The Future of the Advertising Business Model

Does the ad model have a future?  Many think not.

The arguments are twofold: one based on supply and one based on demand.  On the supply side, pundits say that that consumers have grown tired of having their media experience interrupted and will increasingly avoid ads.  On the demand side, they say that marketers are becoming more savvy and are learning that advertising never worked anyway.

Both arguments are specious and don’t hold up to scrutiny.

Supply: The Myth of Ad Avoidance

At the crux of the first argument is the assumption that people simply hate ads.  They are offended that their media experience is diminished and, if given the option, will run in droves from the cheesy media owners that force them to sit through ad breaks.

This should be ridiculous on its face.  There has long been alternatives to ad supported media:  Public television, paid TV like HBO and recorded entertainment like DVD’s.  Nevertheless, TV broadcasters have prospered.

In actuality, there is no evidence at all that people make an effort to avoid ads.  It’s not that hard.  If you want to avoid banners, just download something like this.  It’s free!  Don’t like TV ads, get a TiVo.  However, despite a penetration rate in the mid-30’s, timeshifting on DVR’s makes up only 6% of total viewing and even then a lot of people watch the ads.

Besides, an ad free world is not the nirvana that some would have us believe, as anybody who lived in the former Eastern block can attest.  I personally experienced the last dying gasps of it and I can tell you that it wasn’t a pretty sight.  To get an idea what it was like, take a look at this Polish ad below reminding people how it was.

The headline reads: No Ads? We already know what that's like.

Demand: The Myth of Ad Decline

The second leg of the argument against advertising business models is that marketers are finally smartening up.  They’ve finally realized that advertising doesn’t really work and that they’ve been throwing away their money for decades. (Ooops!)

Okay, maybe this isn’t so ridiculous.  If advertising doesn’t work, business would be wise to not waste their money.  Therefore, since advertisers are spending less money, they must finally be waking up. Quod erat demonstrat.

Unless…of course…you actually check the facts.

The above chart shows the trend in global ad spending since 1997.  As you can see, advertisers spend more every year pretty consistently, with some dips during recessions.  They do it because it does work and as profit driven corporations it is in their interest to do so.

It’s no accident that the “old media is dead” nonsense reached a fever pitch during the economic crises.  What’s a bit bewildering is that, as media companies are coming back strong, some of these idiots still won’t give it up.

The Crux of Change: Owned, Earned and Paid Media

None of the above should be taken to mean that things aren’t changing.  They are, and in profound and important ways.  Probably the best way to understand what’s going on is through the relatively new framework of owned, earned and paid media.

Owned Media: This used to mean things like packaging, occasionally and other forms of self promotion, but has been expanded to include stuff like websites, blogs, Twitter accounts, Facebook pages and even TV programming.

Owned media is a very hot area right now, but I, for one, am skeptical.  I just don’t see how replacing crappy 30 second TV ads with crappy full length content will accomplish much.  As for blogs and social media, well, there’s a lot more to writing than typing.  No doubt some will succeed, but most will fail.

Earned Media: Earned media is really just another word for advocacy.  Much like owned media, it  existed before, but has become a much more serious enterprise with the rise of social media and blogs.  In the past, “word of mouth”was a  nebulous concept.  However, social listening tools are getting very, very good so “earned media” is getting some much deserved attention.

Paid Media: Buying ads, as discussed above, is supposedly out of vogue, but in reality it remains the main promotional vehicle for serious marketers and with good reason.

To get a sense of how important paid media still is, take a look at the top branded Facebook fan pages.  Almost all are heavy spenders in mass media.  Last year even Google bought a Super Bowl ad.  If budgets are shifting, it is at a tectonic pace.

The real difference is that, with digital convergence and improved research methodology, we are increasingly able to measure owned, earned and paid media on a level playing field.  When we do, TV almost always comes out on top (followed by word-of-mouth).

Our increased ability to understand our marketing environment is changing the way we operate.  I’ve gone into this topic at length in one post about brand pathways and another one about the evolution of advertising strategy.  For those who want a slightly different perspective, here’s a good article in HBR that makes similar points.

The Quick and The Dead

Marketers do not operate in a vacuum, but must prevail in an intensely cutthroat environment.  They need to launch new products, stay relevant in the minds of fickle consumers and meet sales targets while their rivals are vying to thwart them at every step.  Brands may be built in the long term, but competitive battles are fought every day and losing them is no way to win.

Therein lies the reason why the advertising business model will continue to thrive.  There is simply no faster or more effective way to get your message out.  While it is true that some brands have social media followers in the millions, in the context of mass media that doesn’t amount to much.  Nothing can consistently match the reach or impact of paid ads.

It also explains why ad spending continues to rise with almost metronomic regularity.  As economies grow, businesses need to reach an expanding consumer base (or risk losing to the competition who will).  Therefore, advertisers will always be more willing to pay to reach consumers than consumers will be willing to pay for content.

As long as brands need to promote themselves and content needs to be financed, the ad model will continue to prosper.

– Greg