Advertising occupies a special, historic place in American society. Linked to the bedrock principles that shaped our nation -- free speech, competition and democracy -- it has served the public since colonial times as a source of vital information about our open, market-based economy.
I. Introduction
Today, advertising is aligned with the forces that are transforming our nation and enabling it to flourish, such as new technologies, widespread information access and entrepreneurial innovation.
And, looking to the future, advertising is an important engine of economic growth. It's a huge industry in its own right, as well as a significant contributor to the vitality of virtually every other industry sector nationally and locally.
Advertising. It's linked with our democratic heritage. It's aligned with forces that are dramatically transforming our society. And it's a powerful economic engine helping to drive our nation's growth. Those are lofty descriptors for a discipline that is often overlooked and undervalued in importance. But advertising and America are inextricably intertwined in ways that positively impact the interests of consumers, businesses and our nation as a whole.
II. Advertising: A Consumer Resource
As they annually spend some $6 trillion on various goods and services, American consumers rely heavily on advertising. Why? Because advertising provides them with useful information about features and benefits; alerts them to product availability and purchase locations; helps them differentiate among competitive choices; advises them of pricing information and promotional opportunities; and - ultimately - saves them money by encouraging competition that exerts downward pricing pressures.
In addition, advertising strengthens consumer confidence, contributes to higher levels of productivity, creates job opportunities and helps raise personal incomes throughout our society.
III. Advertising: A Business Resource
Enterprises, of course, also rely heavily on advertising. To compete and grow in today's diverse, ever-changing marketplace, businesses must efficiently reach their target customers, quickly alerting them to new product introductions, improved product designs and competitive price points. Advertising is by far the most efficient way to communicate such information.
But not only national companies benefit from advertising. In its many forms, advertising is also critical to local businesses, many of which engage in cooperative advertising, whereby national manufacturers and local retailers share advertising costs. Indeed, for many such businesses -- from drug stores to supermarkets to restaurants -- cooperative advertising is the cornerstone of their marketing efforts.
In fact, virtually all businesses -- even those not perceived as major marketers -- depend on advertising for their economic well-being. For example, many companies with limited consumer visibility, advertise heavily to other businesses. Still others, particularly those producing basic resources or involved in heavy manufacturing, do little advertising themselves but depend on the sale of heavily advertised goods to sustain demand for their products.
IV. Advertising: An Economic Engine
Advertising contributes abundantly to sales and economic growth in this country. In 1998, more than $200 billion -- roughly 2 percent of the U.S. Gross National Product -- was spent on advertising. In fact, advertising expenditures as a percentage of GNP have remained consistently strong over the past 75 years. Why? Because during good times and bad, it pays to advertise.
Donald M. Kendall, former Chairman and Chief Executive Officer of PepsiCo, underlined this point in a presentation to the Federal Trade Commission:
- "There is literally no way to count how many salesmen at the front door it would take to reach the number of people who see and hear a television commercial. But even if such a massive sales force could be assembled, the costs of their salaries or commissions would raise product prices astronomically. The use of media advertising...represents a conscious choice as to the most effective and efficient way to generate consumer demand."
And two Nobel Laureates in Economics, Dr. Kenneth Arrow and the late Dr. George Stigler, similarly endorsed the value of advertising in there 1990 report:
- "Advertising is a powerful tool of competition. It provides valuable information about products and services in an efficient and cost-effective manner. In this way, advertising helps the economy to function smoothly - it keeps prices low and facilitates the entry of new products and new firms into the market."
More recently, a 1999 study prepared for the Advertising Tax Coalition (ATC) by the WEFA Group, one of the country's premier econometric modeling firms, further underscored the economic impact of advertising. Dr. Lawrence R. Klein, who was awarded the Nobel Prize in Economics in 1980, assisted the WEFA Group, which found that advertising played a key role in generating 18.2 million of the 126.7 million jobs in the United States in 1999. The report further concluded that advertising expenditures contributed between 12 to 16 percent of private sector revenues throughout the country, in rural as well as urban areas.
