Art & Commerce: Free Spenders

If people are pessimists because of intelligence and optimists because of will, there appears to be enough willpower to go around in advertising this winter.

Pretty much across the board, leading prognosticators see the ad business regaining some zip in 2003, and maybe even staging a boom in 2004. The industry declined this year and last—the first two-year dip since reliable records have been kept. The pros pect of an upturn in the new year, even a modest one, is heartening.

At least one medium—radio, whose sales pitches remind us of its rapid responsiveness—is already reacting to something good and is heating up. Another positive sign came at the big media conferences held last week in New York by rival brokerage firms UBS Warburg and CSFB. Combined registration appears to have exceeded 3,000, which is a lot, probably a record, and especially impressive considering the pounding that stock-market-related companies—investors and brokers—have taken in the past couple of years.

Forecasters typically shield their enthusiasm behind several hedges. First, of course, is the economy, which seems to have sustainable vigor, but if we get dumped back into recession, all bets are off. Then there’s the war worry, although one conference presenter claimed to have evidence that the public actually approves of sponsored news coverage (“This war brought to you by …”). There are also considerations of consumer confidence and corporate profitability. But despite the yellow flags, the tone is clearly optimistic.

CBS’ research maven, David Pol track, sees strong signs that a key cluster of advertisers is responding positively to the latest economic stimuli, which should drive the network TV market up and spill over into other national media. Poltrack categorizes ad buyers by economic character and sorts them into two main groups: those who are price elastic and those who aren’t. Even a non-economist can guess that the “elastics” are those whose appetite for ad time depends a lot on price, while the “inelastics” need what they need and are not as sensitive to pricing.

As business considerations force the inelastics to need more, the added demand drives up prices, so they pay more. With each spin up the spiral, some elastics flee to cheaper media, and increased demand there triggers further price increases, displacing the bargain hunters once again.

There are four main species of inelastics. First are those whose ad expenditures are so small relative to sales that paying up doesn’t dampen profits much. Auto companies fall into this group. Then there are those with rigid time constraints. A Hollywood studio with a big movie opening Friday doesn’t much care what it costs to run a spot Thursday night.

Advertisers locked in combat, whether a price war or a bid to invade or defend a market, are also free spenders. Right now, ad spending is up by nearly 20 percent in the telecommunications and beer categories. Finally, the Internet ad boom was driven by a rare breed of inelastic—one in a hot new category and with much more money than brains.

That last subset has all but vanished, but the ad recovery can surely proceed with three out of four.