Starving at the feast nevo hadas


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Starving at the feast nevo hadas

  2. 2. Never before has so much media been seeing traditional media companies fail, consumed and created, by so many. We even while their industry booms. The are entering a media boom. question of “what business are you in” is ever more relevant to media businesses This boom, however, requires a significant today, as items that held value in the past shift in media business models to fit the rapidly become commoditized and price new paradigms of production and points are threatened by the concept of consumption. As with other historical “free”. technological shifts, we are moving away from an economy of “scarcity” of media to One of the impacted business models is an economy of plenty. However, we are advertising supported media. Most media businesses since the 1940’s have based their income model on the availability of advertising revenue. Like media consumption, advertising revenue will also boom; but how this takes form may change. We are seeing the rapid growth in online, and soon, mobile advertising. New freemium models for content purchases and cost per click advertising are redefining how advertisers and consumers perceive value. Big media businesses, which for a long time have utilized control to impact markets, are now threatened by the freedom of choice that new technologies offer their audience. But is it possible that new technology, rather than spelling the end of media, can bring about a new era? New advertising models that are beneficial to advertiser, consumer and media owner will be possible. Greater variety and choice will demand higher quality content, benefitting the entire value chain from producers to consumers of content. To thrive, the media industry needs to spend more time looking at new opportunities and less defending models of the past.
  3. 3. but is often more visible in this History of media in industry due to the influence that three paragraphs. media holds. We have termed these businesses “Big Media” and they The concept of “mass media” as we control much of today’s traditional know it is relatively new. The first media structures. newspaper was published in England in 1620 but only became “mass” The economics of Big media around the 1830’s. Radio began in the 1920’s and TV in the Media. 1940’s. All in all, the entire industry is less than 200 years old and was It is important to understand that, due made possible by the industrial to its political influence and power, revolution and the printing press. mass media is highly regulated. Big Media have used this to their Each of the technological innovations advantage by limiting competitors, that followed -- the printing press, thus limiting the number of media radio, television -- led to a boom that options available to audience. Limited made not only new platforms but all competition and large audience of the previous ones more valuable. numbers inevitably equal high levels Why? Because new technology of profitability due to high prices. unleashes a large amount of benefit to society and the economy as a whole. Media markets that have rapidly It is hard to imagine the consumer deregulated have dramatically driven economic boom that started in reduced profitability for the key media the 1950’s without the advertising that players in them, even though the promoted it. It can be construed that market overall has grown. a strong symbiosis exists between advertising, the consumption choices The music and film industries are people make and thus overall different, however, as their position is economic stimulus. not regulated. That said, they have used copyright law and distribution As there are tremendous advantages agreements as protective tools to to scale, the media industry has control the distribution of media.1 rapidly become controlled by conglomerates, many of them The most critical tools used by mass invested in a variety of media. This is media to protect their market power not a phenomenon unique to media, are: 1It was the record industry that first fought against copyright in the law courts as they saw it hurting the then emerging record and gramophone market. 3
  4. 4. Distribution Frequencies and distribution economies to reach markets. Imperfect information The selection of data for buyer decision making. Scarcity There is a limited quantity of advertising space and ways to reach an audience. Distribution is power. audience or consumer to engage with content is through the media Big Media has control of the airwaves company and their selection. As Big (or cable) via their broadcast licenses. Media is about mass consumption, Print, music and the movies have the decision for what is “good” and scale and physical distribution to do “bad” is often made to fit the lowest the same for them. common denominator. Control of distribution provides This makes it very hard for small significant market power as you can content providers to get into the limit access. The ability to grant or system and develop an audience as deny access has always been a they have no cost efficient way to strategic position as far back as access the market. The high cost of Leonidas at Thermopylai2. It provides alternative access to audience significant leverage on resources ensures that no competitors can applied and thus profit. In other easily enter the marketplace, thus words, if you want to reach 6 million further maintaining the limited number people in a specific market segment of competitors and the concentration and I control access to those people, I of audience with big media. am in a strong negotiating position. If I have a small competitor set, my Big Media uses its size to engender position is protected as, assuming trust via their own marketing. By sufficient demand in the marketplace, being pervasive in a way only scale it is in none of my competitors’ allows, they promote their businesses interests to significantly undercut and content offering at no cost, which prices. is a significant strategic advantage over all other industries. The bigger Control of distribution also equals your audience is, or the more limited control of what reaches the audience. the selection of media in that The distribution channels are tightly category, the more powerful that tool held and thus the only way for the becomes and the harder it is for new entrants to gain a substantial footprint in the market. 2Known in popular culture via the movie “300”. Leonidas held the Thermopylai pass to stop the Persian advance into Greece. 4
