Advertising : At Halloween, it gets a rock - Statutes make advertising the Charlie Brown of speech

The then-president of a firm where I worked as a creative director once told me he wasn’t certain what the key to effective advertising was, he just knew we needed to do some. He viewed ad expenditures as an integral part of running a business, just like the physical plant or the down-and-away sliders (the company was a baseball team).

Recently proposed budget legislation in the U.S. continues a pattern of often treating advertising like a baseball team : Charlie Brown’s.

This newest pitcher-undressing proposal involves allowing companies to treat only half their advertising expenses as incurred in the current year for tax purposes. The company would then amortize the other half over five or ten years. Budgeteers Senator Max Baucus and Representative Dave Camp reason that the taxman should treat advertising partly as a long-term expenditure because audiences retain its impact long after the current year.

In some cases that may prove true. Met Life’s long-running campaign starring the Peanuts characters, for instance, has had significant longevity. Perhaps one can conceive that the initial placement did derive five percent of its sales from consumers who recalled its brand message a decade after its debut. Of course, the insurer continued similar messaging in subsequent years, so it would seem impossible to measure that impact precisely.

We might also find it difficult to measure the influence of sponsored tweets from, say, twitter.com/OfficialPeanuts over a decade-long span. That’s because that form of advertising hasn’t existed for a decade. Do some creative directors huddle with their media planners to determine how to construct messaging such that purchased tweets will remain somewhat effective in ten years? Perhaps so. And maybe there’s a Great Pumpkin, too.

Sure, sites like YouTube extend the shelf life of some TV ads, but companies can also have ongoing expenses associated with such exposure, such as talent residuals. The point is : Different advertising efforts have different aims and cost structures for the short and long terms and a suggestion that the value of every brand communication depreciates over the same length of time seems unsupportable (see also our previous blog post on Defining Advertising,). The same is true for the cost of other good or bad decisions that impact a brand over those years. If you have a lame company Christmas party (maybe with a play where one dog plays all the animals), it could hurt employee morale for years.

So if the ad amortization plan doesn’t add accuracy to the tax code, what does it offer? Its framers intend it to provide revenue lost from cutting the corporate tax rate to 25%. If reducing the corporate tax rate will “jumpstart”⁽¹⁾ growth, as Senator Baucus put it, then the resulting larger revenue pool will compensate for a certain amount of that lost tax money, perhaps all of it.

Writing about the proposed budget in Ad Age, American Association of Advertising Agencies President and CEO Nancy Hill notes, “The research firm IHS Global Insight estimates that ad sales in the United States could be reduced by as much as $446 billion, with 1.7 million U.S. jobs placed at risk.”⁽²⁾ I have no idea whether the IHS figures are accurate, but the supply-and-demand curve for every product always shows that raising the cost of something means less of it gets consumed. Companies currently try to use precisely as much advertising as they judge efficient when weighed against other ways they could spend the money. If the bill distorts the ads’ true cost (which it will through long-term inflation, at the very least), firms will substitute other inputs. For instance, it might be most efficient in an absolute sense to spend 40% of your budget on advertising and 60% on sales rep salaries. Since this bill artificially favors sales personnel over advertising, a company might shift to a less efficient 20/80 split given the incentives they’ve inherited. The overall effect is a loss of productivity for American business. Add in the inefficiency caused by nightmarish compliance costs (also touched on in our previous post) and it seems far from certain that halving the advertising deduction will, in fact, make up the revenue lost from the 10% reduction in the corporate income.

While the revision would have a negative overall impact on American productivity, some companies might benefit, at least in terms of market share. The companies would include those who need advertising less than their competitors. Big brands or legacy industries who have established brand equity in the minds of consumers might see their competition stifled, specifically competition with fresh, new ideas who need to communicate about their innovation. Those startups will especially feel the pain of an expense they must deduct over ten years when they just hope their business makes it ten days. Companies like General Electric, General Motors, and Citigroup (all donors to David Camp’s last campaign⁽³⁾) might feel less net effect. And, of course, when those established firms’ R&D departments do come up with new ideas, it will be tougher for them to communicate their own improvements. Hey, everybody knows where the neighborhood Psychiatric Advice Stand is. If it is more expensive for Linus to inform people about his new competing one around the corner, Lucy benefits. Does the world benefit when policy inhibits new ideas from coming to market?

Advertising contributes a lot of new ideas itself. So why does it get a rock in its bag when it arrives at the taxman’s door wearing its innovative multi-eyed ghost costume? Historically, advertising has been easy to single out.

