Rounding upwards has been around since people first started estimating. When I hung around with evangelical Christian ministries, we used to call it "evangelically speaking." When standing in front of 501 people, the evangelist would always say, "Looks like we've got nearly a thousand people here tonight." If the rules of math permitted selecting a higher number, you can always count on the evangelist to do so. It's good for his faith. :)
Of course, this isn't the sole purview of church people. Ask any march organizer how many people showed up, and they'll always stretch things — and often more than a bit. This is why smart reporters will always go to the police for their estimate, because it's usually closer to reality.
Rounding upwards is precisely the problem local television affiliates have as they seek to build online business models. The industry is so accustomed to its own spin that it becomes suddenly dysfunctional in the face of something different. And, to really make money off the web's disruptive influences, stations must eventually sell against themselves and all that rounding. That's a tough pill to swallow, when your bread and butter is based on such.
But if we don't sell against ourselves, the ad industry will do it for us. Already, there are rumblings in the form of a down upfront season. According to Merrill Lynch, the slowdown caused by digital and multi-platform elements in deals was expected, but the principal reason for the drop was haggling over price. This is just the beginning, because more and more advertisers are taking a very close look at what they've been getting for what they've been paying.
Two years ago, Kathy Sharpe of Sharpe Partners in New York made the proclamation that the advertising industry was in denial. In a guest commentary for MediaPost, Sharpe wrote that the whole industry was based on intricate myths, and it wasn't so much that its foundation was cracking as it was that there never was a "real" foundation in the first place, "just a series of shared beliefs, like a religion or a culture."
Did Nielsen ever offer more than a gross proxy for the real television audience? No, but that was okay, as long as that stand-in was big and growing (and the one with the most buying power). Were media planners ever blind to the implications of magazines inflating circulation numbers with cheap subscription drives? Even in the days of the two-martini lunch, everyone knew that the value of the impression had to decline. It's just that nobody much cared to do anything about it. Certainly, nobody from the agencies would; and even advertisers blithely ignored it because there was no alternative to TV other than print.
But the web has changed everything for advertisers, because its value proposition to advertisers is precise measurement. And what television station account executive wants to make the case with advertisers that he's been selling blue smoke and mirrors all those years? Yet, that's exactly the pitch to be made in selling the web over broadcast. Ask any competent web sales executive, and they'll smile at the notion.
While the ad industry is still primarily tilted in the direction of Kathy Sharpe's intricate myths, they're now beginning to ask the right questions. Like a fish flopping around out of water, industry trade publications are filled with "try this" and "try that," and industry observers are so filled with lashing out or defending the myths that the fish actually leaps off the ground from time-to-time. This writhing is not only necessary but it's helpful, as the industry tries to get its footing in the new world.
But in the process, one can truly say that neither the media industry nor the ad industry really knows what its doing, and the tendency still is to remain with the old model. This is why the banner ad game — whether it's rich media or otherwise — is built upon the cost-per-thousand impressions (CPM) game. The problem here is that this game was created (and priced) based upon the myths that Ms. Sharpe rightly points out everybody knew were blue smoke and mirrors anyway. The internet, however, doesn't produce such hocus pocus; the numbers here are real, and nobody knows how to act. The reality is that if we're going to play the CPM game with the internet, then there must first come an acknowledgement that an online CPM has a greater value than any other CPM, because the advertiser will get real numbers instead of somebody's self-serving estimate.
Why pay a $500 CPM for a television ad that estimates the thousand people when an online ad will honestly deliver those thousand people? It makes no sense. There's the argument that the thousand people the TV ad reaches are different than the thousand people the online ad reaches, and there's certainly truth to that. But it begs a whole series of other questions about which thousand the advertiser would rather reach, and the Interactive Advertising Bureau (IAB) is right there with compelling arguments that are increasingly resonating with advertisers.
One day — and sooner than you might think — online ads will command greater CPMs than elsewhere, and that will do more to remove the blinking, whirling, disruptive (un)creative that passes for ads these days than any industry efforts to do so. And the important thing for broadcasters to recognize is that this will happen regardless of their efforts to slow it down, and unless they get involved in accelerating the event, the bulk of those nice ad dollars will go to smart companies from outside their markets.