  5. 5. campaigns tremendously. Thus, they Imperfect information. know that advertising works, but cannot specifically say what The other key component for advertising works best. advertising supported media is the paucity of measurement available in For example, in the newspaper traditional media. Most research is business at the moment (Dec 2009) based on a small subset of audience Rupert Murdoch is publicly blaming which is then extrapolated out to the internet and search for the demise provide a view of the whole market. of print newspapers. However, if we It’s a well known fact that the unpack the business model for measurement tools for traditional newspapers we see that it media are considered to be imperfect, consciously utilises wastage and but as long as everybody is imperfect imperfect information to capture a we accept that the big picture is higher return from advertisers. generally correct. Newspapers are sold on readership. A This means that, as an advertiser, you reader is a multiple of the circulation cannot be certain as to how your of the newspaper (the number of advertising is performing without a newspapers printed and sold or number of complex measurements in handed out). Let us assume that 3 your fulfillment mechanisms. Most people on average read a newspaper advertisers do not do this as that and that a newspaper has around 100 would push up the cost of the pages including inserts. Each page 5
  6. 6. represents the opportunity to sell enough” for the majority. This also some advertising. That means that for relates to music albums. each copy sold we are assuming a potential of 300 page views. We don’t Although it is rare for somebody to know, however, if the reader actually love all the songs of a band’s album, reads all the pages. They may just be the record industry’s multi-song interested in the business section or album format is based on the delivery just in sports. All the newspaper mechanism, i.e. an album, rather than business has to sell, however, is an the actual value of the songs. The estimate. We therefore have a same can be said for pay TV channel business model based on imperfect bouquets and for most forms of information. bundled pay broadcasting. As with all imperfect systems, Big Media behaves in ways that are either Scarcity. inconvenient to its audience or even dishonest to “cheat” the Where there is a physical limit to measurement of their audience. advertising air-time on television, Whether it is “bulking”3 by print radio and print space, there will be publications, or the repetition of a upward pressure on the price of radio station name and frequency advertising. Similarly in a world where every 10 minutes 4 , both aim to create there are a limited number of options higher measurement scores and thus to reach an audience, the more increase revenue without providing audience you reach, the higher your the advertiser with even a vaguely price climbs. The less advertising accurate sense of the extent and space is available, the greater your nature of engagement with their fee per spot. The key pricing game for specific advertisement. media companies is managing the yield per advertising spot versus the Effectively, imperfect information number of spots that can be sold, mixed with power of distribution while still maintaining audience rewards mediocrity of content. interest. It is thus a “marginal value” Content doesn’t have to be “the best” analysis where value is defined by for any specific member of your audience size due to their interest in audience, it just needs to be “good the programming and the most advertising breaks they are willing to bear before switching channels. 3 Bulking pertains to giving away free copies of publications and reporting it as added circulation to drive up readership and thus reach. This in turn increases the price of advertising space. 4With per track pricing now available via iTunes and so many other online music sellers, it can be seen that most blockbuster artists do not sell albums, but rather that individual “hit” songs. This has impacted label revenues dramatically even though a greater volume of purchases is being generated. 6
  7. 7. Record labels such as EMI are in The scarcity of content is also bankruptcy, newspaper revenues in relevant. By controlling the content the US have tumbled from $60 Billion flow, you consolidate audiences on a to $37 Billion and amid flat advertising smaller number of platforms. This growth, internet advertising has increases efficiency and profitability. It overtaken television as the largest therefore isn’t in the media owners’ advertising medium while radio interests to have too much choice, as revenues and profitability are down creating high quality content is significantly in developed markets. expensive. While all of these changes are not driven by the emergence of the Is the impact of the Internet, it has dramatically shifted the internet the end of Big speed with which these changes are happening. Media? The challenge for Big Media is that From the late 90’s the online media the internet reverses the key elements tsunami has been coming in. The that provide their market power and cliché that major technology shifts fundamentally changes price always take longer to arrive then structures. anticipated but their impact is always more severe than imagined, seems to be coming true in the media space. 7
