the effects of new advertising media

New advertising media have had remarkably little effect on aggregate advertising expenditure. In 1919, total U.S. advertising expenditure was 2.5% of U.S. GDP. The corresponding figure in 2007 was 2.0% of GDP. Advertising spending as a share of GDP is cyclical, and in 2000 the advertising share reached 2.5% of GDP. But from 1919 to 2007, the advertising-to-GDP ratio shows no overall trend.

Advertising-to-sales ratios for major advertisers confirm the relative constancy of advertising spending over nearly a century.  In 1917, a survey of 90 national advertisers found an average advertising-to-sales ratio of 5.2%.  Other firm-level data from this period also support about a 5% advertising-to-sales ratio among major advertisers.  In 2002, among 50 leading national advertisers, the average advertising-to-sales ratio was 5.9%.[1]  Major advertisers allocated about the same share of sales revenue to advertising about 1917 and 2002.

From 1919 to 2007, the media distribution of advertising spending changed greatly.  In 1919, newspaper and periodical received 60% of total advertising spending, and radio, television, and the Internet did not exist as advertising media.  In 2007, newspapers and periodicals received 21% of total advertising spending, and radio, television, and the Internet received 40%.[2]  The development of new media did not increase advertising spending, but merely redistributed it.

The relative constancy of aggregate advertising expenditure increases the threat of new advertising media to current advertising media.  An important new advertising medium may be networked electronic books that make possible inserting timely advertisements in books. Information about the book a person is reading is highly valuable for providing useful ads to that person.  Google’s recent announcement that it will soon sell electronic books probably isn’t just a new venture into e-commerce.  It also makes sense as positioning for competition in a potential new advertising medium.

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[1] L.D.H. Weld, “The Economics of Advertising,” Printers’ Ink, v. 54, no. 2 (July 11, 1918) pp. 99-100 cites two studies of advertising-to-sales ratios.  One, described in Printers’ Ink, Oct. 19, 1916, “found in an investigation made in 1916 that the average advertising expense of fifty-one national advertisers was 5.67 per cent of sales.” See Hurd advertising expenditure survey, 1916.  Another study, made at Yale, “yielded an average of 5.2 per cent as the average advertising expense of ninety national advertisers.”  Weld included a sub-sample categorization of average advertising-to-sales by firm type.  Martin, Mac, Advertising Campaigns (New York: Alexander Hamilton Institute, 1919) pp. 116-7, lists advertising-to-sales ratios for 35 major national advertisers about 1915. The average advertising-to-sales for these firms is 3.9%.  The 2002 advertising-to-sales figures are calculated from the first 50 advertisers listed in the 2003 Ad Age 100 Leading National Advertisers. See the supporting spreadsheet for the advertising-to-sales data (xls file here).

[2] The figures for the media distribution of advertising expenditure are calculated from the Coen Advertising Expenditure Dataset.

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