So the idea of selling against ourselves doesn't offer us much of a choice. We either do it, or we watch others take the money. There is a way to do it, however, that is tried and true in the business world, for media isn't the only industry that's ever faced this kind of disruption. It requires courageous leadership, and a willingness to think beyond the quarterly report, for overcoming the vast shifting of audiences currently underway requires a longer runway than many are willing to provide.
Clayton Christensen is one of the leading thinkers on the subject of disruptive innovations that influence markets. His books, The Innovator's Dilemma and The Innovator's Solution are the standards for what to do — and what not to do — in the world of business disruptions. In an interview two years ago with Gartner Business Fellow Howard Dresner, Christensen was asked how companies can match up against disruptive innovators. His answer reveals the formula:
To catch up against disruptors, incumbents must be prepared to set up subsidiaries and give them autonomy to kill their parents. There are a few examples in recent times. HP used to sell its inkjets through its laserjet business but it wasn't very successful. They then set up an independent organization in Vancouver to kill its laserjet business.
Surprisingly, they discovered the inkjet business took off without cannibalizing the laserjet business and they remain as the dominant printer company.
So the smart thing for broadcasters to do is set up autonomous web businesses and let them do their thing, even to the point of killing the parents, if that's necessary. Along-the-way, these businesses would be free to sell against the blue smoke and mirrors that is the heart and soul of the parents' business model.
In order to get this started, broadcasters must begin talking to people who don't watch them anymore. Follow this thread from Dresner's interview with Christensen:
Dresner: Would you say a company's install base of customers is another inhibitor of innovation?
Christensen: That's right. A customer will never lead you to develop a product which that customer cannot use.
Dresner: So sustaining innovation of course can keep a company viable for many, many years, but listening only to the customer base, for the long term, could in fact be quite damaging.
Christensen: That's right. In fact, if you're looking to start a new-growth business, very often, the most important customers to understand, are non-customers. Because if you figure out why it is they're not customers, and then bring an innovation that allows them now to become customers, that's what growth comes from.
Dresner: For an existing company with an installed base, how would you suggest they simultaneously serve the installed base, while trying to invest in future growth businesses? How do you do that? What's the right structure?
Christensen: If the organization or the business unit charged with serving the installed base is also asked to go after non-customers with the more affordable, simpler product, they can't do it. Because the business models are so different, and small customers with the lower priced product — it's not an attractive financial — it doesn't solve the financial goals of an established business unit. Almost always, this new game begins before the old game ends. If you somehow create a strong economic incentive for the management of the existing business unit to go after the new disruptive opportunity, you take your eye off the main profit and cash engine of the company, and you stumble very quickly. And yet, while that is still going, you've got to get your foothold in the new market. And that's why it's just really important to set up a separate unit.
No company has gone through a more massive restructuring in recent years than Kodak. Disrupted by digital photography, the company fought the disruption rather than embracing it, and it nearly cost them everything. It wasn't until new, more courageous management was brought in (from the outside) that the company was able to right the ship and reassert itself in the world of photography.
In January 2004, the company laid of 20% of its workforce (15,000 people). Its net income had fallen to $19 million, or 7 cents per share, compared with $113 million, or 39 cents per share, in the same period the previous year. In May of this year, Kodak president Antonio Perez announced another restructuring that gave its various units autonomy but also expected more from them. Pay close attention to what he said in the press release (emphasis mine):
"We will hold the businesses more directly accountable for their results. Kodak is now a digital company, and these actions are required to support our digital business model."
"As a result of the rapid and effective actions we have taken over the past two years to restructure our manufacturing assets, we can increasingly assign responsibility for manufacturing to the business units that the production facilities support," Perez noted. "In one sense, this marks the last break with the ‘economy of scale’ manufacturing model that served our company so well for more than 120 years. In a digital age, we need to make decisions faster and better, and these changes will enable that."
So Kodak is now functioning free of a business model that sustained the company for 120 years. Its stock price is above $23, and while the company still has a way to go to overcome mistakes made in the face of the digital disruption, it is clearly better positioned today.
2006 is turning out to be THE critical year for broadcasters to make forays into the digital (internet) world. It's not just about extending our brands into this new pond; it's about whole new ways of doing business. There is only trouble ahead if we don't see the value of selling against ourselves. In terms of revenue, 2006 is not delivering what's normally expected of an Olympics and election year, and that means 2007 will be a year of shake-outs the likes of which the industry has never seen.
Who will survive and who won't? It'll largely be based on who has the courage to back away from speaking evangelistically and sell against themselves.