The Advertising Economy

May 2008
 Once Upon a Time, Marketing = Media + Creative

•Traditional media was primary (sole?)

venue for communications objectives

2
 But Fragmentation Fractured That Proposition

3
 New Platforms Would Make Change Possible

120.0%
Mobile Phone
Subscriptions
100.0%

Multichannel Homes
% of US Households

80.0%

Broadband Homes
60.0%
VOD Homes

40.0%
DVR Homes

20.0%
Satellite Radio
Subscriptions
HD Subscriptions
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

4 Source: MAGNA Global

 Music Was The Canary In The Coal Mine
•Digitization changed production, distribution and consumption

Manufacturers' Shipments of Recorded Music

18,000
Total
16,000 Digital
Sales
Revenues ($000s)

14,000 Retail
Napster Launched Sales
12,000
(June 1999)
10,000 BitTorrent, Kazaa,
Grokster, etc. active
8,000 iTunes Launch
(March 2003)
6,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
5 Source: MAGNA Global, RIAA
 The Venture World Would Shake Everything Else Up
•Thousands of new models would surely change everything
Traditional Medium Equivalent / Ad-Supported Revenue Driver
Radio/Music TV Online/Print Out-of-Home Marketing Other
Services Marketing
UGC
Production
Social Content
Individual or Corporate Behavior Driver

Consumption
Niche Content
Consumption
New Place
Consumption

Asset
Management
Content-on-
Demand
Information
Seeking
Commerce /
Shopping
Game Playing

6 Source: MAGNA Global

 And DVRs Were To Be The Last Nail In The Coffin

7
 With A Digital Revolution Blooming In The Aftermath

8
 But Traditional Media Never Died

“Television is the
worst form of
advertising, except
all the others that
have been tried”

9
 But Traditional Media Never Died
•New advertisers rely on it for mass branding effects

Top 10 Network TV Advertisers

1987 2007
1 McDonald's 1 AT&T Wireless
2 KFC 2 Verizon
3 Burger King 3 Sprint
4 Miller Lite 4 McDonald's
5 Budweiser 5 Home Depot
6 AT&T 6 T-Mobile
7 Wendy's 7 Subway
8 American Express 8 Toyota Tundra
9 Miller High Life 9 Lowes
10 Advil 10 Wendy's

10 Source: MAGNA Global analysis of TNS-CMR data

 But Traditional Media Never Died
•Large brand-based advertisers: focus on reach…

Network TV Prime Time Reach - Live Only Adults 18-49

96.17% 96.72%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2002 2007

11 Source: Initiative Analysis of Nielsen Data

 But Traditional Media Never Died
•…And frequency

Total US Population: Hours Spent With Media

Millions of Person-Hours Per Year

600,000
TV
539.0bn
500,000
Radio
400,000
Total Internet
300,000
241.3bn
Newspapers
200,000
56.9bn
100,000 Consumer
51.3bn Magazines
0 37.0bn Search
2005 2006 2007 2008 2009 2010 1.8bn

12 Source: MAGNA Global, US Census, Veronis Suhler, OPA

 But Traditional Media Never Died
•This is true in established markets…

Media Reach By Country

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

Newspapers

Magazines

Internet
Radio
TV

13 Source: MAGNA Global, WARC, InternetWorldStats. Weekly reach figures for France and UK, daily for other countries. Reach definition for magazines = issue reach in France, Italy and
Spain. Internet reach typically = % of population online monthly per Nielsen NetRatings, ITU and other sources as of June 30 2007 (except for US = March 31, 2007)
 But Traditional Media Never Died
•…And emerging ones

Media Reach By Country

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Radio
TV

Internet
Newspapers

Magazines
14 Source: MAGNA Global, WARC, InternetWorldStats. Weekly figures for Brazil and Russia. Russia, China and India magazines are issue reach figures. Indian TV and radio = daily, newspapers
= issue. Chinese TV = weekly and radio = daily. Internet typically = % of population online monthly per Nielsen NetRatings, ITU and other sources as of June 30 2007
 But Traditional Media Never Died
•It also holds for young audiences…

