Key points
- From relatively low penetration a decade ago, digital advertising today serves as the primary platform for most companies’ marketing activit.
- However, a confluence of factors is contributing to a current recession in digital advertising spending, raising questions about the sector’s long‑term growth profile.
- Yet, powerful structural characteristics supporting the industry are central to its longer‑term prospects.
The growth in digital advertising spending in recent years has been nothing short of spectacular. From relatively low penetration a decade ago, digital advertising today serves as the primary platform for most companies' marketing activity. And it's not difficult to see why. More efficient and quantifiable than any other advertising solution, digital advertising has offered superior returns on investment for companies. Recently, however, various factors have combined to negatively impact the digital sector. Has digital advertising reached its peak, and can the growth profile of previous years be repeated? Here we look at four key reasons why the near‑term challenges digital advertising faces are expected to be a temporary blip on the industry's longer‑term growth profile.
Digital Is the New Norm
Targeted, multi‑channel, advertising providing easily measurable results
1. Powerful Long‑Term Tailwinds
The powerful tailwinds that have supported the rapid growth in digital advertising over the past decade—growing internet penetration, rising popularity of smartphones, increase in social media usage, rising penetration of e‑commerce, increased investment in technology and digital platforms—are very much intact, and it is these same tailwinds that are expected to underpin growth moving forward. These secular trends show no sign of abating, and as has been the case over the past decade, we expect digital advertising to continue to outperform other forms of media for years to come.
The past year has been illuminating in the sense that it has highlighted the underappreciated cyclicality of digital advertising. Amid a more volatile macro environment, where spending visibility has become less clear, it has been a little surprising to see how quickly companies have moved to cut the digital portion of their overall marketing budgets. Nevertheless, despite the recessionary period we are currently seeing, the long‑term potential that digital advertising offers is hard to deny. One of the main reasons is the opportunity for superior returns on investment.
2. Opportunity for Attractive Returns on Investment
Digital advertising offers companies the potential for superior returns on invested capital. Advertising no longer needs to be a case of going in blind. Instead of generic advertisements aimed at no particular audience, the data‑driven nature of digital advertising provides more accurate, measurable, and immediate customer feedback. This allows marketing teams to plan campaigns in a much better—and more targeted—way, zeroing in on a specific audience and providing tailored offers or products to the very people most likely to act on those offers. This compares with more traditional avenues like print media or billboards, which provide zero feedback or customer insights.
It is also worth noting that, despite the sharp deceleration in digital ad spending seen in 2022, which also needs to be considered in the context of the pandemic‑distorted levels of 2021, the U.S. digital advertising market is expected to continue to grow at a steady pace. Spending in the U.S. is anticipated to surpass USD 300 billion by 2025, which would account for roughly 75% of all media spending .
This post was funded by T. Rowe Price
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