Pureplays and the 50% Threshold
July 6, 2010
I was first introduced to the 50 percent threshold concept in the early 1980s. The product at the time was VCRs, and the issue was what would happen to television when over half of the homes with TV sets in the U.S. had VCRs attached? The forecast wasn't good for broadcasting, and that was just the beginning. About the same time came the remote control, and the die was cast for serious technological disruption.
There's something magical about the 50 percent threshold. It's almost like nobody takes any threat seriously until it impacts half of the marketplace. By that time, though, reactions to it are always defensive. Before? Well, it's just an upstart with big ambitions. Who cares?
The axiom, however, seems to govern business, and that's why we need to see a piece of recent research from Borrell Associates in a different light.
Each year, Borrell publishes a pie chart showing the shifts in the local online advertising marketplace. Which type of media gets what kind of share of the local ad pie, and so forth? I've added and recolored the image from 2004, so that we can compare the market five years ago to the market today. The pie itself has been growing, and for 2010, Borrell is projecting it'll be $14.2 billion. It's a big pie.
Notice the shift in the purple slice. Pureplay Web companies — those businesses without a brick and mortar connection — now get 51.2 cents of every dollar in the world of local online advertising. In 2004, that number was just 15%, and this latest report represents the first time pureplays have crossed the 50% threshold for local advertising. By "local" here, I mean money that originates in the market, including franchises, whether controlled locally, regionally or nationally. Over half of this money is now flowing elsewhere, and the point is it didn't used to be that way.
The pureplay category includes players like Google, Yahoo, MSN, various other content portals, social sites like Facebook and MySpace, and hundreds of smaller companies with software that helps enable commerce like Yodle, Reach Local, Yelp, Groupon and many, many others. One thing they generally have in common is that whatever they're offering to local businesses and merchants, it works, and in many, if not most cases, it's measurable and better than what local traditional media companies have to offer.
Not only has the share of the pureplays been growing, it has been doing so against a backdrop of dramatically increased online spending. Regardless of how you slice it or define it, this is money that used to go primarily to local media companies. Notice, for example, the dramatic loss of share for local newspapers.
The significance of this is completely lost on the local merchants who are unaware they're sending their money outside the market. After all, they assume, "My nickels and dimes don't mean much," but it adds up quickly.
Think about this for a minute. In a market like, say, Louisville, Kentucky, where Borrell projects 83 million local dollars will be spent for online advertising this year, 51.2 percent — or $41.5 million — will leave the market to line the pockets of companies who have absolutely no stake in the Louisville community whatsoever. They don't pay taxes. They have no employees. They don't donate to the local United Way. To paraphrase Perot, all Louisville gets is just a great sucking sound, and it's damaging the very economy from which local businesses draw their sustenance.
This is a serious, serious matter for local economies, and when businesses find out about it, they are not happy. I know, because I'm sharing the message in various places as I talk to people about the value proposition of local ad networks.
Gordon Borrell thinks that the pureplays will continue to take money from local markets. Pureplays are generally well-funded and all share the knowledge that "local" is where online revenue growth is. It's no surprise they all want an increasingly bigger piece of the pie. Borrell told me that the share will taper off, however, as the pureplays realize they can only go so far without sales feet on-the-street. This will force them into partnerships with local media companies who have such sales teams.
This is reflected in an interview I did with Fred Wilson two years ago. Wilson is one of the top VCs in the new media space, his Union Squares Ventures having funded, in part, such well known companies as Del.icio.us, Feedburner, Boxee, Clickable, Disqus, Foursquare, Meetup, Outside.in, Tumblr, and, oh yeah, Twitter. Noting that venture-funded companies are taking money out of local markets, I asked if he felt like a competitor to local media.
"I'd rather be a partner with local media companies," he replied. "We don't want to build the sales organizations. We don't want to go into each individual city or town and start to develop the relationships with local merchants. What we can bring to the table are new technologies and new business models, and I think we can partner with the local media companies to help with sales."
