Advertising Loses Its Balance
February 16, 2009
In his brilliant speech at the 2007 Supernova conference, former McKinsey and now Deloitte and Touche business guru John Hagel posed fourteen unanswered questions about business in the age of digital connectivity and information technology. The first was highly provocative: "What if there is no equilibrium?"
Equilibrium in the business world is a stable situation in which forces cancel one another; a sense of balance; a state of sameness in which things are either completely still or moving at a consistent rate. "When a market is not in equilibrium, prices will rise or fall, or quantities produced will rise or fall in order to reach the point of equilibrium," according to Yahoo Answers.
There is a symbiotic relationship between equilibrium and scale, for it is equilibrium's assurance that determines how well the market for a product or service will grow. Scale is the most over-used and over-valued business school term of the early 21st-Century, and its assumption as a necessity for making money confounds business experts trying to compete in the new world, where that which scales is free and revenue flows from the edges.
So Hagel comes along and asks the greatest business minds of the world a simple question, "What if there is no equilibrium?" It is a profound question and one that is especially troubling for the world of advertising.
When I began consulting with media companies about technology and content, the first question in every board room or conference room was "Okay, Terry, we hear what you're saying, but where's the money?" This has always been the cart before the horse, but the question was so common that I began to switch the focus of my attention from the content of new media to advertising, where I've made exactly the same observation that I made about media many years ago — that the vast majority of the writing about advertising these days comes from people within the advertising and marketing industries. As I did with media people writing about media disruptions, I find this to be misinformed and self-serving, for Madison Avenue — like institutional media — wants and needs to co-opt the Web to sustain its place in the culture.
That's not going to happen. The disruption to advertising is even more significant than the disruption to media, for the symbiotic relationship between media and advertising is such that the symbiote, the media, feeds off the host, advertising, so advertising's disruption is of greater importance to media than any content that media may create.
Every question about the funding of future journalism, for example, taps this core issue, for advertising doesn't "need" the symbiote anymore. Just as media has been disintermediated, so, too, has advertising. And the disruption to advertising is different than the disruption to media, because people are using technology to flee what they view as a relentless bombardment of unwanted messages. At least there is a demand for news and information.
What if there is no equilibrium?
An article last year in Online Media Daily was typical of the advertising industry trying to explain to itself the causes of the disruption. These efforts always lead to Hagel's question, because the assumption of equilibrium — with its laws of supply and demand — is strong.
J. Moses, CEO of Ugo Networks, a Hearst company, New York, said no one would have predicted that tools making it easy for advertisers to do their job would produce lower CPMs (cost per thousand page impressions) for publishers. "That largely has been caused by the enormous supply of inventory pushed through the market," he said, noting that Ugo's remnant inventory pricing dropped significantly during the past couple of years.
Compounding the issue, the rise of blogs and social media created an imbalance between supply and demand, which some said produced confusion when trying to price media. The promise of the Internet is accountability, but buying display ads is a complex process that makes it more difficult for demand to offset the abundance of supply.
Media companies that base their business models primarily on ad-supported content are all suffering today. Bankruptcies are commonplace now, and those that are able to avoid such protection are doing so by gutting their operations. 2009 is looking like the year of the bloodbath for institutional media, but for all the squawking about content, audiences and disintermediation, it is the disruption to Madison Avenue that's really to blame. As advertisers shift their money to the Web, the industry runs smack into Hagel's question.
Advertising — and specifically the type of brand advertising that runs Madison Avenue — is built upon the scale provided by equilibrium. In defending the Interactive Advertising Bureau (IAB) from comments by MSNBC president Charles Tillinghast that IAB standards had led to online display advertising being commoditized, Randall Rothenberg, CEO of the IAB, wrote in his blog that Tillinghast was ignoring history.
Indeed, the accusation ignores the very reason IAB members...developed the ad standards in the first place: to reduce the complexity and transaction costs associated with interactive advertising, and allow the medium to scale.
Indeed, Rothenberg's standards assume a stable environment and a sense of balance in the developing market of internet advertising, but such an environment simply does not exist online — nor will it ever — and this is beyond problematic for media companies hoping to create online revenue the old fashioned way.
Already, the paradigm is collapsing.
Gordon Borrell, whose Borrell Associates studies local online advertising, believes that local online display advertising has already peaked and that it is a losing proposition for tomorrow. The graph at the right shows that companies with digital strategies based on generating page views and ad impressions will not have a future, assuming such strategies are hoping to produce revenue growth.
The online display advertising paradigm was pulled directly from the print industry, the group that originally designed the Web for media. Assumptions were made that simply don't apply, because the Web is not a one-to-many, mass marketing medium. It's a place where horizontal connectivity replaces the vertical, top-down model of communications. We weren't aware of this in the early days of the Web (or at least the media and advertising businesses weren't aware), so display advertising seemed a logical choice.
So dependent have media companies become on this that we've actually convinced ourselves that evidence to the contrary is simply wrong; at least that's the way we behave. Jakob Nielsen's usability studies have long shown that the eyeballs of users very rarely even see the ads, so the efficacy of the concept cannot possibly be what we hope it can be. And new research by Addvantage Media in the UK reveals that most people ignore display ads and especially on general interest websites. It's better for niche or specialty content sties, but those sites don't produce the kind of scale that Madison Avenue needs to function successfully.
