Lack of Competition Shrinks Ad Pie

Four consecutive years of impressive growth in the economy have seemingly passed over the local advertising industry, which oils the wheels of private consumption. While the economy expanded 17.6 percent between 2003 and 2006, the advertising pie shrunk 4.7 percent during the same period. The industry grew ever so slightly last year, by 0.5 percent to $805 million, lagging well behind 5.1 percent for the country.

Per-capita spending on advertising is lower in Israel than most Western nations, and trails behind countries with significantly lower GDP, such as Slovakia, Czech Republic, and Slovenia.

Atrophy in the industry is particularly noticeable as well when comparing the share of advertising in GDP in Israel to its share in other nations. Had the local ad industry such a comparable share, its market would be worth $2.5 billion, or three times as great as its current value. The growth of the advertising industry in Israel last year was also lower than in Brazil, Russia, India and China - the so-called BRIC nations.

This sector's slow growth is surprising, especially considering that the main cause of growth over the past two years has been private consumption, which grew 4.8 percent last year and 14 percent during the past three years. Moreover, the financial market, which was fairly dormant until recently, underwent significant reform in 2006.

The reason for the freeze in the ad market can be found in one-time or local factors, such as the Second Lebanon War or the reduction in advertising budgets in favor of other operations, such as customer relations or sales promotion.

However, it seems the main cause for this unique phenomenon lies in one of the prominent, structural characteristics of the local economy: Control of many industrial branches is concentrated in the hands of just two or three major players, preventing and weakening effective competition by service providers from neighboring states. The low level of competition in the country has declined in recent years in the wake of mergers and acquisitions, or the formation of cartels in service-related areas such as banks, credit cards, multi-channel television, international calls and high-speed Internet.