Chief Analyst

B2B.ru Open Barter System

Back in late 2008 many research companies and major advertising companies forecast that the Russian advertising market would tumble down. The reality turns out to be worse than the forecasts: there has been a considerable decline in the advertising market almost all over the world, but Russia faces a far more severe downfall than in most other countries.

Estimates of the extent to which the Russian advertising market has dropped in 2009 vary from 15 to 50% year-on-year. For instance, TNS Media Intelligence estimates the number of advertising accounts to fall by 11% in Q12009. Printed media witness the most severe fall in the number of accounts of -34%, with -7% for TV, and -4% for radio ads.

The Russian Association of Communication Agencies (RACA) estimates the Russian advertising market to fall by 29% in Q12009 in value terms, from RUB58-59bn to RUB41.5 – 42.5bn.

Vladimir Makarov, head of the Moscow City Advertisement, Information and City Appearance Committee, estimates the downfall of the Moscow advertising market in 1H2009 to be 40-45%.

Thus, all experts agree that the market capacity has considerably decreased, and while TV and online advertising is still afloat helped by the strong audience coverage and accurate targeting capabilities, outdoor, radio and printed media advertising segments are in a critical position. For example, the RACA estimates the decline in these segments to reach 36%, 38% and 42%, respectively, in 1Q2009. The radio advertising segment suffered the most since radio lacks the flexibility inherent to printed media capable of varying their circulation numbers, periodicity, printing quality level, etc., and therefore specifically depends on its advertising time utilization ratio.

It is clear that even if the market might slightly recover in 2H2009, the overall situation will still be quite unpleasant. Many advertising agencies and media businesses are in a tough position, some plainly struggling for survival.

Is there a way out?

The reason for the ad market downfall is clearly not that the demand from Russian businesses for advertising suddenly stopped. The decline in demand is due to either deplorable business conditions, or increased prudence of accounts.  Many firms saw their sales shrivel, and available debt facilities dramatically reduce, or are still unable to estimate their business development outlooks in medium term. As a consequence, top managers took a waiting stance, with advertising budgets cut down and/or reallocated as a result.

The industry is obviously aware of the situation and is not thumb-twiddling. Advertising agencies, operators and specialized editions use such client churn methods as price freeze, wider discount ranges, promo offers (including package offers), and post-paid services. These measures undoubtedly allow them to mitigate the problems to some extent, but they are clearly win-or-lose solutions, i.e. accounts are indulged with certain discounts and other advantages, all at the expense of the advertising companies who, as a result, earn less, work harder, indirectly finance their own clients and agree to other trade-offs unprofitable to themselves.

Barter as mutually beneficial solution

Is it worthwhile seeking in the current tough market environment for a solution beneficial both to advertising accounts and advertising market players: operators, agencies and media? We believe barter deals to be such a solution, and for a reason.

Accounts sacrifice advertising for the lack of free cash which is due, in its turn, to a decline in demand, all ending up in a vicious circle: the lack of demand makes accounts stop advertising and, thus, lose their buyers, and, hence, earn no money to spend on advertising. Meanwhile, many financially robust companies have a unique opportunity to gain a larger market share for little pain by intensifying their advertising on the back of their competitors leaving the media area. Practice shows that the market share taken during a crisis can be maintained long after the crisis is over. It turns out that accounts are deeply interested in keeping their advertising levels high to support – at least somehow – their sales and avoid being ousted by their competitors from the market.

In their turn, advertising companies are also interested in selling more ads while maintaining their prices and giving no discounts.

The interests of the sides seem to be directly opposite, with the outcome depending on who will prove to be stronger. The real situation is, however, different. Advertising companies and their accounts can achieve mutual benefits if the accounts are able to sell their own products and advertise them without spending cash withdrawn from commercial turnover, and the advertising companies are able to sell more advertising space for a full price, even if paid for with useful products or services rather than traditional cash. As a result, the parties strike a single win-win deal to solve the problem of both selling products and paying for advertising.

