ON THE FUTURE OF ADVERTISING – The sea changes that are upending advertising

By Marc Brodherson

Advertising is an amazing industry. It’s worth about a trillion dollars globally, grows above GDP, and is either the primary business model or one of the fastest-growing ones for at least five of the top ten companies by global market cap. Advertising matters to traditional media companies and tech giants, big brands and small businesses, agencies and other ad services and tech providers, and now even to nonmedia consumer companies that are starting advertising businesses.

There’s been a sea change, which is now accelerating, in traditional brand advertising as consumers spend their time differently and tech giants compete with traditional TV advertising. Younger audiences are spending more time watching short-form mobile videos—versus traditional TV content—and playing video games that are normally less amenable to advertising. Combined with the rise of ad-free streaming, these trends make it harder than ever to reach audiences who can pay to avoid ads, and they raise socioeconomic questions about who has to see them.

Another growing trend is large tech platforms launching ad-supported tiers for their streaming products and moving into the most valuable ad category of all: live sports. At minimum, this will make the market even more competitive for legacy TV and further collapse the boundaries between brand and performance marketing as well as digital and TV marketing.

But the biggest trend right now is the rise of e-commerce companies building advertising businesses by selling access to their consumers. We call this retail media or commerce media. This is a new way for advertisers to reach consumers. Right now, retail brands with consumer data can reach customers at the moment they express interest in a product. They sell sponsored listings, which then pop up to consumers as suggested products. In some cases, these lines of business are worth tens of billions of dollars, with margins that can exceed 20 times traditional retail margins. The investor community is starting to recognize commerce media as a material part of company valuations, though retailers are primarily known for selling consumer goods rather than ads.

Retail media is expanding to players like rideshare and delivery companies, which know users’ locations and can put relevant ads in the apps at the right time. Hotel chains are doing it, credit card companies and banks are looking at it, and airlines have the potential to get into it—they have screens on planes and in apps, and physical media such as billboards and in-flight magazines in the terminal, on the jet bridge, or on the plane.

“By 2028, we believe that spending in retail and commerce media will be bigger than for all of global television and streaming advertising.”

These seismic forces are reshaping advertising. By 2028, we believe that global retail and commerce media spending will be bigger than all of television and streaming advertising. This provides an unprecedented ability to do closed-loop advertising, where a company can say, “I know an ad appeared, and I know it did or did not lead to a purchase.” It’s super-targeted, highly performative media. It effectively collapses the marketing full funnel—from awareness to consideration to purchase—into a single step. Media and social platforms are also experimenting with this, collapsing the funnel the other way by turning their content into shoppable media, in which the audience can make purchases inside of the content they are consuming.

This leads to challenges on the advertiser side. In the past, a traditional brand doing a lot of brand advertising could call four TV networks, three newspapers, and maybe a little radio and premium digital publishing and be done. Now there is much more complexity to manage, figuring out how a whole new category of advertising fits in, how to measure ad effectiveness, and how to budget and plan.

There’s more opportunity, too. These changes allow small and local businesses into this new advertising ecosystem. They might not spend a million dollars on a TV campaign but may spend a few thousand to create a video ad, maybe with the help of generative AI, and hyper-target it.

We’re on the precipice of a huge shift, and companies are trying to make sense of it. The solution, obviously, is to try to get as much data as you can from willing customers to serve relevant ads. But that’s easy to say and hard to do, and there are major implications for consumer privacy in an environment where Big Tech companies are making changes to data collection, as well as more regulatory interest.

There are industry-level challenges, so there needs to be a fundamental reset for chief marketing officers and CEOs to align amid a different landscape, bring in new talent with new skills, encourage experimentation with new ad formats, and prepare for a shift toward new marketing ROI paradigms. Right now, there’s a lot of change with more questions than answers, but it’s a very exciting time.

About Author

Marc Brodherson is a senior partner in McKinsey’s New York office.