Despite the widespread power and impact of advertising, it is a force that is naturally controlled by the marketplace. Advertising cannot sustain demand for products that consumers do not want. As one former advertising agency president noted, advertising is successful only if the consumer is satisfied:
- "The fact of the matter is we are successful in selling good products and unsuccessful in selling poor ones. In the end, consumer satisfaction, or lack of it, is more powerful than all our tools and ingenuity put together. You know the story: we had the perfect dog food except for one thing - the dog wouldn't eat it."
Nothing kills a bad product faster than good advertising.
V. Advertising as a Foundation of the Media
The economic health of most of our country's media rests primarily on the strong financial foundation provided by advertising revenues. Commercial over-the-air broadcasting, both radio and television, is supported solely by revenue gained through the sale of airtime to advertisers. Other media, such as magazines and newspapers, cable television systems and the Internet, rely on subscription fees as well as advertising for revenues. Without advertising dollars, many of today's media outlets would not exist and the cost of those media that survived would be substantially higher for the consumer.
Advertising revenue has led to a tremendous proliferation of media choices. For example, television viewers in the early 1950's and 60's could watch only three broadcast networks. Today, viewers can choose from six broadcast networks, hundreds of cable channels and direct broadcast satellite programming.
Consumers have many more choices in print media, as well. According to the Newspaper Association of America, there were 312 morning newspapers in 1960; today there are more than 700. The number of consumer magazines available in the U.S. has grown dramatically, from approximately 13,000 in 1988 to over 18,000 titles today. Virtually none of these developments would happen without mass advertising.
Furthermore, advertising has played a critical role in the development of the Internet, where millions of Americans now get their news and entertainment and engage in commerce. The online media has developed at an extraordinary pace. It took 38 years for radio to reach 50 million Americans; network television took 13 years and cable television took ten years. It took only about three years for the Internet to reach 50 million users in the U.S.
Traditional media, both print and broadcast, are developing important additional roles in the new electronic media mix and are reaching ever more diverse audiences. Americans now have access to more information than ever before in our history. Advertising plays a substantial role in keeping information costs at a minimum for consumers.
The health of the media contributes to the democratization of knowledge and information in our society. Without advertising support, Americans would either have to pay for all of the news, information and entertainment they now receive on a subsidized basis, or the government would have to provide financial support for the media. Due to advertising, both the rich and the poor in the United States have more access to information than at any time in our history. Whether you live in a remote rural area or a large city, everyone can obtain more information at no cost or low cost, due to the financial support of advertising.
By supporting multiple voices, advertising provides more competition in the marketplace of ideas.
VI. Advertising and Taxes
Federal Taxes: Advertising is a cost of doing business. Like most other normal and ordinary business expenses, advertising expenditures are currently 100% deductible in the year they are incurred. As the business expenses of all selling methods are currently treated similarly in the tax code, businesses are free to choose the most efficient and effective means of generating sales.
However, in the recent past, concern over federal budget deficits had led members of Congress to review numerous existing tax deductions, including the 100% tax deductibility of advertising expenses. Bills were introduced to limit or deny the deduction for advertising costs for certain products, or to require advertising costs to be amortized.
In 1986, under the auspices of ANA, the American Association of Advertising Agencies and the American Advertising Federation, Wharton Econometrics Forecasting Associates studied several of the proposals to alter the deductibility of advertising expenses. Wharton found that changing the current tax treatment of advertising would exacerbate, rather than help, the federal debt problem. By limiting the deductibility of advertising expenses, the government would make advertising more expensive, forcing businesses to either reduce the amount of advertising or increase the costs of goods and services. In either case, the result would be a decrease in consumer demand, slower economic growth, increased unemployment, lower profits and ultimately less tax revenue for the government.
Two Nobel Laureates in Economics concluded after a comprehensive study of the existing economic literature that the attacks on our current tax policy regarding advertising expenses were not well founded. In this study with the economic consulting firm of Lexecon, Inc., Dr. Kenneth Arrow of Stanford University and the late Dr. George Stigler of the University of Chicago concluded that proposals to change the tax treatment of advertising costs are not supported by economic evidence.