  8. 8. Distribution From control to anarchy. Imperfect information From lack of data to in-depth data. Scarcity From limited ad space and audience to unlimited ad space and audience. From limited content to unlimited content. Second, audiences can utilize more Distribution. media with no switching costs, increasing the diverse amount of The internet fundamentally changes media they consume and making it government’s ability to regulate media excessively hard for media companies and thus the ability of a small number to be a viable way to reach an of companies to access to audience. The increasing use by consumers. Whether content is free, individuals of multiple media means “freemium”, or behind a dedicated that the same person could be pay wall, it can be delivered cheaper, targeted across a variety of platforms, faster and without a license. reducing the power any single platform has to demand premium We have moved from the limitations advertising based on scarcity. All this imposed by lack of frequency or the creates new advertising models and cost of a subscription to a pay technologies which will be discussed service, to unlimited quantities of at a later in this eBook. content, available through multiple providers and from anywhere in the The loss of distribution power is world. effectively the loss of Big Media’s monopoly. There are limitless new This loss of control over distribution entrants, significantly large numbers impacts the business model of competitors, increasing numbers of fundamentally. ways for advertisers to reach audiences and dramatic impacts on First, the cost of entry drops enabling both price, and how media is sold. almost anybody to provide media to an audience. In fact, the shift from scarcity to plenty presents a new problem for consumers: they have to Imperfect information. sift through all of the content available to discover what they feel is useful. The move from imperfect information “Search”, provided by companies like towards perfect information will Google and Microsoft, is therefore a dramatically change the price of critical tool in selection of media, advertising and have a significant effectively becoming its own impact on the benefit to advertisers. advertising medium. 8
  9. 9. Traditional advertising pricing models planners will prefer simple are based on a measure of measurability over broad targeting, “wastage”5. The selling of media is and this will shift media spend based on targeting an audience using towards a medium or model where rough reach measures and broad Return on Investment is simpler to media. measure. Further, the difficulty of measuring efficacy limits how refined an Perfect information. advertisement can be to target specific consumers. The old adage, “I Living in a world of scarcity is know half of my advertising works, I something that we are all familiar and just don’t know which half,” rings comfortable with. Though many New true. Age types would disagree, scarcity is common in the physical world. The The new models, though not internet, however, has developed to foolproof, offer far greater enable a “wealth” of information at measurability of advertising success, our fingertips. Though not limitless, it making it easier to monitor both reach is generally abundant. and interaction. With measurability comes the ability to understand the The cause for the abundance of efficacy of advertising mediums and media the ease of adding and executions and deploy advertising accessing information. Where before, spend more effectively. Bob the Butterfly Collector couldn’t afford to publish a weekly magazine The change in the level of information and the editors of the local available to advertisers will have a newspaper didn’t give him a Butterfly significant impact on price. It can be Beat column, now he can reach an expected that over time the price per audience. And for thousands of other interaction will increase and wastage butterfly enthusiasts this is a real will decrease. Advertisers will be benefit. willing to pay more per interaction (or person reached) than they are today. This same story is repeated literally millions of times, from bloggers to So, we may see an effect where even specialist publications. The net result though advertisers are spending less is that media no longer serves the overall on advertising, they are paying “mass market” only, it starts to serve more per advert. The biggest threat those at the edges. “The long tail.” this transition poses to traditional The interesting thing about the long media is that CFO’s and media tail is that every person is part of a long tail for something. 5 Wastage identifies the target audience reached that is not core or interested in the offering. 9
  10. 10. Now these butterfly enthusiasts are will have very little competitive not only into butterflies. They fit into differentiation as broad tools of reach other target markets too. They buy and frequency. cars, go on holidays and have mobile phones. Reaching them through Butterfly Beat is as viable an option The declining cost of as it is via the New York Times. If the advertising. message is crafted, in fact, it may well be more effective on Butterfly Beat. The increasing number of media providers and methods in which the The abundance of media choices audience can be reached will force a creates another price shift for decline in the price of advertising as advertising. The easier it is to reach we know it today. Alternative forms of your audience through a variety of reach will devalue even traditional suppliers, the less market power each advertising models. This will create a supplier has, and the lower the price significant challenge for media they can charge. The fact that you as owners unless new models in which an individual in a target market value can be unlocked are found. consume 10 different media providers by the time you finish your morning coffee at work gives the advertiser the Relevance over reach. option to choose how to reach you. Although each medium may have As already discussed, mass media different benefits and qualities an advertising is currently sold based on advertiser may wish to employ, they a reach model that incorporates high 10
