If no one cares about advertising, why is there so much of it in India?
About 57 Mn Indians filed income tax returns last year, of which about around 42 million earn less than 6400$ a year. Yet the Indian advertising industry will spend a projected 23 Bn$ this year in reaching this addressable market by the end of 2022. Just for context that’s about 419$ of ad spend per capita.
If this seems like a bunch of useless information to you, you may consider what sales ad-revenues would be generating after that significant cost of acquisition, and what the subsequent discounting effect would be for the 42 Mn lower wage Indians.
So, humour my heuristic, but if lower wage India discounts the cost of customer acquisition for the top 25% of India, then doesn’t this amount to excess advertising? Among OTT providers, India is notorious for being a ‘cheap DAU farm’ where user activity seems to ‘chase the metrics’ rather than service a higher goal of credible reach. In the words of Kunal Shah, one of India’s biggest fintech company founders, the user activity simply justifies valuation without ‘contributing to ARPU’. This should signal a warning to advertisers about the true nature of consumption in India. Shark Tank aside, India has serious concerns. Shah himself had stated that ‘it’s hard to sell things to people when their basic income is not enough to get food’.
So, if all the advertising is just about centered on the 15 Mn affluent Indians, why do we need so much of it? Surely today’s digital environment negates the bulk targeting mechanism of the Mad Men era. And what do Indians really feel about this excess advertising in India?
To answer some of these questions, we could look at some data, & to economics. The dirty secret is that there is no real un-biased estimate of a sentiment analysis on advertising volumes done in India. Who on earth would pay for that? Not the private sector I guarantee you. And before we can discuss how people ‘feel’ about excess advertising, let’s try and define that concept of ‘excess’.
Welfare economics is the branch of economics that deals with optimal allocation of goods and services. And herein lies the issue with that definition. Neoclassical Economists were conflicted with the way they viewed advertising as a good or service. Some of them have viewed it as wasteful & counterproductive to the good of consumers. Others have viewed it as useful to the extent that it informs consumers of opportunities & therefore reduces their ‘search’ costs. Before I put you to sleep, it’s important for us to understand how we’re looking at advertising before we label it as ‘excessive’ In the empirical sense.
If we take the second view, that advertising is indeed important to discount search costs of consumers, we can look at various models to understand how it works, apply the litmus test of one such model. This model (by Butters & Shapiro for example) states that the amount advertisers pay to reach a proportion of consumers they consider uniformed, is the cost borne by society. But the real social cost of advertising should never exceed the reservation price of a consumer for a unit of the good, else it be labeled as excessive.
In a small petri-dish study of the data conducted on radio advertising revenues in India, we do see that this social cost has exceeded the stated reservation price for a few campaigns by count. But these campaigns represent 60% of the total spend on radio over the 2-year period.
That’s a lot of airtime, for admittedly very little effect. If we analyse the hours of airtime sold at peak listenership during the festival months of Diwali in India, you will notice 45 mins of ads per hour in some extreme cases.
If that’s what’s happening in radio campaigns, how would we replicate this process for the rest of the media in India? There is no easy answer for that. Deriving each proxy variable for an ad campaign is a complicated process, and the data doesn’t always lie in the public domain.
One thing is clear. Advertising needs to be regulated in terms of socially acceptable volumes as per addressable markets, and advertisers need to audit the sentiments of their consumers to that end. The regulation of ad volumes has vast reaching effects, not just with respect to neo-classical models of economics for the entertainment media, but also with organisational economics where the news media is considered a public good and freed from the constraint of advertising.
I’ll be doing a series of articles about this regulation of advertising, and (more importantly) consumer sentiment on the excess in the media.