State Taxes: Advertisers pay a multitude of taxes at the state level, including, where applicable, state income taxes, property taxes and sales taxes on their purchase of goods.
Some state lawmakers, in their search for new revenue sources, have proposed broadening their sales tax laws to include a tax on the process of advertising. Only one state, Florida, has attempted to tax all national advertising within its borders. Florida's ad tax was in effect from July 1, 1987 until repealed in December of the same year.
Immediately following imposition of the tax, many advertisers reduced their expenditures in Florida. The tremendous loss of advertising revenue quickly led to substantial pressure to repeal the tax. National spot-TV advertising declined an average of 11.8% in Florida's top six media markets during the third quarter of 1987; in two markets the drop-off was almost 20 percent.
Several other states and local governments have experimented by imposing more targeted advertising taxes, including Arizona and Iowa and the City of Baltimore. Each found the laws to be counterproductive and repealed them.
Since 1987, advertising taxes have been proposed, but rejected, in forty states.
VII. Constitutional Protection for Advertising
The First Amendment to the U.S. Constitution states: "Congress shall make no law . . . abridging the freedom of speech, or of the press. . ."
Throughout our history, Americans have viewed protection of freedom of speech as an essential element of our democracy. However, advertising, or "commercial speech," has been accorded constitutional protection only in recent years. In 1942, in Valentine v. Chrestensen, 316 U.S. 52 (1942), the U.S. Supreme Court held that governmental bans or restrictions on "purely commercial advertising" were not limited by the First Amendment.
Not until 1976 in Virginia Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976), did the Supreme Court affirmatively extend First Amendment protection to commercial advertising. In that case, the Court declared unconstitutional a law that precluded price advertising for prescription drugs. Virginia's arguments that price advertising would foster a lower level of professional conduct by pharmacists and harm the customer-pharmacist relationship were rejected. The Court saw an alternative to the "paternalistic" approach of banning all prescription drug price advertising:
- "That alternative is to assume that this information is not initially harmful, that people will perceive their own best interest if only they are well-enough informed, and that the best means to that end is to open the channels of communication rather than to close them. It is precisely this kind of choice between the dangers of suppressing the information, and the dangers of its misuse if it is freely available, that the First Amendment makes for us." 425 U.S. 748, 770 (1976)
Since 1976, the U.S. Supreme Court has strengthened the First Amendment protections for advertising in a long series of cases. The test for the protection of commercial speech was formulated by the Court in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). The Court, while reaffirming advertising's First Amendment protection, established a four-part test defining the permissible boundaries of government regulation of advertising. The Central Hudson test asks (1) whether the speech concerns lawful activity and is not misleading; (2) whether the asserted governmental interest is substantial; and if so, (3) whether the regulation directly advances the governmental interest asserted; and (4) whether it is not more extensive than is necessary to serve that interest.
When the courts make this analysis, the Government bears the burden of identifying a substantial interest and justifying the challenged restriction. Edenfield v. Fane, 507 U.S. 761 (1993). The Supreme Court requires the government to "demonstrate that the harms it recites are real and that its restriction will in fact alleviate them to a material degree." 507 U.S. at 771. (emphasis added)
The high-water mark for First Amendment protection for advertising came in 1996 in the case of 44 Liquormart v. Rhode Island, 517 U.S. 484 (1996). The Supreme Court unanimously struck down a Rhode Island law that banned all price advertising for alcohol beverage products. In so doing, the Court expressed one of its strongest statements ever about the importance of advertising in a free market economy. The Court rejected the government's argument that advertising about so called "vice products" was entitled to less First Amendment protection. The Court has now made it clear that advertising about every legal product and service has the same strong protection under the First Amendment.
