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The news flow from many of the companies that have dominated digital advertising in recent months has been highly negative. But we shouldn’t confuse short-term disruption with a change in the long-term trajectory.
In the past few years, digital advertising was a breakout star in the US$3 trillion entertainment and media (E&M) industry. As PwC’s Global Entertainment & Media Outlook (Outlook) reported last year, advertising grew a stunning 22.6% in 2021, accounting for 32.2% of total E&M industry revenues. The forecast calls for advertising to grow at a 6.6% CAGR through 2026—faster than the E&M industry and the economy as a whole—on the way to becoming a US$1 trillion market in its own right. The growth is fed largely by digital. Over the five-year forecast period, global internet advertising revenue will expand at an impressive 9.1% CAGR to reach US$723.6 billion in 2026.
We believe that, despite some short-term hiccups, the prognosis remains fundamentally sound and that we shouldn’t write off digital advertising’s longer-term growth prospects. What we’re seeing is the latest in a series of shifts that continue to transform this industry. In real time, the historic metrics of volume and reach are evolving. Digital advertising spending is rapidly following the customers’ time spent on social media platforms, apps, retail media and gaming environments. The rise of new areas like retail media, connected television and shoppable commerce are producing different types of metrics and attribution models. In some sense, digital advertising is getting smarter and more effective, less blunt and more focused, less tactical and more strategic—and more connected to purchasing. All of that is pushing advertising closer to the point of sale and towards platforms where commerce is conducted.
Macro push and pull
Investments in marketing tend to track overall consumer spending. And it is true that in some large economies—the UK and Germany, for example—the combination of higher interest rates, the energy crisis, inflation and generally slower economic growth is taking a toll on consumer spending, and hence on advertising and marketing. Economic growth in China has slowed significantly, and the near-term track is made more complicated by covid. But in many other areas, including in some of the most important consumer markets in the world, spending has remained robust. The World Bank in January projected that India’s economy, the fifth largest in the world, will grow 6.1% in 2023, fuelled by consumer spending. In the US, retail sales in December 2022 were 5.9% higher than in December 2021. The International Monetary Fund, in its most recent forecast, projects that the global economy will grow 2.9% in 2023, following 3.4% growth in 2022.
Diversification, not contraction
One of the digital marketing trends we’re seeing is that some of the biggest incumbents are losing market share. As the Wall Street Journal reported, the combined market share of US digital advertising spending for Meta and Google last year fell below 50%.
Incumbents have been losing market share in the broader E&M universe for decades. In dynamic industries where consumer habits, technologies and business strategies evolve quickly, there is a near-constant reshuffling and reordering of business. And so, to a large degree, we are seeing volatility among individual sectors—and indeed, among players within sectors—even as the long-term trend remains intact.
One of the consistent themes of our analysis of the Outlook is that the platforms on which people spend their time, money and energy continually morph, grow and evolve. The giant platforms may see declines in revenue. But a new slate of competitive players that engage with different types of consumer behaviour is transforming the digital advertising experience—largely for the better. Connected television, shoppable commerce, in-app and in-game ad experiences, advertising on e-commerce websites: all of these sectors are not only becoming larger, they are offering advertisers a fundamentally different value proposition—one in which they can more faithfully track the outcomes and return on investment from spending.
- The world of retail media—advertising on e-commerce sites and at retailers’ owned real-world assets—is growing rapidly. In the fourth quarter, Amazon reported US$11.6 billion in advertising revenues, up 19% from the year-before quarter, while Walmart’s Connect business generated US$2.7 billion in 2022.
- The platforms that capture the attention of the youth are seeing revenues explode. In late 2022, TikTok projected its ad revenues for the year to more than double, from US$4 billion in 2021 to US$10 billion.
- As gaming continues to grow as a medium, it is becoming the locus for a heightened level of advertising. In the 2021 Outlook, we charted for the first time the size of the in-app games advertising market. Coming in at US$54 billion in 2021, it is expected to more than double by 2026 to US$118.6 billion.
- According to the Outlook, connected TV advertising will rise from US$16.6 billion in 2022 to US$27.7 billion in 2026.
- As streaming companies encounter headwinds to subscriber growth, they are also starting to focus on advertising as a potential growth area. Netflix, for example, has launched an advertising business, centred around a cheaper, ad-supported tier that offers a lower monthly subscription price aimed at expanding the potential universe of subscribers.
Privacy and tracking
There is a third factor at play here. Shifts in consumer behaviour, competitive behaviour, and regulations surrounding privacy and tracking play a role in determining how effective and efficient different forms of advertising—especially digital advertising—are. As we noted in last year’s Perspectives from the Global Entertainment & Media Outlook report, the launch of Apple’s App Tracking Transparency framework in 2021, which mandates that iOS users opt in before their identifier for advertisers (IDFA) can be accessed, has had a major impact on the revenues and operations of iOS advertisers, app publishers and even Apple’s big tech peers. The trend away from the third-party cookie tracking that dominated the last decade-plus of web-based engagement models is also driving more brands, agencies and publishers to use data “clean rooms” and other identification, prediction and attribution services.
Strategic implications
The last few years, since the onset of the covid-19 pandemic, have been a period of unusual volatility and uncertainty in the economy and consumer behaviour. Many sectors, products and services that saw explosive pandemic-induced growth (including Zoom and Peloton) have been hit by mean regression. But in many other areas, the strong underlying trends that are driving long-term changes in behaviour are firmly intact.
Importantly, what we’re seeing is an underlying strategic shift. We’re moving from a world in which volume and reach metrics were the primary factors focused on, even if that meant ignoring waste and spam. Instead, we are moving closer to a world of vastly improved metric and attribution models. The continuing rise in market share among connected television, shoppable commerce and retail media is changing both the nature and the value proposition of advertising spending. Brands may have to keep paying to play, but the technologies inherent in these media—and the behaviours with which they are co-located—enable participants to track outcomes and ROI on ad campaigns with much greater precision.
Further reading
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