Two-thirds of advertising agencies are not prepared for the industry changes prompted by social networks and new forms of digital media, a report has found.
The Institute of Practitioners in Advertising, which will publish the "Social Media Futures" report compiled by Future Foundation next week, has warned that advertising agencies face growth of just 1.2 per cent a year by 2016 if the industry fails to tackle the changes to the media created by sites such as Facebook, YouTube and Twitter.
Social networks enable consumers to pass on information about products and services, and recommendations from friends are more influential than traditional forms of advertising.
Advertisers are already taking advantage of the trend, with the Cadbury "Gorilla" spot being viewed over 10m times on YouTube as well as being aired on television.
The Dove "Campaign for real beauty", which advertised Unilever's cosmetics range, was also boosted by a YouTube video showing a high-speed transformation of a model's natural face to the made-up and touched-up final version which appeared on a billboard.
But not enough agencies are adjusting to the online world, the IPA warned. In its worst-case scenario, the resulting decline in paid-for advertising space could see £16m ($23m) of revenues lost by the industry by 2016, if agencies fail to create new products and services to cater to the social media world.
However, the report says that two-thirds of that decline could be made up by creating new forms of web content that contains branding messages, and by analysing the data expressed on the web.
Clients' investment in new content and rapid data analysis will increase by around 5 per cent, according to the IPA's survey. Other sources of revenue derived for social networking include consultancy and e-commerce.
"The current downturn will accelerate these trends in agencies as everyone is looking to innovate and stand out from the crowd," said Moray MacLennan, IPA president and chief executive of M&C Saatchi Worldwide, an agency.
"I don't think [social media] is a replacement for paid-for media, it is just going to be a challenger for [consumers'] time and attention."
Social networks themselves are still figuring out how to make money from advertising on their sites. Pricing for generic banner advertising on social networking is relatively low compared to other sites, because their users are logging in for communication rather than commerce.
That has prompted both networks and advertisers to look for more innovative ways to connect with consumers.
"Within this environment, one needs to acknowledge that more often than not you are interrupting private conversations," said Mr MacLennan.
Joe Staton, planning director at the Future Foundation, who co-wrote the report, said that marketers needed to secure "permission" to approach users on social sites.
"As people are being more considered about purchasing, they want to go out and find information themselves rather than just receiving it," he said.
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