The Court reinforced these views in Greater New Orleans Broadcasting Association v. U.S., 527 U.S. 173 (1999). In that case, the Supreme Court unanimously struck down a 1934 federal law that banned broadcast advertising of casino gambling. The Court concluded that "the speaker and the audience, not the Government, should be left to assess the value of accurate and nonmisleading information about lawful conduct."
Taxes and the Constitution
The Supreme Court also has made it clear that the use of discriminatory taxation to suppress speech violates the First Amendment. In Speiser v. Randall, 357 U.S. 513 (1958), the Court recognized "speech can be effectively limited by the exercise of the taxing power" and "a discriminatory denial of a tax exemption for engaging in speech is a limitation of free speech." 357 U.S. at 518.
When the Court has upheld denials of tax exemptions in connection with speech-related activity, it has always stressed that the restrictions could not have survived scrutiny if they had favored some speech over other speech on the basis of its content. Regan v. Taxation with Representation, 461 U.S. 540 (1983). In Arkansas Writers Project, Inc. v. Ragland, 481 U.S. 221 (1987), the Supreme Court stressed that "above all else, the First Amendment means that government has no power to restrict expression because of its message, its ideas, its subject matter or its content. . . Regulations which permit the government to discriminate on the basis of the content of the message cannot be tolerated under the First Amendment." Thus, proposals to limit or disallow the tax deductibility of advertising for "controversial" products such as tobacco or alcohol, violate the First Amendment.
The First Amendment protections for commercial speech are the ultimate safety net for all advertisers. As an ever-widening range of advertising becomes controversial, the court system becomes an ever more crucial battleground for advertisers. ANA has played an active role in almost every major commercial speech case in the past fifteen years, through "friend-of-the-court" briefs.
VIII. Advertising is a Heavily Regulated Industry
Advertising is a heavily regulated industry. At every level of government - federal, state and local - and at virtually every point in its creation and placement, advertising is closely scrutinized.
The Federal Trade Commission (FTC) is the principal federal agency with regulatory authority over advertising. The FTC can seek to ban or regulate advertising it believes to be false, deceptive or unfair and can bring penalty actions against advertisers who violate the law. An advertisement is unfair if it causes or is likely to cause substantial consumer injury which is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers or competition.
The FTC requires that advertisers have adequate substantiation for all objective claims in their advertising; failure to have this substantiation is considered a violation of the FTC Act. The FTC also has power to regulate on the basis of deception by omission if it finds that the representations in an ad, even if they are truthful, would have a tendency to deceive a consumer without additional material information being included.
The FTC has made clear that its authority extends to the online environment, having already brought several cases against false or deceptive advertising on the Internet.
In advertising cases, the basic remedy for a violation of the FTC Act is a cease and desist order. If merely prohibiting future misrepresentations will not dispel misperceptions already conveyed, the Commission may order corrective advertising. In extreme cases, the FTC may also order consumer redress or other financial remedies. In fact, the agency has imposed multi-million dollar fines in several cases where it found such strong action to be warranted.
Numerous states also have followed the federal government's lead by adopting so-called "little FTC Acts," providing broad regulatory authority over advertising disseminated within their borders.
For specific industries and/or products, Congress has from time to time given an agency other than the FTC principal or concurrent authority over advertising regulation. For example, the Securities and Exchange Commission has responsibility for the advertising of stocks, bonds and other related financial instruments; the Department of Transportation regulates airline advertising; the Federal Communications Commission regulates certain aspects of children's advertising; the Food and Drug Administration regulates advertising for prescription drug products; and the Treasury Department's Bureau of Alcohol, Tobacco and Firearms regulates certain aspects of alcohol beverage advertising.
In addition to these regulatory watchdogs, the Lanham Trademark Act of 1946, which covers false comparative advertising, prohibits a company from making false or misleading statements about its own goods and services. Competitors can sue under the Lanham Act if they believe they have been injured. In recent years, the courts have greatly expanded the scope and coverage of the Lanham Act, and monetary damages have been substantial in some cases. These remedies complement any action that can be taken by the federal or state governments and serve to further insure that advertisers and their agencies proceed carefully in developing truthful, nondeceptive advertising.
