Outlook for Advertising, Marketing and Data 2023: Clouds On The Horizon? Bruce Biegel, Senior Managing Partner January 18 th , 2023 About Winterberry Group A specialized management consultancy that offers more than two decades of experience and deep expertise in the intersecting disciplines of advertising, marketing, data, technology and commerce Winterberry Group helps brands, publishers, marketing service providers, technology developers and information companies — plus the financial investors who support these organizations — understand emerging growth opportunities, create actionable strategies and increase their value and global impact. 2 The Evolving WG Spend Model – 2019 - 2023 3 Annually, WG evaluates its models to see what has changed or needs to be added. During the COVID period (2020 - 2022), the industry continued to undergo significant changes – including the growth of new digital channels warranting inclusion and update. 2023 Channel Coverage Offline Media Digital Media New Digital Channels Added 2020 - 2023 Linear TV Display CTV Addressable TV Search Gaming Radio Email/SMS Influencer Newspaper Digital Out - of - Home Affiliate Magazine Digital Radio B2C Lead Generation Traditional Outdoor Digital Video Direct Mail Paid Social Experiential/Sponsors hip In - Store Jan, 2019 Channel Coverage Offline Media Digital Media Linear TV Display Addressable TV Search Radio Email/SMS Newspaper Digital Out - of - Home Magazine Digital Radio Traditional Outdoor Digital Video Direct Mail Paid Social Experiential/Sponsorship In - Store Note: In 2019 several categories from the 2018 model were consolidated, including Mobile moving into Display and Cinema into Dig ital Out - of - Home. Also removed from the 2019 model are the Teleservices, Lead Generation and Affiliate spend categories as data had not been updated for several spend cycles. Looking Back at 2022: A Tale of Two Halves Why Did the Hyper Growth of 2021 Fizzle in 2022? 5 Inflation soared primarily driven by the supply side Interest rates increased 7 separate times as the Federal Reserve fought to stem rising inflation Equity markets worst year since 2008 - 2009, mortgage rates stalled, housing market boom Unemployment stayed low, as the supply of workers remained constrained Fear of a recession came back into the conversation for 2H22 into 2023 Consumers, faced with higher costs slowed spending growth, GDP growth slows Benchmark: 2x GDP Growth Economic and Geo - Political Headwinds Impact Marketing Growth... Are We Heading Back to The Old Normal? 6 2.8% 2.3% 2.6% - 1.5% 5.7% 2.0% 0.2% 6.0% 5.2% 4.0% - 3.4% 20.8% 9.4% 5.9% 2017 2018 2019 2020 2021 2022 2023P US Marketing Spend Growth Benchmarked to GDP Growth 2020 - 2023P US Advertising/ Marketing Spend Growth US GDP Growth Forecast Source: Winterberry Group Spend Analysis (2023), US Bureau of Economic Analysis (2023), Conference Board (2023) $376.6 $363.8 $439.7 $480.8 2019 2020 2021 2022 US Annual Advertising and Marketing Spend 2019 – 2022 ($BB) Review 2022: Its Not Where You Start But Where You End – Market Expansion Slowed in the Second Half 7 Source: Winterberry Group Spend Analysis (2023) +20.8 % - 3.4% +9.4 % Review 2022: As Usual More Spend Captured by Digital, But Offline Held On 8 $222.7 $183.7 $195.4 $203.5 $154.0 $180.1 $244.3 $277.3 $376.6 $363.8 $439.7 $480.8 2019 2020 2021 2022 Offline Marketing Spend Online Marketing Spend US Marketing Spend on Offline and Online Channels 2019 – 2022 ($BB) CAGRs (2019 - 2022): - 2.9 % +21.7% +8.5% TOTAL Source: Winterberry Group Spend Analysis (2023) Review 2022: Offline Growth, Powered by Political Ad Spend, Return of In - Person Shopping and Experiential Linear TV $61.5 Addressable TV $3.5 Radio $12.2 Newspaper $6.6 Magazine $6.8 Direct Mail $41.7 Traditional Outdoor $.7.7 Experiential/Sponsorship $17.3 Shopper Marketing $22.3 +13% + 7.7 % +2.5% +2.5 - 5.6 % - 9.1% Source: Winterberry Group Spend Analysis (2023) +4.2% +1.6% US Offline Marketing Spend, 2022 ($BB) Total: $203.5BB 9 + 3.9 % +24.3 Review 2022: Direct Mail Volumes Increased, Cost Pressures Began to Abate, A Ramp in 1H22 Was Not Sustained Into Year End 10 81,413,576 69,653,439 72,191,819 72,930,837 2019 2020 2021 2022 Direct Mail Volumes 2019 - 2022 Source: USPS (2022) +3.6 % - 14.4% +1.0 % Review 2022: CTV and Video Out - Performed Through the Year, Yet Growth Decelerated in Most Online Channels 11 Email/SMS $6.0 Display $15.4 Digital Video $47.0 Affiliate Network Fees $3.8 Search $98.4 Digital Out - of - Home $3.6 Digital Audio (Radio/ Podcasts) $6.1 CTV $21.2 Paid Social $60.0 Video Game Advertising $5.2 Influencer $5.9 B2C Lead Generation $4.8 +5.7 % +6.5 % +16.1 % + 15.0 % +9.3 % +46.5 % + 3.9 % +2.4% Source: Winterberry Group Spend Analysis (2023) Note: Display refers to banner ads that appear on desktop; affiliate network fees exclude media and platform costs + 13.5 % +17.5 % +9.4 % +4.0 % US Online Marketing Spend, 2022 ($BB) Total: $277.3BB + 27.9 Review 2022: Digital Performance Media, Platform Transformation Analytic Use Cases and First - Party Demand Accelerated Spend 12 