Many readers might think that bartering is an exclusive feature of the Russian and other emerging economies and only applicable in the context of a financial system collapse when everyone is short of cash, with the little cash available continuously losing its value. However, this view is far from being true: some estimate that above 350 thousand U.S. businesses are involved in barter deals. Furthermore, around 65% of Fortune 500 members recur to barter at least once a month.

Advertising market operators from developed Western countries also often use barter. Below is an extract from RBC Daily news quoting Wall Street Journal: “Last year the overall capacity of the U.K. advertising market amounted to £12bn, including £100m for barter transactions by media agencies. GroupM, a subsidiary of WPP, a British holding company, forecasts that this year the amount of advertising proceeds in the U.K. will drop by 5.6%. The U.K. experts forecast the amount of bartering to grow by 30% in 2009.” Hence, we see that international advertising companies apply barter and that they express more interest in such solutions in crises. But is it that simple?

Advantages of open barter

Honestly, the classic barter where one specific product/service is exchanged for another specific product/service, in a strictly limited amount and within strictly limited time, is not always an optimal solution for the advertising market players. Since clients of advertising companies offer a limited range of products and services, advertising companies sometimes would find it unprofitable to exchange their advertising services for such products and services. For instance, we all understand why manufacturers of excavators or mineral fertilizer producers need advertising. But it is quite a challenge for a media agency to decide what to do with fertilizers or excavators. The agency would perhaps much more need accounting or legal services, or meal delivery for its staff, or payment of office lease fees, or many other things.

For this reason an open barter system is much more convenient. Similar services are implemented all over the world via specialized barter venues. A barter venue is a commercial entity that provides a trading platform and a booking system to its members. Member companies buy and sell from and to each other their products using an in-house currency called “barter dollars”, “trade dollars”, etc. The members do not have to buy from those to whom they sold their products or services, or the other way round. Products of any system member are available at any time for barter money. Thus, say, an ad market operator can sell its advertising services to an excavator manufacturer for “barter money”, and use the proceeds to buy corporate cars in two days, and one-year office clean-up services in a week.

The proactive nature of barter venues is another advantage. They are run by brokers who help different members find what they exactly need, be it advertising or other products and services. Brokers are interested in helping members find each other as the venue charges a certain interest on deals.

Note that advertising agencies and operators, general and specialized editions, and other businesses engaged in advertising, are highly attractive partners for barter venues and their members as advertising is a basic product regularly needed by an overwhelming majority of companies.

Barter is clearly not sufficient to substitute all ad sales for cash, for advertising companies must pay salaries and taxes, to name just one reason. Still, global practice shows that switching 10-15% of dealings to bartering might prove to be highly efficient. Advertising sales will grow by this very percentage, which is quite a strong performance.

Magna Global Trading estimates that current annual bartering turnover at the advertising market exceeds US$3bn, and this figure may grow by 30% in 2009 due to the aggravation of the financial crisis. Obviously, North America still accounts for a major part of this amount, but European countries swiftly take these practices over.

What will happen when the crisis is over?

First of all, we must admit that we do not expect a quick recovery. Although experts from Zenith Optimedia are expecting a certain recovery of the global advertising market as soon as in 2010 onwards,  Eastern Europe and Russia, in particular, should not expect any considerable growth before 2011.

We cannot, however, assert that bartering thrives during crises, and that no crisis means no barter. The practice of multiple international barter venues shows that their turnovers grew faster in poor years than in a strong economical environment. Still, turnovers keep growing even when markets have stabilized. Clients who once had to come to barter venues are able to appreciate the convenience of bartering and become regular customers. Thus, in the rather calm year 2006 the U.S. bartering market grew by 10%. In 2005 every twelfth small-size U.S. business recurred to bartering at least once over the year, and 7%, on a regular basis, to cut down cash expenses. Moreover, turnovers of such companies were in average 13% higher than those of their competitors not using barter.

http://www.sostav.ru/columns/trandinmarketing/2009/0018/