IX. Advertising Self-Regulation
Long before regulators see or hear an advertisement, it must pass through a multi-level screening process imposed by the advertiser, the advertising agency and the media. Advertising copy is generally first reviewed by the legal departments of the advertiser and its agency and when appropriate, by the technical and scientific staffs with the expertise to evaluate the accuracy of product claims.
If an advertisement is to run on broadcast networks, a "story board" will often be submitted to each of the television networks for clearance and approval. Once these approvals have been obtained and the production process begins, the review process continues, with the legal departments, the technical staff and the networks all reviewing the commercial to insure that nothing in the final work has distorted the original copy.
The self-regulatory process for advertising does not end when an ad makes it into print or on the air. At this point, the self-regulatory authority of the National Advertising Division (NAD) and the National Advertising Review Board (NARB) of the Council of Better Businesses comes into play. The NAD's mandate is to ascertain the truthfulness and accuracy of national advertising claims. NAD's caseload is drawn from consumer complaints, challenges from competitors and from its own monitoring of advertising. Children's advertising is closely monitored by a separate Children's Advertising Review Unit (CARU) within the NAD. More information about the self-regulatory process is available at www.bbb.org.
NAD cases are normally resolved by the advertiser satisfactorily substantiating its claims or by the voluntary withdrawal or modification of the advertising. In those few instances where the NAD is unable to resolve a case, the NARB is called on to intervene and a five-member adjudication panel is appointed to act as a court of appeals. If an advertiser refuses to comply with the decision of an NARB panel, the matter is forwarded to the FTC or some other appropriate government agency for further action.
Compliance with the NAD/NARB process is voluntary. Since its creation in 1971, the NAD has successfully handled more than 3,500 cases. In virtually all cases where advertising was found to be misleading, the ads were voluntarily modified or discontinued. The NAD has established procedures for the expeditious handling of complaints, so that decisions are generally rendered in several months. By contrast, resolving these complaints through litigation or regulatory action can take several years.
NAD/NARB decisions are made public, providing valuable information to consumers and other companies. Information about the NAD/NARB cases also is available at www.bbb.org. Numerous FTC Commissioners have cited the NAD/NARB system as a model of effective industry self-regulation.
The strongest force for honest national advertising, however, is not government regulation or self-regulation, but the fact that advertisers are dependent for their success on millions of sales that can be accomplished and maintained only through repeat business and the maintenance of consumer trust.
X. The Advertising Council
One of the most important activities of the advertising community is the development of public service advertising. In 1942, The Advertising Council was established by ANA, the American Association of Advertising Agencies, the Magazine Publishers Association, the National Association of Broadcasters, the Newspaper Advertising Bureau and the Outdoor Advertising Association of America. The Ad Council was established to be the central body through which volunteers from business, advertising and media create and distribute public service campaigns.
Over its lifetime, The Ad Council has been responsible for a number of memorable campaigns. Smokey Bear works for fire prevention; ads for the United Negro College Fund teach us that "a mind is a terrible thing to waste;" and McGruff the Crime Dog works to "take a bite out of crime." The Ad Council also has taken a lead role in efforts to combat alcohol and drug abuse and drunk driving, with the "Friends Don't Let Friends Drive Drunk" campaign. The common thread among all Ad Council campaigns is the promotion of individual volunteer actions to solve America's social problems.
The Advertising Council is supported solely through the contributions and volunteer efforts of numerous corporations, advertising agencies, broadcasters and publishers. Since 1942, more than $25 billion in media space and time has been contributed in media support of Ad Council campaigns.
For many years, The Ad Council has been one of our nation's 100 largest advertisers. 1998 was a record year, when donated media surpassed $1 billion annually for the first time. Beyond the media contributions are the invaluable voluntary efforts of the advertiser/campaign coordinator and the advertising agency in creating each of the campaigns.
More information about The Ad Council is available at www.adcouncil.org.