Direct Mail $5.6 Email $2.8 Digital Media (Display, Video, Social) $17.8 TV (Linear, Addressable and CTV) $5.5 +16.1% +21.3% Source: Winterberry Group Spend Analysis (2023) Note: ‘’Digital Media’ includes display, video and paid social; ‘TV’ includes linear, addressable and CTV; ‘Data, Identity, D ata Services and Platforms’ includes analytics (modeling, measurement and attribution), spend on CRM, CDP and DMP platforms, database management and hygiene, excludes cloud hosting services +32.2 % US Spending on Data, Identity, Data Services and Platforms, by Channel , 2022 ($BB) Total: $31.7BB - 4.0 % +0.9 % Digital Media/Commerce $72.9 (1,105) Marketing Technology $40.3 (1,247) Agency & Marketing Services $8.1 (491) Traditional Media $17.2 (211) Digital Advertising $5.8 (237) M&A and Investment Activity, 2022 ($BB) Marketing, Media and Technology Industries (# of Transactions) 2022 M&A: Rising Interest Rates, Equity Market Declines Led M&A and Investment Activity Down Across Market Segments 13 Source: Canaccord Genuity (2023) Total deal value of $144.2BB decreased 61.3 % , down $229BB Y/Y Volume of deals decreased by 18.7% , with 3,291 transactions vs 4,050 prior year Buyer Activity in 2022 But valuations have declined since beginning of the year , correlating with the realities of a diminished equity market and higher interest rates needing to increase debt costs (and lower availability) Marketing - related dealmaking is still active, notably at the mid - market level on targets of up to $1BB, focused on businesses with tech - enabled models and/or proprietary data and media tools Although SPAC and IPO markets are at standstill given public volatility, higher interest rates and broader economic uncertainties... Dealmaking Remains Active Across Middle Market Despite Public Market Volatility (and Lower Valuations) 14 Source: Canaccord Genuity (2023) Buyer Deal Value % of Value # of Deals % of Deals Strategic $53.58 37% 1779.00 54.1% Private Equity Buyout $19.98 14% 149.00 4.5% Private Equity VC Growth Capital $70.54 49% 1362.00 41.4% Agency Holding Companies Data and Technology Private Equity 2022 M&A Themes: Focus on Commerce, Tech - Enabled Media, Customer Experience and Measurement 15 February 2022 Identity resolution and consumer intelligence for $225MM January 2022 Acquired: for undisclosed amount Customer data infrastructure solution March 2022 Invested in: TV - viewing app and analytics company for $ 325MM March 2022 Acquired: for $160MM Measurement and attribution platform for converged TV August 2022 Invested in: Platform for creative intelligence September 2022 Tech - enabled insight and strategy company for undisclosed amount Invested in: October 2022 Acquired: Performance marketing agency December 2022 Acquired: Account - based marketing platform for $ 750MM for undisclosed amount Acquired: Real - time, AI - powered SaaS platform for undisclosed amount July 2022 October 2022 CX and Insights Platform May 2022 Acquired: SaaS ecommerce intelligence platform for ~$200MM December 2022 Acquired: Canadian commerce agency for undisclosed amount Acquired: December 2022 Acquired: US - based commerce agency December 2022 Acquired: Customer insights and advisory for undisclosed amount for $50 - 60MM leading in $110MM investment Macro Trends : What’s Driving the Market Trend: Increased Emphasis on Customer Experience to Drive Retention, Tightening Marketing Spend Management 17 Consumers focus to value from brands as post - Covid re - opening, buying channel selection matures; the shift to digital is not the trend – the shift within digital consumption is the key. Trend Marketers still optimistic yet seek shorter term marketing commitments to manage recession risk. Optimization, personalization and omnichannel integration guide strategies and tactics. Impact Trend: Retail Media Marketing (and Marketplaces) Continuing to Take Share of Mind and Wallet 18 Retail/vertical media marketplaces spend has raced ahead ($20BB to $45BB 2020 - 2022), new forecasts see $100BB in 2026 . Search and display drive spend with budgets moving across media and shopper/trade promotion Trend Source: McKinsey (2022) Product metrics, measured by cost per order as important as ROAS. Understanding the true impact of incrementality and the alignment of media sales teams objectives with merchandising’s needs will become a focus in 2023. Impact Trend: Is Direct Mail Suddenly... Interesting Again? 19 Inflation Driving Cost of Digital Media and Shifting Budgets Towards Direct Mail 20 Rising cost of digital performance media will likely encourage marketers to shift spend from prohibitively expensive channels to offline channels delivering higher (and more predictable) returns Meta’s CPM (cost per thousand) has increased 61% YoY, averaging at $17.6/CPM +61% TikTok’s CPM (cost per thousand) has increased 185% YoY, averaging at $9.4/CPM +185% Google’s programmatic display has increased 75% YoY; search ad CPC (cost - per - click) has increased 14% YoY +75% Instagram’s CPM (cost per thousand) has increased 23% YoY +23% Source: LinkedIn (September 2022)