Media companies are catching on. Jay Small, president of Cordillera Interactive, is into the idea of partnerships and makes a strong argument for strategic arrangements:
Almost every company that represents the pure-play revenue in Borrell's data will, or would, entertain reseller partnerships with incumbent local media, as an alternative to building its own sales forces especially in markets smaller than the top 25. Incumbent media can resell best-of-breed interactive and mobile marketing solutions profitably. Plus, the incumbents do still have significant distribution clout via their legacy, offline operations, and will for many years to come...
..If a local media operator can claim to sell products on par with best-of-breed marketing platforms, online and offline, then we shift the game back to differentiators that actually matter: our people, our relationships, our client service, our commitments to the communities in which we operate.
Small argues rightly that the sales teams attached to legacy media are not necessarily the feet-on-the-street sought by these pureplays, however, because, among other things, "legacy products remain easier to sell to existing customers, at higher gross dollar amounts and much higher margins than anything the 'interactive department' can show." Like Borrell, Small believes that separate sales staffs will ultimately be needed to handle these kinds of arrangements.
And so begins a season of local media companies partnering with pureplays to solve commerce issues within the community. This is logical and smart, but it comes with a caveat: the 50-percent threshold is guaranteed in any arrangement where local employers send half of partnership revenue elsewhere. We can argue the inevitability of this, but that doesn't make amends for the outcome.
The first such partnership was the Yahoo Newspaper Consortium, the network of 800 newspapers who "sell into" Yahoo properties as a way of gaining market share. The Yahoo technology also brings newspapers into the world of selling behavior. The revenue split is 50-50, with Yahoo providing the technology and the newspapers providing all the expense of maintaining the sales arm. The newspaper consortium began in November of 2006. It has not stopped the shrinking of market share for newspapers, nor has it slowed down the growth of share for the pureplays. That was apparently never the point, however, because Yahoo was considered a friend, not a competitor.
The Online Marketplace
One of the problems here is that we in media still don't view the whole local online marketplace as ours. We behave as though we're competing only with other traditional advertising companies online. We watch what "they" do. We imitate what "they" do. If that station does hyperlocal, I've got to do hyperlocal. If "they" run rich media ads, by God, we've got to run rich media ads. We compete to see whose practices can win accolades against other media companies, and we judge our success based on "their" success. We look around the industry to find those who are doing it "right," whatever that means. Apples to apples, we think. This is understandable, given our history, but it plays right into the hands of those same pureplay companies.
Besides, there's a new history being written, and here are ten facts that reveal a much different marketplace.
The very essence of advertising is in full-blown disruption. Rather than immerse ourselves in this disruption, we've chosen to let others innovate while we invest in seeing how best we can make the disruption conform to our beliefs and practices.
Advertisers themselves are now a form of media companies, able to connect with customers outside our walls. The inexpensive tools of personal media have opened doors nobody even considered just ten years ago.
The legacy brands that sustain us are of declining value, because people under 25 generally don't even know who or what they are. Those people will run the businesses of tomorrow, so even if those brands open doors today, we cannot believe that it will always be the case.
For local television, people are now being conditioned by technology that programs are separate from sources, and innovations like GoogleTV will continue this reality. Programs separate from sources pose significant problems for those of us who monetize such sources.
Hyperconnectivity impacts marketing more than anybody cares to admit. We're no longer just connected "up" to brands; we're connected horizontally, and this undercuts the strategies and tactics of traditional advertising. We dare not underestimate empowered consumers.
To consumers, advertising has always been an annoyance, but technology now enables them to ignore it. For every new method to "reach" people, those who don't wish to be "reached" find a new way to block it. Madison Avenue's grip on the institution, however, cannot allow honest acceptance of this, and so — like newspapers 15 years ago — the advertising industry is involved only in how the Web can serve its interests, consumers be damned.
