Advertising “In Structural Decline”: NYU’s Scott Galloway

As new technologies change the way companies interact with customers, NYU Stern marketing professor Scott Galloway has predicted advertising’s death as the value chain upon which brands are built is reshaped, and capital re-allocates from traditional media into product innovation, discovery and distribution.

In arguably the best presentation at Cannes this year, Galloway stated – a belief he has since repeated – that the sun has passed midday on the role of traditional brand as a function of broadcast media.

He said the traditional channel-customer relationship managed by a push approach in communication, where an average product with great advertising was the brand building algorithm, is over.

“Simply put you want to be a builder, not a brander – great products breakthrough,” Galloway said.

“It is not that brands do not matter – it is they just don’t matter as much.”

According to Galloway, traditional brands as we know them are declining in value due to digital “diligence tools”.

He said the tools of product discovery have turned from broadcast to Amazon, TripAdvisor, social media and search, and therefore consumers now no longer need to defer to a brand.

“Their favourite brand is going to be whatever Google tells them at that moment it matches their exact needs,” Galloway said.

In fact, the percentage of consumers that can identify their favourite brand across key categories has declined by somewhere between 30 and 50 per cent, Galloway added.

Consequently, the traditional media industry is on the wrong end of this change in consumer diligence, and TV specifically is ripe for disruption, he said.

Galloway noted that TV has raised its prices faster than inflation but with no underlying increase in productivity, innovation or effectiveness.

“There are going to be more people with Amazon Prime subscriptions than cable in the US in seven years’ time,” he said.

“The people who are cutting cords are young and wealthy, so effectively they are exiting the platforms where they can be exposed to traditional marketing.”

Galloway said innovation, as well as the young and rich, are going to non-ad-supported programming where the storytelling is not interrupted by ads.

He said that these over-the-top platforms are growing 30 per cent year-on-year, while all the ad-supported media is in decline.

“You pay a price to effectively exit the advertising ecosystem,” he said.

“I think advertising has become a tax that only the poor and technologically illiterate pay.

“Anyone with any money is going to have the technology and the ability to start avoiding most advertising out there.

“Advertising is not a great business – it is in structural decline.”

Galloway predicts this will put a strain on advertising industrial complex as capital re-allocates from traditional advertising into product innovation, and also into direct-to-consumer retail.

He noted that Apple spent almost 50 per cent less of its revenue on advertising, compared to Samsung, who dominates digital advertising and has chosen to re-allocate its capital into stores.

“Samsung may come out with a better product in the next few months, but it will take them about ten years to match the brand of Apple,” he said.

“Apple has taken about $4 billion in a year and allocated it into 450 retail stores such that no matter how cool Samsung’s VR is, it is never going to match the brand capital that Apple has invested in their unbelievable purchase temples to the brand that Apple calls their stores.

“But with Samsung, you are still going to have to walk into a Verizon or AT&T store and talk to someone with a name badge on who does not really know how to sell the product.

“Apple’s core competitive killer product is not their iPhone – it is their stores, and they are the most productive retail stores in the world.”

Galloway said retail stores dying and going out of business is a myth.

“That is bullshit,” he said.

“The middle class are dying. Stores in wealthy neighbourhoods are doing just fine.

“Show me a middle-class neighbourhood, and I will show you all businesses are going out of business, including stores.

“General Growth Properties and Simon [Property Group] are the largest mall developers in the US. Moreover, their stocks are at an all-time high. Why? Because they own malls where rich people live.”

Galloway said the brands that are doing well, with the most visibility, are those that re-allocate capital from broadcast advertising into product innovation, innovative product discovery and distribution.

“How much does Tesla spend on traditional advertising? Zero,” he said.

“The big idea in the auto industry 20 to 30 years ago was ‘let’s have Cindy Crawford talk about Cadillac’ or ‘let’s call the Volkswagen a lemon’.

“Now all the big ideas in the auto industry are around product innovation like self-driving cars and self-parking cars.

“It is the reallocation of advertising dollars into R&D.

“If you look at the companies that are winning, they all spend a disproportionate amount of capital on products trying to make a better product, because better products break through the algorithm.”

Galloway said the death of advertising will also hurt companies who have built great businesses on traditional media, specifically consumer packaged goods (CPG) brands.

“CPG is the house that advertising built,” he said.

“Of the top 100 CPG brands in America, 90 per cent lost share and two-thirds of them lost revenue.”

Galloway attributes this to every aspect of CPG being attacked by a well-financed player who is exiting the advertising ecosystem and investing in subscription models.

“If you look at Google Search – a great proxy for brand equity – you will see the Honest Company has more searches than Pampers or Huggies,” he noted.

“Moreover, you will see the same thing with Dollar Shave Club versus Gillette, which used to have an 80 per cent market share.”

Galloway argued that subscription is a better business model because it creates a sufficiently large lifetime value that enables a brand to invest into customer acquisition.

He said recent behavioural research supports the idea people have limited bandwidth to make decisions. Moreover, the more daily decisions people have to make, the greater the likelihood they will make a bad decision.

“I think the reason we are moving towards a subscription-based economy is young people are figuring out if you take every non-critical decision in your life and move it out, you can focus your limited bandwidth on decisions that matter,” he said.

The top advertisers in the world have not changed much in 50 years, and according to Galloway, data analysis reveals the world’s biggest advertisers are losing share of revenue relative to GDP.

In a bid to reverse this trend, some of the largest brands are moving towards new business models to recapture market share.

“P&G are now investing in Amazon dash trying to make CPG products with recurring revenue,” Galloway explained.

“They are reducing their ad spend as a percentage of sales in the last three years.

“The writing is on the wall – the biggest advertisers in the world are reducing their ad budgets and reallocating capital out of traditional marketing.”