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Threat of war cutting advertisers' budgets

NEW YORK — The prospect of war in the Middle East is casting a lengthening shadow over Madison Avenue as worried advertisers postpone media-buying decisions, threatening to derail the industry's nascent recovery after one of its most difficult periods since the Depression.

In recent weeks, advertisers like the Gucci Group and Merrill Lynch have informed agencies and media companies that they may cut ad budgets or scale back commitments even before a war breaks out. Scores more have put into place contingency plans in case of war, which require the immediate suspension of campaigns or the shifting of commercials and print ads away from any coverage of hostilities. And some marketers, media executives say, are signaling that they would stop all spending until a war ends or the crisis abates.

"The war seems to be putting a fog in front of their eyes," said William D. Holiber, the publisher of U.S. News & World Report in New York. "They all seem to want to wait until there is more clarity."

The cutbacks and slowdowns are hurting radio, monthly magazines, newspapers and local television stations the most. The broadcast television networks, which have been leading the ad-spending resurgence, have been less affected.

"The business in general is holding its breath," said Mel Berning, president for U.S. broadcast at MediaVest Worldwide in New York, a large media services agency that is part of the Starcom MediaVest division of the Publicis Groupe.

"The one question everyone in our jobs has to answer," he added, "is, what would this do to advertising budgets over the next 18 months?"

Most forecasters, heartened by continued strong demand for television commercial time from movie studios, packaged-food companies and retailers, are predicting an increase in ad spending for 2003 of 3 percent to 7 percent. Last year ad spending showed a modest uptick of 2.6 percent compared with 2001, when spending fell 6.5 percent, the largest decline since 1938.

There are even predictions that the coming market for commercial time on broadcast TV networks sold ahead of the 2003-2004 season could increase 10 percent atop the robust gains registered last spring.

But those forecasts become more tenuous each day a war appears more likely.

The problem is "the Iraq overhang," said David B. Doft, an analyst for CIBC World Markets in New York.

"Why make a decision to go ahead with launching a new campaign or a new product when you can wait a couple of months and play it safe?" Doft said. "The caution comes from not wanting your ads to show up on TV next to dead bodies."

As a result, he added, "we have noticed a definite hesitancy on the part of advertisers and media buyers in terms of going ahead with full-fledged new initiatives."

Even before any possible wartime disruptions, many advertisers have already trimmed their budgets, particularly in categories like airlines, energy and petroleum products, financial services, insurance, lodging, luxury goods and travel.

If the contingency plans come into play, that would reduce ad revenue for media companies even further as marketers like American Express, Boeing and Northrop Grumman would withdraw to the sidelines until the dust settled. (The Army, and the other armed services, worried about the juxtaposition between recruitment and reality, have standing policies to stop advertising during a war.)

"Every advertiser has contingency plans," said Steve Lanzano, chief executive for the North American operations of Mediaedge:CIA, a large media services agency in New York owned by the WPP Group.

If a war were to begin, there would be little or no opportunity at the onset to advertise on most broadcast and cable networks, which under standard procedure would limit or eliminate commercials if they are presenting war coverage. For the print media like daily newspapers and weekly magazines, war coverage would overwhelm other subjects.

"Most of our clients are resigned to the prospect of war," said Michael Drexler, the chief executive at Optimedia International in New York, a media services agency that is part of the ZenithOptimedia Group. "They plan to hold off advertising during the initial phase of any attack and see how it plays out." ZenithOptimedia is owned by the Cordiant Communications Group and Publicis.

Jon Mandel, co-chief executive and the chief negotiator at MediaCom in New York, the large media services agency owned by the Grey Global Group, offered this assessment: "For most advertisers, it's not so much a question of what are they going to do as it is a question of what they're not going to do. They're not going to want to be in or near war news."