Borrell noted in an email that the problem for Madison Avenue is a textbook disruptive technology scenario, namely that they make so much money running their core businesses that they think themselves too big or too important to deal with smaller interactive buys that don't produce the kind of scale normally associated with big money brand advertising.
As a result, they have recognized the problem too late. Dozens of major interactive agencies have captured the business, leaving a lot of agencies with "interactive units" that pale in comparison to what the interactive-only agencies are capable of doing. Itís a painfully familiar story with media companies that have tried, internally, to seize the Internet opportunity with existing staffs who inevitably try to mold the opportunity to fit the mothershipís goals. Newspaper and TV web sites are chock full of news, weather and sports, while 88% (literally) of Internet users are NOT going to those sites, but instead flitting around between Google, MySpace, YouTube and thousands of niche sites that meet their needs.
Tim Hanlon, Executive Vice President/Managing Director of VivaKi Ventures and one of the most astute observers of big picture advertising agrees. In an interview, Hanlon said that there used to be a relatively straightforward process for creating a message and finding places for it, but all of that has exploded. "The sheer complexity of opportunities makes Madison Avenue problematic."
Madison Avenue is in the throes of the "death by a thousand cuts phenomenon." Lots of different opaque, black box services that agencies have done exclusively over the years are being chopped away by digital. These services are being made available to the common man, either through lower costs to entry or lower price points.
The classic agency response is until it scales, it's not interesting. The scalable solution needs to be solved and agencies and holding companies are in the best position to get there. The McDonalds and Proctor and Gambles of the world need that. but what I'm concerned about is the rest of the marketing world. smaller brands, media properties, smaller agencies and the smaller dynamics such as social media or RSS that aren't immediately scalable and maybe never will be. To say that they don't exist or aren't important because they're not scalable is very dangerous.
Hagel's question is haunting. What if there is no equilibrium?
Equilibrium and scale matter much less in the direct marketing world, where it's all about finding interested people and delivering messages that generate business leads. This is the Web's specialty, and two of Borrell's projected growth trends — email marketing and paid search — involve direct marketing and lead generation.
Brand advertising has never been the Web's strength, despite Madison Avenue's wish that it would be, and Borrell thinks this is a big part of what's killing media companies.
I spent the last few months of 2008 visiting local agencies and studying the flow of marketing expenditures toward interactive media. Enormous amounts of money are being spent on website development and design, email marketing, search engine optimization, ecommerce functionality and database management. Because none of this is classic advertising, it tends to go right over the heads of agency managers.
The typical agency visit was dominated by the major media buyer and planner who brought in their "Internet experts" — typically junior people who said nothing during my visit — to discuss interactive advertising with me. When I questioned these experts, they were very knowledgeable about search engine marketing, somewhat knowledgeable about search engine optimization, and not knowledgeable at all about much else when it came to website development or interactive advertising. But they did know about the IAB ad standards and could cite the pixel dimensions quite clearly.
The needs of todayís businesses are critical. Bankruptcy looms for many of them because of the economy. Now, more than ever, agencies need to do what they do best — help marketers sift through the "push" sales of media and determine the appropriate media mix that will affect sales... Most of these agencies today need to completely retool their organizations (though many of them would claim that they have, with their own in-house interactive units) to accept a different, technological-based understanding of marketing.
Borrell is spot on in viewing Madison Avenue's problem from the perspective of the people actually spending the money, for many of them are taking matters into their own hands. Nothing prevents any advertiser from becoming their own media company, shifting money away from traditional brand advertising to creating compelling content and serving it — along with their own ads — online. The mission is generating leads, for leads create real customers, and once you have a customer on your property, it's merely a matter of sales.
A large automotive client of mine in the South has built its own ad server and closely monitors every piece of data in developing strategies and tactics that it can control online. It's a textbook case of a local business using the tools available to anybody to drive its business in the online world. This company knows more about search engines than most media companies, and its use of tagging and data manipulation is so stunning that it causes real problems for the media companies in town, who wish the auto company would just buy branding space on their websites. That horse is so far out of the barn that it will never come back.
This client embraces social media and has developed successful — and highly cost-effective — ad campaigns via Facebook. They are only interested in leads, and they employ Google Analytics to study the movements of users as they come and go on their websites. They know which ad placements refer the most users to their sites, and because they serve their own ads, they are able to place advertising on any site that hosts traffic in the market, measuring the unique eyeballs that their ads cume. Each ad is fully tagged and contains unique code that allows the automotive company to examine bounce rates and determine where they're getting real return for their advertising dollars.
This is not good news for either the media companies or the ad agencies in town, but this is the future that Madison Avenue faces. The irony is that those who run media websites know all about using analytics to shape business. Why we can't use that knowledge to genuinely enable commerce for everybody in our communities is a real mystery.
The rise of personal media and the growth of businesses that cater to it — especially Google — is the real threat to local media downstream, for what J. D. Lasica termed the "personal media revolution" in his seminal book Darknet, Hollywood's War Against the Digital Generation includes both the people formerly known as the audience and the people formerly known as the advertisers.
What if there is no equilibrium? The question applies to the neat, modernist world of yesterday and the businesses that have exploited it for gain through fundamental capitalism. As we are learning, however, the world of tomorrow — thanks mostly to the horizontal connectivity of the World Wide Web — doesn't play well with fundamental anything, and those who can get beyond their old assumptions are a yard ahead of everybody else.