The unprecedented events of the past quarter, with the bailout of America's financial institutions and two of its automakers, changed assumptions about what otherwise would have been considered a typical U.S. cyclical downturn for advertising industry holding companies. The unpredictability of the year ahead could bring the kind of challenges that have never been experienced by the current generation of executives running marketing communications companies. One sign of that volatility: Zenith Optimedia's quarterly advertising forecasts will now be done on a monthly basis.

Industry seers have generally been more optimistic than outsiders, with current 2009 estimates ranging from a decline of 3 to 6 percent in U.S. and North American ad spending. Others take a harsher view: Fitch Ratings believes industry weakness will extend into 2010 and be similar to the drop in 2001, when ad spending slipped 6 to 9 percent in real terms.

Even the quadrennial stimulus of the Olympics and presidential election couldn't boost spending this year in the world's largest ad market and analysts are predicting project work could have dropped by 30-50 percent in the fourth quarter. Factor in the industry's exposure to Detroit automakers and charges related to layoff severance costs and it's small wonder that industry shares are trading near their 52-week lows. Citi Investment Research says the three-year period of 2007 to 2009 is shaping up to be the longest stretch of weak and, now declining, advertising growth since the end of World War II.

"It's different now because this is a credit-driven recession, which is going to have a deeper impact on just about every industry. This is not just a corporate-led downturn, not just consumer led," says Catriona Falon, a Citi Investment Research analyst. "Previously, companies with declining sales could take on debt. Now they have contracting consumer spending and capital acquisition restraints. Consumers could draw upon their credit cards and home equity loans, but not now. Some of the levers to fix economic downturns are being restrained and it's hard to say when a turnaround will occur."

In the current credit environment, liquidity and capital preservation may take precedence for marketers over earnings, and ad spending has always been one of the easiest fixed costs to cut.

Historically big ad spenders like automotive manufacturers and dealers, finance companies and retailers are being especially hard hit. The industry's ties to automotive clients are legion. By Wall Street estimates, they account for 14 percent of Omnicom's revenue; 13 percent of Publicis' and 10 percent of WPP's. (Publicis works for General Motors and Toyota, with declining sales, but not the extensive problems of U.S. companies.)



Even as three of the top four industry companies-Omnicom, WPP and IPG-released third-quarter revenue or profit increases in October, they were already beginning to freeze or cut spending on new hires, freelancers and travel and entertainment while reevaluating bonuses.

Ironically, IPG -- whose CEO Michael Roth has been aiming for peer-level margins -- had one of its best quarters in years and posted better organic revenue growth in Q3 than its rivals. While the firm may hit its 2008 full-year margin targets of 8.5 to 9 percent, it will be tough for IPG to maintain that momentum in 2009.

The biggest costs, of course, for all industry holding companies are payroll and real estate. It's hard to know the exact number of job losses in 2008 -- some industry observers say it's now over 6,000 -- and ad markets like Detroit will never regain their stature. Many of those being laid off may not work in advertising again as marketing communications is restructured in a digital era. (That transition could speed up as marketers switch dollars into more measurable media in tough times.)

The industry's woes are primarily in the U.S. and Western Europe, while emerging economies and digital help offset those declines. Accordingly, in a CNBC interview last month, WPP CEO Martin Sorrell signaled a shift in investment: "That will be very difficult for Anglo-American-dominated companies or European-American-dominated companies who've been traditionally in the position where they've made their investments in people, in capital, in salaries, in bonuses, in the mature markets and have ignored that investment abroad."

In a telling sign of the times, Sorrell, who has bought some of Madison Avenue's most prominent agency brands, went on to describe WPP as the world's fourth-largest information company -- following last year's acquisition of market research firm Taylor Nelson Sofres -- competing with Thomson Reuters, Bloomberg and Nielsen.