Young Audiences' TV Viewing Trends

29.0
Hours of Viewing Per Week

27.0 P2-5

25.0
P6-11
23.0
21.0
P12-17
19.0
17.0
P18-34
15.0
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
15 Source: MAGNA Global analysis of Nielsen Media Research data
 But Traditional Media Never Died
•…In the US and around the world

TV Reach: Adults and Teens

100.0%
90.0%
80.0%
70.0%
60.0% Adults
50.0%
40.0% Teens
30.0%
20.0%
10.0%
0.0%

Brazil
Italy
Germany
UK

France

Spain

US

India
Russia

China
16 Source: WARC
 But Traditional Media Never Died
•Is New Media always a better substitute? Consider criteria

Yes! Not
Really
General Print TV
Limited TV content
Sufficient Range available today
of Content
Internet can’t deliver
Sufficient high res video well
Technical Quality
Print is tactile
Equipment
Substitution IPTV: no STB integration

Sufficient QoS is critical for video

Customer Service
Hard to navigate to find
Efficient audio/video
Navigation
Cheaper to Online bandwidth can
be expensive to provide
Substitute
Increased Print is typically portable
Convenience
Prospects for online
media substitution limited
SUMMARY by drawbacks relative to
traditional media

17 Source: MAGNA Global

 But Traditional Media Never Died
•Reflected in actual usage
• Conventional TV popularity: 100x vs. Online in 2011?

200.0x
Popularity Factor of Conventional

Below Trend
180.0x 2007 Growth Rate Was 34.4%
160.0x 145.8x
140.0x 119.8x
TV in 2011

120.0x Above Trend

99.2x
100.0x 82.7x
80.0x 69.4x
58.6x
60.0x
40.0x
20.0x
0.0x
25% 30% 35% 40% 45% 50%
Different Scenarios:
Assumed 4-Year Compounded Annual Growth Rate of Online Video

18 Source: MAGNA Global, Accustream

 Communications Extends Beyond Media

“The company is
(putting) retail
marketing strategy
under the same
marketing directors who
oversee brand teams

19
 Communications Extends Beyond Media

•Large advertisers’ real shift: non-media marketing

Hershey Promotion and Advertising Expense 6-Year CAGR

25.0%
Advertising Growth
20.0%
-6.2%
15.0%
Promotion Growth
10.0% 8.8%
5.0%
0.0%
-5.0% 2001 2002 2003 2004 2005 2006 2007

-10.0%
-15.0%

20 Source: MAGNA Global, Company Reports

 Communications Extends Beyond Media

•Large advertisers’ real shift: non-media marketing

Coca-Cola Selling and Advertising 6-Year CAGR

35.0%
Selling Expense Advertising Expense
30.0% Growth Growth
25.0%
12.8% 6.5%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0% 2001 2002 2003 2004 2005 2006 2007
-10.0%
-15.0%

21 Source: MAGNA Global, Company Reports

 Communications Extends Beyond Media

•Large advertisers’ real shift: non-media marketing

Liz Claiborne Marketing and Advertising 6-Year CAGR

25.0%
Marketing Growth
20.0%
9.0%
15.0%

10.0%
Advertising Growth
5.0%
4.4%
0.0%
2001 2002 2003 2004 2005 2006 2007
-5.0%

-10.0%

22 Source: MAGNA Global, Company Reports

 Communications Extends Beyond Media

•Large advertisers’ real shift: non-media marketing

Wrigley Merchandising, Selling and Advertising 6-Year CAGR

60.0%
Merchandising and
50.0% Promotions/Other
Growth
40.0% Selling and other
15.2% Marketing Growth
30.0% 16.2%
20.0%

10.0%
Advertising Growth
0.0% 10.0%
2001 2002 2003 2004 2005 2006 2007

23 Source: MAGNA Global, Company Reports

 Drivers of Online Spend = Endemics, New Businesses

•Largest advertisers drive TV, smaller advertisers drive online

24 Source: MAGNA Global analysis of TNS-CMR data

 Drivers of Online Spend = Endemics, New Businesses

•Online allows for lower cost, narrow reaching campaigns

2006: Unique Advertisers By Medium

9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Network TV Internet Display