For one thing, despite being a form of speech, it has received less than robust First Amendment privileges. In Valentine v. Chrestensen in, 1942, the Supreme Court ruled that commercial speech was not entitled to First Amendment protection.⁽⁴⁾ Truthful advertising clawed back a bit of freedom over the next few decades, including the 1976 case Virginia State Pharmacy Board v. Virginia Citizens Consumer Council,⁽⁵⁾ and 1993’s Edenfield v. Fane,⁽⁶⁾ but the so-called “Central Hudson Test,”⁽⁷⁾ from the 1980 decision in Central Hudson Gas & Electric v Public Service Commission the Court still provides the state a framework for doing away with disfavored commercial speech. For years, state regulations on advertising by professionals⁽⁸⁾ might have forced Psychiatrist Lucy to take down her “5¢” sign.

Less than half of Americans have a positive impression of the advertising industry, according to Gallup.⁽⁹⁾ Nancy Hill noted that Congress also considered changing the advertising deduction in 1986 and 1993,⁽¹⁰⁾ and the business will continue to serve as an easy target for politicians as long as it retains its negative public perception. But does it deserve to be the Pig-Pen of communication?

In many ways, advertising represents the purest form of mass communication. That’s because you know who is doing the speaking and what they’re trying to accomplish. If you read this blog, you need to do some research to figure out whether I work in the advertising industry (I’ll save you the Googling – I do).  When you read a financial reporter’s column, you may not know what stocks he has in his 401K. If you read a New York Times editorial praising eminent domain, you may not know whether the paper has used the process to reduce their costs on a construction project.⁽¹¹⁾

Advertising is different. You know the source because they put their logo right on it. If Peppermint Patty tells you in a Met Life commercial that it would be smart to plan for your demise, you know it’s because Met Life wants to sell you life insurance. You have the option to ignore the advertisement, research its claims further, to not do business with its sponsor, and to share or not share it with your friends. You can also sue them for false advertising if they lie. You don’t have that recourse when it turns out there are no WMDs in Iraq or that you can’t keep your health insurance.

All communication is advertising in some form or another. You engage in content marketing for your personal brand every time you speak. Straight-up advertising tends to be very honest about its agenda, and not at all wishy-washy.

Does advertising deserve to be treated the way Violet and Lucy treat Charlie Brown, saddled with a lesser status among business expenses? The costs of this Joe Shlabotnik⁽¹²⁾ of laws may be a lot more than peanuts. A decision to implement it might be well be nuts.

 Footnotes

⁽¹⁾ Michael Cohn, “Baucus Proposes Changes Tax Accounting Cost Recovery Rules,” Accounting Today. accountingtoday.com/news/Baucus-Proposes-Changes-Tax-Accounting-Cost-Recovery-Rules-68811-1.html (accessed November 25, 2013).

⁽²⁾ Nancy Hill, “Don't Let Congress Scale Back the Ad-Expense Deduction,” Ad Age. http://adage.com/article/agency-viewpoint/congress-scale-back-ad-expense-deduction/245360/ (accessed December 2, 2013).

⁽³⁾ “Dave Camp,” Center for Responsive Politics. http://www.opensecrets.org/politicians/summary.php?cid=N00008086&cycle=2012 (accessed December 6, 2013).

⁽⁴⁾ T. Barton Carter, Mark A. Franklin, Jay B. Wright, The First Amendment and the Fourth Estate (Westbury, New York : The Foundation Press, Inc., 1988), p. 321.

⁽⁵⁾ T. Barton Carter, Mark A. Franklin, Jay B. Wright, The First Amendment and the Fourth Estate (Westbury, New York : The Foundation Press, Inc., 1988), p. 323.

⁽⁶⁾ “Advertising is Protected by the First Amendment,” Advertising Compliance Service.  http://www.lawpublish.com/amend1.html (accessed December 6, 2013).

⁽⁷⁾ Doug Linder, “Government Regulation of Commercial Speech,” Exploring 

Constitutional Law.  http://law2.umkc.edu/faculty/projects/ftrials/conlaw/commercial.htm (accessed December 6, 2013).

⁽⁸⁾ Deborah Haas-Wilson, “The Regulation of Health Care Professionals Other than Physicians,” Regulation. http://www.cato.org/sites/cato.org/files/serials/files/regulation/1992/10/reg15n4d.html (accessed December 6, 2013).

⁽⁹⁾ Frank Newport, “Americans Rate Computer Industry Best, Federal Gov't Worst,” Gallup Politics. http://www.gallup.com/poll/149216/Americans-Rate-Computer-Industry-Best-Federal-Gov-Worst.aspx (accessed December 6, 2013).

