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The Chaos Scenario: Will You Be Ashes, or Green Shoots?

Posted September 21st, 2010 by Andrew Goodman

The “Chaos Scenario” is upon us. It’s not proving to be an orderly transition. On one side: “old, dead media” (and the advertising that assumed and furthered its continuation). On the other side: “something very different,” and possibly far less valuable. There is hope…if you’re nimble enough to find value in something very different instead of clinging to the status quo and trying to survive on the old paradigm’s fatally diluted advertising rates.

Whoops, did Dwight Schrute from The Office get in here and down an extra strong glass of fermented beet juice? Am I channelling a hallucinating functionary played by Zach Galifianakis in Dinner for Schmucks IV? Sadly, no. “The Chaos Scenario” (by Bob Garfield) is the very real and very now-unfolding drama of the collapse of traditional advertising revenues in print and broadcast media (or the former “television-industrial complex,” to use Seth Godin’s term).

Between that ex-gravy-train and a soon-to-congeal new paradigm of companies finding efficient ways of connecting with customers is the current “Chaos Scenario,” wherein many large broadcasting companies, content producers, print publishers, ad agencies, and various other hangers-on, shrivel down by 95 percent or disappear entirely.

Denial is rampant and, unfortunately, the bargaining stage of the grieving process won’t be much prettier. Direct analogues of old media models – digital versions of the same things – are getting old and stale. They typically raise 2 percent or less of the former ad revenue base, which is not close to being able to fund the same quality of content. Case studies of experimental “all online” TV launches turned out to get too few viewers and not nearly enough ad revenue to cover the lavish expenses of traditional television production.

In other words, it’s really nice that your “video went viral,” but as media consumption patterns change, so do total ad revenues. And that will trickle through to production (no money to fund shows), which will accelerate the downward spiral of traditional broadcast. With no clear economic model to neatly take its place.

But, because consumers and brands still want to connect, we will eventually get to the other side. It’s hard to describe this future – especially if you happen to be a hapless reporter in the dead-tree press who still breathlessly follows the brand lifts of huge-budget campaigns for some increasingly superfluous packaged good (“I solved my pain reliever problem 25 years ago,” as Godin tells keynote audiences. “I use the one in the yellow bottle – the generic.”).

We’ll even need to get past the generalized optimism about “moving a percentage of traditional ad budgets to digital.” They won’t simply move. To our conventional eyes, those ad budgets look for all the world like they’ll be simply shrunk, or cut. (It’s more complicated than that, of course.) Old advertising models won’t absorb digital as “another channel,” and “ad rates” won’t just hop from one “medium” to another. What we’re witnessing is the collapse of a vast, complex, and long-overrated economic system.

The enormity of the mess created will cause some to focus purely on the mess itself. But it’s a real transition with real root causes, not mere episodic failure. Diagnosing the problem seems depressing only if you believed too much in the old structure.

One digital megabrand is most representative of the failed attempt to neatly port old media thinking online. The story was persuasive at first, because the advertising dollars were there at first. As Y Combinator’s Paul Graham recently recounted, back in the day, “Yahoo’s sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions.” In light of that, why would Jerry Yang pay attention to emerging technologies that would extract maximum value from more targeted forms of media? Old media models were working fine. The company’s post-IPO DNA was pro-interruption despite its roots as a “search” pioneer.

“Content” would grow rapidly, and be created, aggregated, or “produced” by a leading digital brand – Yahoo – that would consolidate leading “properties.” Multiply CPM rates by being the brand that serves the most pages of content in the world, and the future seemed assured. But Yahoo was engulfed by a wider math. Everyone else started producing and aggregating “content,” too. Under very different conditions from the old broadcast world, the value of that content to advertisers plummeted, and continues to plummet, often held up today more by persuasion than by market forces. Yahoo’s declining profitability and stock price year after year are proof only of a valiant but ultimately doomed fight against those forces.

Yahoo’s own scientists know the real truth about content. Today there are vast, ever-expanding amounts of user-generated and long tail content, much of it useless, but a certain percentage of it incredibly useful to someone. And that’s a massive opportunity in some way, but not one you can glibly charge $25 CPMs against.

Unfortunately, the fight was out of Yahoo long ago, in Graham’s view. So capitalizing on these opportunities today is a longshot. Even in 1998:

“The company felt prematurely old. Most technology companies eventually get taken over by suits and middle managers. At Yahoo it felt as if they’d deliberately accelerated this process. They didn’t want to be a bunch of hackers. They wanted to be suits. A media company should be run by suits.”

The anti-Yahoo, of course, was clearly Google. Around search, and a search-based advertising platform, it built other fast-iterating marketing response technologies, including an auction-based display ad network that worked far more cleverly than nearly any other. Almost anticlimactically, the company acquired ad network giant DoubleClick. And out of the acquisition of a mid-sized company called Urchin, it built by far and away the leading Web analytics platform in the world, Google Analytics.

This “anti-Yahoo model” gives us a clear view of the future; hope that out of the ashes of this “Chaos Scenario,” we will see green shoots emerge. If you’ve been working diligently in certain parts of this industry – in particular, search, response testing and conversion improvement, analytics, and related app and platform development – you probably see that forest more clearly than others. The key is not to be distracted. Don’t let weaker parts of the advertising world dilute the power of what you’re building today, just because they’re bored, envious, or not fully cognizant of the magnitude of the change.

The largest diversified advertising agency conglomerate in the world, WPP, plus the “Yahoo” of the Internet advertising industry (that would be Yahoo), are worth a combined $26 billion. The leading digital publisher, Google, is worth $144 billion, even as it reinvests much of its mega-profits in future-building activities related to mobile, operating systems, and new free services. That’s more than a pattern forming. It’s proof of utter, disruptive chaos.

Or to cite Bob Garfield, this is “the democratization of the information economy, simultaneously destroying fortunes and creating them.”

This column originally appeared at ClickZ on August 27, 2010. Reprinted by permission.



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