Consequently, industrial age, top-down marketing — every bit of it, including its language — is fast becoming an archaic relic of a former age. MBA programs that are built on the old will have to change, 'lest their offspring be ill-equipped to run the businesses of the 21st Century.
The paradigm of mass marketing is giving way to the direct marketing tilt of the Web. As more and more local businesses learn that they can access customers or potential customers directly through the above hyperconnectivity, the less they need any — yes, ANY — old school marketing.
Core strategies are giving way to edge strategies, a whole new academic and practical discipline being written right before our eyes. Headed by Deloitte & Touche's think tank, under the guidance and leadership of John Hagel, moving business resources away from core competencies and to edge competencies is the model of the 21st Century.
Finally, the very definition of local is changing, because local isn't defined simply by location anymore. Jeff Jarvis has a phrase that articulates this: "Local=Mobile=Me." When Amazon will sell you a vacuum cleaner cheaper than Sears and deliver it to your doorstep for free the next day, what is the value of the local store, except for returns? This redefining is a part of the bigger picture, but it puts yet another strain on our need to think strategically about all of this.
So partnership deals with pureplays may shift a little of today's money around, but they ultimately position us at the wrong end of the value chain: we handle all the expense of sales and reselling, while the pureplays provide only technology and the business model.
The revenue available to media companies behaving as media companies — that is to say using ads adjacent to scarce content — is insufficient to make a dent in the now 52-cents of every dollar that goes to pureplays. Moreover, partnering with them guarantees the 50 percent threshold remains. We're doing their work for them.
When McClatchy inked a deal with Groupon to bring the "deals" giant to its newspaper chain, local media consultant and former Kelsey Group Web guru Greg Sterling wrote that the deal made sense for both companies, although he likened it to the old "keep your friends close and your enemies closer" adage.
In the relationship Groupon will apparently "own" the advertiser, while McClatchy will have the relationship with the reader-consumer. Collectively US newspaper sites reach almost 60% of the online audience according to comScore. Groupon will get additional reach in McClatchy markets and presumably some additional branding and visibility. In a short period of time, however, Groupon won't need newspapers...
...In my mind itís a kind of a smart "stop-gap" in the near term. However itís doubtful that McClatchy is building any long-term value here for itself.
I couldn't agree more.
These pureplay companies are not our friends; they're our real competition, and we get in bed with them at some risk. What I like least about these arrangements is how accepting we are of the new status quo. Rather than actually compete, we're capitulating in the name of an easy buck. Every time a media company "partners" with a pureplay company, we affirm and strengthen the pureplays' grip on local advertising. Remember, these people don't employ anybody in our markets. They don't pay taxes and they certainly don't support local charitable giving. To them, we're willing participants in our own demise.
As Jay Small notes, none of these companies have relationships in the marketplace, but we do. They're willing to share their better mousetraps with us for, in most cases, a 50-50 revenue share. Sure, we get 50 percent, but the other half leaves the market, guaranteeing growth beyond the 50 percent threshold. There is no future in this for us, and especially for the local economy. And 50-50 is such an arbitrary ratio anyway. Shouldn't the "partner" who carries the biggest expense get the biggest share in any such arrangement?
Every dollar originating in the marketplace that goes elsewhere is multiplied many fold in its negative impact on the local economy, increasing the demand on the community itself to make up the difference. Let me repeat: when the business community learns of this, it is not happy, and we can use that energy to our advantage.
Jay is absolutely right in that building "me-too" projects is very bad strategy, but what about something completely different? It may come to the point where we need to work together at the local level to build a better mousetrap. As long as we keep fighting each other, we're handing victory to outsiders. It's that serious, and it will take a tremendous amount of courage for anything to really change.
We can also launch a year-long campaign to inform local businesses about what's really happening. Use Borrell's local data to tell the story. These companies, regardless of how tempting their applications seem, are not the friend of local markets.
In the interim, the best advice is Sterling's. Let these arrangements be short-term only. Recognize these people as what they are: enemies that must be kept close.