⁽¹⁰⁾ Hill, “Don't Let Congress Scale Back the Ad-Expense Deduction.”

⁽¹¹⁾ Matt Welch, “Why The New York Times ♥s Eminent Domain,” Reason. http://reason.com/archives/2005/10/01/why-the-new-york-times-s-emine (accessed December 6, 2013).

⁽¹²⁾ “Joe Shlabotnik,” Baseball Reference. http://www.baseball-reference.com/bullpen/Joe_Shlabotnik (accessed December 6, 2013).

Defining Advertising : A Bridge to Nowhere? Budget legislation would codify the impossible

We can figure out what television advertising costs. You pay a company (hopefully mine) to create a spot. You pay a TV station to run the spot. We add up the invoices, pay them net 30, and we know what our advertising has cost us.

However, as it turns out, your EVP of sales and marketing spent a pretty good chunk of her time ideating about the new campaign and looking at that big customer research project you did. Does the cost of advertising include her prorated time and some part of the research? How much of each? Was the time she spent on the ad campaign more important than the time she spent going on sales calls with her AEs? Do we include the ample time she spent persuading the CEO to use the cool edgy campaign instead of the "Maximum Manilow" theme he had convinced himself you needed?

How about the time spent putting the behind-the-scenes photos from the commercial shoot on the company Facebook page? If you're advertising the advertising, does it still count, especially when it's more reporting than advertising? That might be content marketing. Dang. Is it still advertising when it's got no call to action? Or is an insightful blog on the company page an advertising cost, but when an employee reposts it to his personal LinkedIn page on company time, it isn't?

Were the previous three paragraphs a purely hypothetical exercise designed to stoke the historic rivalry between accountants and creatives? While I'm not above that sort of thing (just kidding - some of my best friends are accountants), the paragraphs do have deeper implications. Pending legislation in the U.S. may require Congress and other governmental bodies to define advertising.

Okay, the bills aren’t strictly for purposes of advertising definition. Nobody decided to pass a law after observing the U.S. falling behind Burundi’s advertising sector due to inefficient standard-making. The bills have to do with national budgets and corporate taxation.

Adweek’s Katy Bachman notes that the House and Senate budget committee chairmen’s budget proposals include allowing only a 50% immediate deduction of advertising expenses, with the other 50% amortized over a five- or ten-year period. ⁽¹⁾ Currently, firms can deduct all ad costs in the year they incurred them, the way they do with most other expenses.

Setting advertising aside as different from other expenses requires defining what constitutes it. The senator’s staff discussion draft provides a general definition as “The term ‘advertising expenditures’ means any expenditure (whether made internally or externally) paid or incurred for the development, creation, or placement of advertising, or for any similar activity with respect to advertising.” ⁽²⁾ It goes on to include some exceptions, like discounts and “any amounts paid to employees and contractors for performing sales functions.” ⁽³⁾ It didn’t clarify much from this blog’s opening salvo, including negatively slanted earned media in the Manilow Fan Club newsletter.

It would eventually be up to committees and staffs and executive branch agencies to do the real detail work. For instance, they may elect to exclude “section 168 property,” as the discussion draft did. If you skim that section of the tax code, as I forced myself to do, you’ll find it uses great detail to define different kinds of property. Good luck with keeping up with advertising terms in the digital age. A section 168 boat dock moves only in a hurricane. Digital definitions ride a daily maelstrom.

Accounting Today’s Michael Cohn cited Senate Finance Committee Chairman Max Baucus as saying, “More must be done to simplify tax rules, lessen the burden on small businesses and jumpstart job growth.” ⁽⁴⁾ Let’s focus on the simplification component.

Regulatory simplification that actually simplifies something frees businesses to shift resources from compliance to productivity.  Baucus seems to recognize that assertion with his statement about lessening burdens.

If employees need to spend an enormous amount of time with new tax-funded ad regulators figuring out how to comply with the latest directive on Snapchat placements (how would you depreciate those??), it figures to diminish companies’ jumpstarting capabilities. Here’s the point : Since determining what constitutes advertising involves a complexity rivaling that of a Steve Vai3-neck guitar solo, any legislation requiring such a task cannot possibly make the tax code less complicated.

Of course, one could really simplify things by eliminating all the section 168s of the code. One would just calculate corporate income by subtracting everything a company spent from everything they took in that year, treating all expenses equally.  Also, if pigs built jet packs, they would be able to fly.

The bill as proposed would add simplicity for one area of the industry : late-night comedians. The jokes about “advertising definition brought to you by the writers who gave you the government shutdown and healthcare.gov?” Those will be easy.

