In this excellent post on social media companies, Aswath Damodaran articulates something I’ve long wondered – about the finiteness of the global advertising market. Given the number of companies that come up with new mechanisms to match advertisers with consumers, one can be forgiven for believing that the market for advertising is infinite. That the more avenues you create for serving advertisements to people, the more the advertising that will flow, and there won’t be a let up anywhere.
This picture here is from Damodaran’s blog (which I recommend you subscribe to, since every single post is worth reading). Based on the numbers that Damodaran presents here, the overall growth of the worldwide advertising market seems rather low.
The number to take away for me from this calculation is the shrinking pie of non-digital advertising. Based on these numbers, the total non-digital advertising market in 2008 was $468 billion. In 2014, going by the same numbers this is down to $400 billion. This de-growth is significant and holds important lessons for other sectors that are dependent on advertising.
So far, the flow of advertising capital has been taken for granted and the number of business plans made (in both old and new economies) with an assumption on advertising growth is endless. If you want your local bus utility to make more money, you rent out advertising space on buses. If a low-cost airline wants to make more money, they put advertisements on the back of seats (a very good idea since it gets undivided attention for the duration of the flight). It is a surprise that insides of toilet stall doors (which again get undivided attention) haven’t fallen prey to advertisements yet.
The point here is that while it is all well and good to plan businesses based on advertising income, what we need to keep in mind is that the advertising pie in the long term grows at the same rate as the global economy. Sooner or later the waters will recede to the natural level, and then we will know who is swimming naked!