Home / Industry / India Knowledge@Wharton | Why ads aren’t moving online

Americans spend an average of 14 hours a week online and 14 hours watching TV. But US marketers spend 22% of their advertising dollars on TV and only 6% online, according to data compiled and analysed by Google Inc.

Why are some chief marketing officers (CMOs) and major advertisers reluctant to add digital technology to the marketing mix, despite the Internet’s ability to help target huge audiences?

(Illustration by: Malay Karmakar/Mint)

Spending on Internet marketing is expected to grow 13.4% in 2008, but that will only add up to 7.2% of the total amount spent on all US advertising, which is expected to hit $153.7 billion (around Rs6.16 trillion), according to TNS Media Intelligence.

According to Wharton marketing professor David Reibstein, another obstacle to moving advertising online is the difficulty of reaching a broad audience with an efficient media buying operation. When three television networks dominated the US advertising world, it was easy for mass advertisers and their agencies to place commercial messages. Now, they are confronted with a complex web of options, including the Internet, which itself is highly fragmented, in-store promotions, social networking and mobile phone technology, as well as traditional media.

“Each one of the pieces is effective, but that effectiveness is overwhelmed by management of the pieces," says Reibstein, adding that many small start-up companies are going into business to help advertisers reach specific markets online, but that may only stymie advertisers more. An advertiser’s response to these companies and their promising technology “is likely to be, ‘Great, but I would have to deal with 10,000 of you’".

According to Wharton marketing professor Peter Fader, the possibility of a US recession may further slow advertising’s move online. In an economic slump, he says, marketers should move spending towards Internet platforms because they are more targeted and customer-centric, with easily measured results. “Here’s the irony," he notes. “When bad times come, people say, ‘We can’t abandon the brand. We can do those customer-centric things next year.’ The CMO will stay with the skills and responsibilities that he has traditionally relied upon."

Foreign stocks help to diversify and reduce risk

In 2007, mutual funds specializing in non-US stocks returned a fat 16%, while funds with diversified holdings in US equities returned around 6%. In fact, the foreign-stock funds have beaten domestic-stock funds over periods of two, three, five, 10 and 15 years, according to Lipper, a fund-tracking company. Moreover, owning foreign stocks helps diversify risk by reducing a portfolio’s volatility.

Why, then, does the typical US investor do little more than dabble in foreign stocks? The average small-investor portfolio has 10-12% of its equity investments committed to foreign stocks, while many experts recommend 20-40%. “There are big gains from diversification that people don’t exploit,"says Wharton finance professor Karen K. Lewis.

For insight into this, Lewis researched whether foreign stocks continue to dampen portfolio volatility as much as experts have thought. Her findings are described in a paper, Is the International Diversification Potential Diminishing for Foreign Equity inside the US?

Lewis found that foreign stocks’ volatility-dampening effects have indeed diminished, but that they are still strong enough to make foreign-stock investing worthwhile. “The bottom line is that there still are benefits to international diversification in 2007 and 2008," she said.

Advocates of foreign stocks have long argued that stocks in different countries march to different drummers. Thus, when US stocks are down, stocks in Europe, Asia or Latin America may be up, and vice versa. Thirty years ago, a US investor could have reduced annual portfolio volatility by 30% by mixing in foreign stocks. Though the figure has fallen, it remains at a healthy 15%, Lewis notes.

To get the full benefit 30 years ago, US investors would have had to put 75% of their stock holdings into foreign issues. Today, an investor can get the full benefit by putting just 20% into foreign stocks, Lewis says.

Many investors believe there are more bargains in markets that have undergone less scrutiny, and that emerging markets offer a potential for higher gains. But, even without these considerations, owning foreign stocks is still a good idea for US investors, Lewis says, because it helps reduce risk.

Private equity now in ‘purgatory’ phase

Private equity (PE) has passed through a golden age, but will now spend a year or so in “purgatory" before entering an even greater period of expansion, according to David Rubenstein, co-founder and managing director of TC Group Llc., the Washington, DC-based PE firm with more than $70 billion in assets.

In a keynote address at the annual Wharton Private Equity and Venture Capital Conference, Rubenstein said the credit crisis triggered by subprime lending has brought the growth of PE investment to an abrupt halt. This is in sharp contrast to its high-flying period from 2002 to mid-2007, when top PE firms were doing deals worth billions and generating returns of 30% for their partners.

The industry’s undoing goes back to the period he now calls the “golden age" of PE, when the business of lending itself became an important part of the industry as large banks earned high fees for making loans to PE firms to do deals. When credit markets dried up, large banks had already committed to $300 billion in PE deals, Rubenstein noted.

Around one-third of that value stayed on bank balance sheets, although much of it has already been written down, he said. Another third was renegotiated with tougher terms for PE sponsors. For the final third, the deals were never completed and are now the subject of litigation or break-up fees. “For the next year or so, we will be in purgatory," he said. “We will have to atone for our sins a little bit."

In order to revive the industry, PE sponsors will need to scale back the size of deals, reduce leverage and look overseas for opportunities in countries such as India and China, he said.

“Once a period of time is over, once the debt on the banks’ books is sold and new lending begins in six to nine months. I think you will see PE coming back in a platinum age, better than ever before," he predicted.

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