Next post : Is advertising, however it’s defined, a normal business expense? And does the First Amendment have a role in all of this?

Footnotes

⁽¹⁾ Katy Bachman, “Sen. Baucus Goes After Advertising in Tax Reform Draft,” Adweek. adweek.com. http://www.adweek.com/news/advertising-branding/sen-baucus-goes-after-advertising-tax-reform-draft-154051 (accessed November 24, 2013).

⁽²⁾ “Chairman's Staff Discussion Draft on Cost Recovery and Accounting Language,” U.S. Senate. finance.senate.gov. http://www.finance.senate.gov/imo/media/doc/Chairman's%20Staff%20Discussion%20Draft%20on%20Cost%20Recovery%20and%20Accounting%20Language.pdf (accessed November 25, 2013).

⁽³⁾ Ibid.

⁽⁴⁾ Michael Cohn, “Baucus Proposes Changes Tax Accounting Cost Recovery Rules,” Accounting Today. accountingtoday.com/news/Baucus-Proposes-Changes-Tax-Accounting-Cost-Recovery-Rules-68811-1.html (accessed November 25, 2013).

Thanking Sports

As the United States celebrates its national holiday for giving thanks, I thought about the debt of gratitude I owe to sports. Certain parts of the sports world deserve to be personally thanked, I decided. The list is not comprehensive, so if I inadvertently left you out, and you’re not an inanimate object, email me and I’ll swing some praise your way.

Perhaps the Most Thanks-worthy People in the History of Sports are Jackie Robinson, Willie O’Ree, Nat Clifton, Frtiz Pollard, Kenny Washington, Larry Doby, and the courageous athletes in all sports who broke down arbitrary barriers that based employment on something other than performance. Their heroism had positive repercussions beyond sport. A world with less racism is a more pleasant one, and it's harder to be a racist when the only thing your tow-headed son wants for Christmas is a jersey with his African-American or Hispanic hero’s name on the back. On a related note, thanks to my father for enrolling me in a youth sports program where I was the one who didn’t look like everyone else. That experience helps inform my outlook to this day.

More hair, less shorts. This shot went in, I swear.

Thank you to ESPN. Thank you for showing the world an all-sports network would work. Now we combine all of your networks with those of Fox, NBC, CBS, and the rest to have multiple sports television options at any time of day. We don’t even have to actually have a television, thanks to tablets and the like.

On a related subject, thanks, TV Remote Control. Most recently, as in, literally as I’m writing this, you enabled me to instantly switch away from a lopsided game just in time to see Gareth Bale steer an astoundingly precise free kick just under the crossbar. Good work by you.

I’d also like to thank Modern Apparel Manufacturing Processes. When I was a kid, you couldn’t get much in the way of sports gear. Now, you can buy shirts, pants, and garden gnomes not only for today’s marquee performers but for just about any team that ever existed. I own an Atlanta Knights jersey. The team’s defunct, the league’s defunct, but I’ve got a replica sweater for them. The Atlanta Knights! Oh, and I have an Alan Ogg Miami Heat cap I got off an order form on the back of a pizza box. Oh, dang, did I say that last one out loud?

Nobody else in the world owns both an Atlanta Knights jersey and an Alan Ogg cap. Nobody. Not that it's necessarily a good thing, but it's unique, at least.

Let’s show some gratitude for Modern Medical Techniques. The advancements you have made let the top sports entertainers return from injuries that might have ended the careers of players in earlier decades. There’s just no downside to that.

My taste buds have requested some praise for Dollar Hot Dog Nights. Just about every team in every sport has one now. Thank you, because, well, they are hot dogs that only cost a dollar - awesome. I look forward to the spread of this tradition worldwide. Who wouldn't want Euro Knackwurst Night in the Bundesliga?

Lots of Dogs commercial with Nolan Ryan

Thank you to Bill Murray in Caddyshack and Bob Uecker in Major League. Sports should be fun. And funny. Gut-bustingly funny.

Finally, I owe Sports in General a big thank you. Knowing sports helped me get every job I’ve ever had, other than bussing tables and delivering pizzas. Not wanting to negatively impact my stamina for basketball kept me from ever trying cigarettes. And I will never not have something to talk about with a fellow sports fan. We will always have a mutually agreeable conversation topic, whether we agree about the content of it or not. Happy Thanksgiving, Sports! Now let’s eat and go watch some football.

Rush Olson has spent two decades directing creative efforts for sports teams and broadcasters. He currently creates ad campaigns and related creative projects for sports entities through his company, Rush Olson Creative & Sports.

RushOlson.com

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