  11. 11. levels of wastage. It reaches not only context, i.e. the purchase of a search the target market, but segments that keyword. are not in the market. The advertiser, of course, pays for all of them. Search-based context allows the advertiser to be where the consumer From an economic standpoint this is is without having to guess which inefficient and advertisers have been media they might be consuming. This looking to find a way to fine tune the is relevance driven by demonstrable targeting of audiences to reach key consumer demand rather than markets more effectively. relevance driven by media supply. It provides the insight that people who Ideally, providing an advert only to are in the market for a car may not relevant consumers in the market necessarily be reading car magazines. would optimize the spend. Relevance however, is based on a number of The relevance model increases the factors including propensity to buy value of the audience for both and timing, e.g. you may have advertiser and media owner. The propensity to buy, but won’t not for more an advertiser can target an the next few years. Currently, audience, the lower the wastage and relevance is achieved through the higher the success rate, thus the context, i.e. placing adverts for cars in more they are willing to invest. Their car magazines. return on investment increases even if New advertising models, such as they are paying more per interaction search advertising, have allowed because they have stripped out the advertisers to purchase relevance cost of wastage. without needing to buy a specific 11
  12. 12. By contrast, traditional media owners Demand versus supply are caught in an old paradigm where based pricing. they generate content and have limited audience that comes to them The Google pricing model has done for that specific content. This means away with the rate card to enable that a certain minimum amount needs keyword auctions. The advertiser sets to be charged for the efforts to be the price of what a keyword typed profitable. Letting advertisers select into a search engine is worth, and as price would be difficult as there is an many advertisers compete for the insufficient audience size to do this same keyword (seeing it to be highly effectively. relevant), the value of the keyword increases as there is still a finite However, in the face of a changing audience typing that keyword into market paradigm and such attractive Google. pricing models, it is critical for media to differentiate its pricing and provide By helping smaller publishers (as value to advertisers or face immense small as a single blog) to solve the pricing model pressures which will problem of selling their sites by make it a struggle to succeed. providing a self-service system, Google has given itself the Targeting. opportunity to rapidly expand its audience. The business is built on the Demographic information is already a basis that advertisers will pay for key value driver for advertisers as it results (there will be a “cost per click”) makes it possible to target a specific and will not be concerned which market. Demographic targeting is media provided them the results. This currently done using broad research means that, through their network of tools and extrapolation of findings publishers placing Google advertising across the total market. spots on their websites, Google can efficiently sell media. With the ability to target advertising on an individual basis (i.e. deliver x And so, their search engine model is banner to y target audience and z leveraged with a network model banners to w audience) advertisers providing almost limitless inventory can enhance their messaging to be space at no cost. In this way, it’s not more persuasive and effective, thus an issue whether one site is achieving more with their ad spend. successful or not. Google can This capability is far more effective therefore have a success-based than traditional broadcasting, where model and auction-based pricing the same message is delivered to the because they can deliver a large array entire audience. of advertisements to make even a Beyond demographic targeting, 0.02% clickthough rate highly behavioral targeting allows profitable. advertisers to deliver messages to 12
  13. 13. customers whose actions and interests are aligned with the target The changes in how advertising is market. Behavioral targeting is priced will mean that, by controlling gathered by viewing the individual’s the amount of reach they are willing to journey across a site or even across target, smaller advertisers will now the internet to discern their interests have access to the advertising and potential buying patterns. opportunities previously only available to bigger advertisers. Behavioral learning can be across a network of properties and media In simple terms, if I can only afford to owners and not just one site, allowing reach 1000 potential customers this an advertiser to reach an month, I can purchase advertising unduplicated6 audience more exposure equal to that. Even if the effectively. price per quality interaction is high, the overall price I am paying will be This means that the new value for far more effective than the price I media owners is not just would have had to pay in the old understanding the behavior of media paradigm. The timing and individuals, but in helping advertisers potential cash flow is also more use this understanding to more favorable as I am more closely effectively target advertising. aligning my revenue stream with my advertising costs. Segmentation drives This ability to purchase smaller revenue growth. chunks of advertising was not possible with the traditional broadcast If you’re able to make advertising or print media, where one had to pay more relevant, targeting smaller for the total audience, whether they segments of the overall audience will were relevant or not. The type of increase. The sum of the segmented advertising could be changed -- you audiences is likely to be worth more could advertise in the classifieds or than the unsegmented, or bulk, on the opinion pages of a newspaper audience currently being sold. -- or the timing could be adjusted, but the impact and quality of your Smaller audiences can be sold at a advertising would inevitably be higher yield than the current bulk compromised in ways you could only advertising deals. guess at without detailed reporting. So, lower prices and more segmented The shift to a bigger sales methods should increase overall market. demand for advertising as the value of the audience would be defined both 6 Duplication of audience refers to reaching the same person through a variety of media, thus spending more than is needed. Unduplicated means that you have reached the person with the targeted frequency (number of times) and not more than that. 13
