My friend Stephen over at ScreenVox wrote a post on GM a while back on a potential opportunity for Digital Signage: GM Cuts $600 Million… and I wanted to add some of my own points, which I found interesting given the “follow the leader” type of approach you may see a lot in the channel/medium business.

To give some background to my follow up post, From Jan-Sep 2006 (9 months) GM spent $1,753,000,000 in advertising (all channels). A $600 million lop off the top is 1/3 of their overall (9 month) ad budget – that’s incredible.

There are much more educated people than I in this industry/area but as I was digging through the numbers even more, I started noticing some other trends which could have a pretty big impact or at the very least were interesting to see.

The Non-Domestic companies have been doing a pretty good job on the collective market shares of what used to be the big 3, as we all know. Is it possible the Domestic’s have been solely trying to spend their way out of their slumps for lack of better ideas/no choice?

Advertising spend in automotive is actually classified as Domestic Auto and Non-Domestic Auto. The total Jan-Sep 2006 automotive advertising spend was actually $5,576 (5.6 Billion) and $6,340 ($6.3 Billion), respectively (Domestic/Non-Domestic). In domestic, that’s a decrease over the same 2005 period of over 10% and in non-domestic, the decrease in total same-period spend was 3%.

I started to wonder why advertising would go down in both categories for about two seconds and then realized that what could be happening here is that GM may have long surpassed its “inflection point” and the rate of return from advertising. GM realized they needed to do “Something” but there have been no mass alternatives available so they keep spending money in the same places hoping that their agency creative will start to register with the various demographics they’re targeting. If this is the case, then this $600 million cut may just be bringing them back down to a place where they actually have an “effective rate of advertising return” – so they’re actually spending how much they “should” be spending.

My next thought was, why would all the other companies start cutting their bugets last year as well? If I were to see my competitor have to give up spending to accommodate financial difficulties, I would look really hard at jumping right in there.

Well, if GM was spending up the market in every area it could, then their competitors would naturally follow them up the ladder to compete….it makes sense for the Non-Domestic’s because their dollar for dollar ad spend was more effective (eating up market share competing directly, so they could afford to do it (their effective rate of return was higher))

But as soon as the Domestic’s stop spending, the Non-Domestic’s can follow suit because the perception of their products is (apparently) higher. Why spend the money if you don’t have to?

I doubt you’ll see too many companies cut their ad budgets in half too soon but they’ll definitely dwindle. This puts some interesting pressure on the ad/marketing folks at each company, however, because if you do drop that much budget across the board, then there’s going to be a surplus amount of Automotive advertising/marketing/media buyer talent hanging around on Madison Avenue and King Street/Bloor Street here in Toronto….unless you find a more powerful, effective place to spend your money – and 5 years of research has painfully taught us that we have it in Digital Signage. :)

As a disclaimer, this is way more complicated than what I’ve written but it’s food for thought on some advertising plays.

Ultimately, it’s a matter of shareholder return. I may think about investing in non-domestic auto stock this year because their bottom line should at least be a tad healthier :) – but I’m no expert on this front so don’t listen to me