25 Source: MAGNA Global analysis of TNS-CMR data

 Drivers of Online Spend = Endemics, New Businesses

•Search primarily driven by small businesses + e-commerce

Search Spending as % of E-Commerce Sales

8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1Q04A

1Q07A
2Q07A
3Q07A
4Q07A
1Q00A
2Q00A
3Q00A
4Q00A
1Q01A
2Q01A
3Q01A
4Q01A
1Q02A
2Q02A
3Q02A
4Q02A
1Q03A
2Q03A
3Q03A
4Q03A

2Q04A
3Q04A
4Q04A
1Q05A
2Q05A
3Q05A
4Q05A
1Q06A
2Q06A
3Q06A
4Q06A
26 Source: MAGNA Global, IAB, BEA
 Drivers of Online Spend = Endemics, New Businesses

•Reflecting effectiveness for SMEs…

Advertising Dollars Spent Per Hour of Media Consumption

$10.00
$9.39 Search
$9.00
$8.00 Newspapers
$7.00
$6.00 Total Internet
$5.00
Consumer
$4.00 Magazines
$3.00 $0.94
TV
$2.00 $0.58
Radio
$1.00 $0.33
$0.00
$0.10
2005 2006 2007 2008 2009 2010 $0.08

27 Source: MAGNA Global, US Census, Veronis Suhler

 Emerging Media Advertising: Sources of Revenue

•Beyond search, emerging media = small business today

2007E Emerging Media Advertising

$10,000.0
Revenues in Millions

$8,000.0

$6,000.0

$4,000.0

$2,000.0

$0.0
Search All Other

28 Source: MAGNA Global, IAB

 Emerging Media Advertising: Sources of Revenue

•Sub-scale media: more effective for sub-scale advertisers(?)

• Emerging media requires ad hoc processes and workflows
• Most or all processes in smaller advertisers are ad hoc!

or

29
 Emerging Media Advertising: Sources of Revenue

•…But “gut” decisions on “feel” frequently drive allocations

• Use of newer media can be similar to magazines: it “feels” right

30
 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Traditional media stops working

31
 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Better infrastructure

32
 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Better-aligned organizations

PR / Corporate
CEO Communications

Other Corporate
COO
Functions

Operating Operating Operating Direct / CMO / Central Retail

Division Division Division Online Sales Marketing Distribution

Product Product Product

Branding Branding Branding Creative Media Other
Development Development Development

Marketing, PR, Marketing, PR, Marketing, PR,

Retail, Sales Retail, Sales Retail, Sales

33 Source: MAGNA Global

 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Focus on people, not pages (or ratings)

34
 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Ability to assess value, not cost

Top 10 DMAs National Network

35
 Emerging Media Advertising: Sources of Revenue

•What will cause advertisers to use more emerging media?

• Ability to actually use data

= +

36
 Emerging Media Advertising: Sources of Revenue

•So when is emerging media used?

• Niche-focused brands or marketing objectives
• Reaching consumers across multiple touch-points
• Experimentation / internal learning / preparation for the future

37
 What Have We Learned Today?
We thought we could make
money on the internet

While the internet is new and

exciting…it hasn’t matured
as a distribution mechanism

It will be a few years

before…media on the
internet can be monetized

- Kyle Broflofski, April 2008

38
 Summary

Old Online
Media: Below New Online Emerging
The Line: Media: Display: Search: Media:
Not Led by
Dead Growth Systemic Focus on Niches,
Driver For Limits for Endemics, Small Multiple
Yet, Businesses,
Becomes Largest Most Large Commerce Touch
Advertisers Advertisers Commerce Points or
Digital
Tests

39
Contacts:

Brian Wieser, CFA

Tel: 646-865-2260
Email: brian.wieser@magnaglobal.com

www.interpublic.com/news+ideas/research