  14. 14. by its reach and by targeting factors. The convenience and simplicity This can be seen in the wide range of argument would show that the trend advertisers that Google and its would be towards the simpler option. competitors attract. With more than 2 Consequently, advertising networks million customers, their client base are becoming more powerful. ranges from Fortune 500 companies Networks place advertising across a to neighbourhood yoga instructors. variety of platforms, allowing the advertiser to reach a targeted audience more easily, all through an The change in how automated interface. advertising is sold. Advertising networks could displace a Selling segmented markets and a large volume of sales both from a larger base of advertisers will require media sales force and media buyers, new models for advertising sales both of whom require a higher transactions. Improved systems to transaction cost. Many large enable higher volumes of more advertisers have already taken media complex transactions with a lower buying in-house as these tools revenue per transaction will need to continue to demystify the media become a core capability of media purchasing process. Smaller houses. Self-service, realtime, advertisers who interact only with an automated systems are already part advertising network will completely of the backbone of the online circumvent much of the value chain advertising. Traditional media will created by today’s media industry. have to match these standards. Advertising networks at the moment operate as an unsold inventory The challenge for most media owners channel, buying up available stock at is that they don’t provide enough the last minute (“unsold inventory”) access to specific markets. E.g. and using that to deliver advertising would I, as a small business, want to for its clients at a low cost. The move place my advertising with 10 different away from unsold inventory solutions media owners and negotiate for the to include premium sales has already best price at each one? Or would I begun with Google’s DoubleClick’s Ad prefer to work with a single provider Exchange program and smarter that can purchase the advertising targeting of site visitors. It is a critical space for me across a variety of development as digital media buyers media owners and still achieve my will not want to access multiple objectives? systems to procure advertising. They will standardize on a small number of systems and those may control the bulk of advertising spend. 14
  15. 15. The strategic requirements for media media is purchased on GRP’s7 rather houses may end up being to expose than the quality of the audience by data and simplify integration points, media planners. The ROI structure of rather than building and owning their ad networks creates a further threat own advertising networks. The ability as low quality audiences can easily be to provide and receive information offset by price, thus creating a from multiple ad networks, numbers-based purchase that erodes dynamically select optimal price and all brand value. run the advert will become a critical part of the value chain. What this signifies is a potential shift in market power, away from media In a world filled with higher levels of owners towards advertising networks. targeting, the advertising networks As these networks have reach gain significant power. Advertisers will through their networks of media be more interested in Return on owners, they have a better ability to Investment in an audience and less direct advertising spend than the worried about where the audience is media owner directly, especially for originated. This will dramatically the smaller advertiser. A large number reduce the power that media brands of small, targeted media platforms, have to command a premium along with advertising messages advertising rates based on the quality tailored to fit, will be a proposition of their audience. This has already hard to beat. happened in traditional media, where 7 Gross Rating Point – a measure of reach and frequency to reach a target market. 15
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  17. 17. The battlefields of the future. While segmentation provides hope for a more profitable future, the route to customers is getting ever more complex for media owners. Reducing media buying to a function of reach or frequency within a broad target market is a growing risk. With higher levels of automation the ability of sales forces to influence sales will reduce, further limiting revenue optimization opportunities. Media houses have to review their channel strategies, develop the capacity to serve the emerging broad-base advertising market and strengthen relationships with key purchasers that live outside automated systems. Behavioral targeting will favour either mass media platforms like Facebook, where large audience numbers aggregate but reveal profound insights into personal preferences and behaviours, or sites that hyper-serve defined niches. It’s premature to predict which system will be the winner in the new media world. Behavioural targeting? Aggregation? Google? Facebook? It is, in fact, likely that there will be a number of systems which will succeed in providing better media experiences for both advertisers and users. They are certain, however, to have one thing in common: Data. To survive -- and to thrive -- Big Media must develop the ability to analyse and segment markets, along with the ability to share the information in a meaningful way with advertisers. Reviewing existing content and product strategies is a key component to creating the depth of inventory needed to compete. The change from supply to demand side pricing will drive a growing reliance on strong yield management software. Decisions regarding which advert to run based on the highest possible price received from different ad networks will be a key factor in optimizing profitability. Already, there are Big Media players who are adjusting their perspective and are succeeding. Many, however, have their heads in the sand. Perhaps the question most worth asking is: Where do you stand? Nevo Hadas 17
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