Online advertising: Exorcising the business model ghost of media’s past

Print is dead. Television is dead. Terrestrial radio as we know it, is dead.

What we are currently experiencing is the business model ghost of media’s past: advertising that sends an irrelevant message at an inopportune time, followed by the frustration of having wasted your time purveying it.

This is not a new situation, Rupert Murdoch’s introduction of paywalls for The Times site formally announced that the print business model was in deep trouble late in 2010 after other numerous publications “shed fat” or closed down entirely.

Let’s have a quick discussion about the subscription model: it’s not sustainable by itself; it works hand in hand with advertising. The subscription model works when the content people subscribe to is in short supply or not readily available. News on the internet, for example, is aggregated — meaning that users can get just as much news from free sites as they can from their subscription to the Wall Street Journal. The same can be said for video and music — why should I pay iTunes when I have an uncapped line and a torrent feed?

The heart of the issue with traditional advertising in general is that it has been sold on shaky ground: it’s not easily trackable, and it’s usually done directly with the publisher which means it is sold at a premium with little to no negotiation on price. Enter parties like Google Adsense and all of a sudden the industry is being middle-manned: advertisers don’t go to the content producers directly, there is no premium sale — there is no sex in the champagne room anymore. Add the proliferation of digital devices to the mix and it’s a cascading avalanche of trouble for traditional forms of media.

Alan Mutter, former COO of Intermedia says that:

The proprietary production and delivery platforms that previously provided publishers with unrivaled market share and pricing power now represent unavoidably huge fixed costs that put them at a distinct competitive disadvantage to the proliferating digital platforms. Even though roughly 1 out of 3 newsroom jobs has been lost at American newspapers in the last decade, publishers still pay far more to produce content than most digital competitors. Sadly for those of us who treasure quality journalism, the high cost of producing original content has turned the medium’s most cherished competitive advantage into a liability from the standpoint of hard-eyed financial analysis. The same can be said for owning printing presses and large fleets of delivery trucks.

Before you automagically place all of your advertising spend online, consider that Web 2.0 giant Facebook is also struggling: shares have dropped well below the starting IPO price and General Motors recently pulled over US$50-million of advertising from the platform pre-IPO. Read into that what you will.

Sceptics are talking about the inefficacy of the display advertising system as well as the really small average income generated per user, even if Facebook has as many users today as there were people on the internet when it started. It also has issues with regards to privacy:

Facebook has a ton of user data. It needs to mine that data in order to monetise it. Mining the data means it becomes increasingly less private. Users get paranoid and stop sharing as much as they used to. The data mine shrinks and so does Facebook’s revenue.

So who is winning?

Google.

And unashamedly so: Adwords brought home the majority of Google’s US$37.9-billion in 2011 by feeding the user’s intent with adverts that are relevant and timely — a fact that is often overlooked when considering the price of GOOG stock. What’s of interest is how YouTube’s revenue stacks up, seeing as it’s the main rival to the traditional TV model: it conservatively brought in a minimum of US$876-million in 2011 (over US$1-billion predicted for 2012) and redesigned its look to have more “channels” — sound familiar?