Instagram. Users can choose who they follow. They also view a distinction between a celebrity who likes to use a product and so “recommends” it and a marketing campaign with the sole intention of sales. Nielsen Media Research found that 92% of consumers prefer “perceived word-of-mouth advertising” over traditional advertising techniques.
The potential for profit on Instagram is huge. None have proven this point better than a wildly successful entrepreneur who got her start on TV. Of course, that would be none other than Kylie Jenner. Jenner’s company, Kylie Cosmetics has fully embraced the use of Instagram as a marketing tool. In fact, almost all advertising is done on the platform, in conjunction with tutorial videos on tech unicorn Snapchat. Because of this unique system, Jenner, who is approaching the 100 million follower mark, spends virtually nothing on advertising. In conjunction with Instagram’s development of streamlined through-app purchasing options, Kylie Cosmetics has managed to keep its profit margin huge. Given all sales are online, the company doesn’t need to invest in brick-and-mortar stores or employees. The results are apparent. Jenner’s company rocked the business world when it recently revealed that it had turned a $420 million profit in the first 18 months of operations. To put that in perspective, it took one of the most successful make-up companies, Estée Lauder-owned Tom Ford, over a decade to make $500 million. Kylie Cosmetics expects to make $386 million in 2017. If growth rates and projections hold, Kylie Jenner may be in charge of a $1 billion company by 2022.
The opportunities in this market are enormous. Instagram has provided a platform that levels the playing field. If a small company can find an Instagram “Influencer” to endorse their product, they can compete with companies who spend millions on advertising. As the market develops these prices are bound to increase substantially. However, the cost compared to TV advertisement will remain insignificant except for a small number of individuals (Stars of Keeping Up with the Kardashians make ~$200,000 per post). Smaller firms should utilize this opportunity to develop this advertising and sales strategies.
Investment opportunities abound in this new market. The owner of Instagram, Facebook (FB) who purchased Instagram for $1 billion in 2012 is an obvious choice. Not only does Facebook have ownership of the Instagram brand and platform, but they have also demonstrated a willingness to combine Facebook algorithms with Instagram usage. The combination could help channel advertisements and product placements towards those most likely to engage with the content. As these algorithms develop they will give social media marketing an even greater edge over traditional forms of advertising. As the market develops further, look for smaller start-ups who specialize in utilizing this form of advertising. If it is not possible to engage during the angel-investment or early investment time-frames, look for larger (public) companies buying out these smaller firms. Omnicom (OMC) has strong fundamentals and the buying power to engage in the industry.
Social media continues to play an increasing role in daily life. This includes how companies operate. It is essential that firms embrace this change, otherwise they will soon find themselves falling behind. As the traditional advertising methods change, it may be that the new “Mad Men” drive Bentleys not Cadillacs and are on the TV, not behind it.
Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions reflect the market conditions when written.